Question 1

If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years?
A)The cost of living has increased by 6%.
B)The cost of living has increased by 2.9%.
C)The cost of living has increased by 12.7%.
D)The cost of living has decreased by 6%.

Accepted Answer

The change in CPI is calculated as (212.7-206.7)/206.7 x 100% = 2.9%, which means the cost of living has increased by 2.9%.

Question 2

If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then changes in the CPI:
A)accurately reflect the true rate of inflation.
B)understate the true rate of inflation.
C)overstate the true rate of inflation.
D)are unrelated to the true rate of inflation.

Accepted Answer

The Consumer Price Index (CPI) might overstate the true rate of inflation if it does not fully account for consumers substituting away from goods that have become relatively more expensive towards goods that have become relatively cheaper. This substitution effect means that the actual increase in the cost of living may be less than what the CPI suggests, as consumers adjust their purchasing behavior in response to price changes.

Question 3

Which of the following is a correct description of 'inflation'?
A)Inflation refers to an increase in relative prices throughout the economy.
B)Inflation is the change in the price level from one year to another.
C)Inflation is a sustained increase in the price level.
D)Inflation is when there is a one-time jump in the price level.

Accepted Answer

Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time. It represents a decrease in the purchasing power of money and affects the overall economy, including employment, investments, and lending. Option A is incorrect as it refers to relative prices, not the general price level. Option B is incorrect as it only refers to the change in prices over a specific time period, not the sustained increase in prices. Option D is incorrect as inflation is a continuous phenomenon, not a one-time event.

Question 4

When the price of petrol rises, some consumers begin riding their bikes more frequently or taking public transport instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behaviour is called:
A)outlet bias.
B)increase in quality bias.
C)substitution bias.
D)discrimination bias.

Accepted Answer

The scenario described is an example of substitution bias. The CPI does not fully capture changes in consumer behavior when prices of certain goods or services increase, such as when consumers switch to more affordable alternatives like riding a bike or taking public transportation instead of driving a car. This can result in an overestimation of the inflation rate measured by the CPI.

Question 5

What is the broadest measure of the price level which includes all final goods and services?
A)producer price index
B)consumer price index
C)wholesale price index
D)GDP deflator

Accepted Answer

The GDP deflator is a measure of the price level that takes into account all final goods and services produced within a country's borders, including those sold to consumers, businesses, and the government. It is a broad measure of price level changes and is frequently used to measure inflation. The other indices listed (producer price index, consumer price index, wholesale price index) do not necessarily encompass all final goods and services.

Question 6

From the data in the following table we can say that the cost of living rose by ________ between 2017 and 2018.

A)2%
B)5%
C)8%
D)13%

Accepted Answer

The answer of From the data in the following table...

Question 7

Suppose an economy has only three goods, and the typical family purchases the amounts given in the following table. If 2012 is the base year, then what is the CPI for 2017?

A)89
B)125
C)212
D)163

Accepted Answer

The answer of Suppose an economy has only three goods,...

Question 8

The 'inflation rate' is measured as the:
A)percentage change in the relevant price index from one time period to another.
B)change in the price level between two time periods, multiplied by 100.
C)percentage change in prices in time period 1 minus the percentage change in prices in time period 2, multiplied by 100.
D)price index in time period 2 minus the price index in time period 1.

Accepted Answer

The inflation rate is measured as the percentage change in the relevant price index from one time period to another. This is because inflation is a measure of the rate at which prices are changing over time, and the percentage change in a price index is a good way to measure this. The relevant price index can vary depending on what is being measured (e.g. consumer prices, producer prices, etc.), but the basic methodology for measuring inflation remains the same.

Question 9

Suppose that the data in the following table reflects the prices in an economy. What is the inflation rate in between 2017 and 2018?

A)2%
B)5%
C)20%
D)10%

Accepted Answer

The answer of Suppose that the data in the following...

Question 10

If the CPI changes from 125 to 120 between 2017 and 2018, how did prices change between 2017 and 2018?

A)increased by 4%
B)decreased by 5%
C)increased by 25%

Accepted Answer

The answer of If the CPI changes from 125 to...

Question 11

The most widely used measure of inflation is based on which of the following price indices?
A)producer price index
B)consumer price index
C)GDP deflator
D)wholesale price index

Accepted Answer

The most widely used measure of inflation is based on the consumer price index (CPI), which measures changes in the prices of a market basket of consumer goods and services. The producer price index (PPI) measures changes in the prices of goods at the wholesale level, the GDP deflator measures changes in the prices of all goods and services included in GDP, and the wholesale price index (WPI) measures changes in the prices of goods sold at the wholesale level. While all of these indices can be useful in understanding inflation, the CPI is the most commonly cited measure of inflation in the media and by policymakers.

Question 12

The formula for calculating the CPI is:
A)(Expenditures in the current year/Expenditures in the base year)× 100.
B)(Expenditures in the current year × Expenditures in the base year)/100.
C)(Expenditures in the base year/Expenditures in the current year).
D)(Expenditures in the base year × 100)/(Expenditures in the current year).

Accepted Answer

The formula for calculating the CPI is the ratio of the total cost of goods and services in the current year divided by the cost of the same goods and services in the base year, multiplied by 100. Option A is the only option that matches this formula.

Question 13

Weekly expenditures for a family of four in 2017 averaged $1 500. In 2018, the cost of the same purchases was $1 600. If 2017 is the base year, what was the CPI in 2018?
A)110
B)107
C)100
D)93

Accepted Answer

To calculate the CPI, we need to use the formula:

CPI = (Cost of basket in current year / Cost of basket in base year) x 100

Using the given information, we can calculate the CPI as:

CPI = (1600 / 1500) x 100
CPI = 1.0667 x 100
CPI = 106.67

Rounding to the nearest whole number, the CPI in 2018 was 107. Therefore, the correct answer is option B.

Question 14

Suppose an economy has only three goods and the typical family purchases the amounts given in the following table. If 2012 is the base year, then what is the CPI for 2017?

A)220
B)208
C)40.08
D)100

Accepted Answer

The answer of Suppose an economy has only three goods...

Question 15

Of the market basket that makes up the CPI, which of the following is the smallest portion?
A)education
B)clothing and footwear
C)transportation
D)housing

Accepted Answer

Education is not included in the CPI market basket.

Question 16

Which of the following describes the accuracy of the Consumer Price Index (CPI)?
A)Changes in the CPI accurately reflect the true rate of inflation.
B)Changes in the CPI understate the true rate of inflation.
C)Changes in the CPI overstate the true rate of inflation.
D)Changes in the CPI are unrelated to the true rate of inflation.

Accepted Answer

The Consumer Price Index (CPI) often overstates the true rate of inflation due to factors such as not fully accounting for the substitution effect (where consumers switch to less expensive alternatives as prices change), the introduction of new products, and quality improvements that can make the CPI a less accurate measure of the cost of living changes over time.

Question 17

When does 'inflation' occur?
A)when the value of money is rising
B)when the value of real GDP decreases
C)when the value of real GDP increases
D)when the general price level is rising

Accepted Answer

Inflation occurs when the general price level in an economy is rising. This means that the value of money is decreasing and it takes more money to buy the same goods and services. When the general price level is stable or decreasing, there is no inflation.

Question 18

Suppose that the data in the following table reflects the prices in the economy. What is the inflation rate in between 2017 and 2018?

A)5%
B)2.9%
C)4.6%
D)7.5%

Accepted Answer

To calculate inflation rate, we can use the formula: 
Inflation rate = ((Price level in later year - Price level in earlier year) / Price level in earlier year) x 100%
Using this formula, the inflation rate between 2017 and 2018 can be calculated as ((120-116)/116) x 100% = 3.45%. Rounding it off to one decimal place, we get the answer as 2.9% which is closest to option B. Therefore, the correct answer is B.

Question 19

'Inflation' is an increase in the:
A)overall level of economic activity.
B)rate of growth of GDP.
C)average hourly wage rate.
D)general price level in the economy.

Accepted Answer

Inflation refers to a general increase in the price level of goods and services in an economy over a period of time. Therefore, the best choice among the given options is D which states that inflation is an increase in the general price level in the economy.

Question 20

Of the market basket that makes up CPI, which of the following is the largest portion?
A)health
B)clothing and footwear
C)housing
D)communication

Accepted Answer

Housing is the largest portion of CPI, encompassing the cost of rent, mortgage payments, utilities, and other related expenses.

Quiz 8: Inflation

If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years?

If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then changes in the CPI:

Which of the following is a correct description of 'inflation'?

When the price of petrol rises, some consumers begin riding their bikes more frequently or taking public transport instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behaviour is called:

What is the broadest measure of the price level which includes all final goods and services?

From the data in the following table we can say that the cost of living rose by ________ between 2017 and 2018.

Suppose an economy has only three goods, and the typical family purchases the amounts given in the following table. If 2012 is the base year, then what is the CPI for 2017?

The 'inflation rate' is measured as the:

Suppose that the data in the following table reflects the prices in an economy. What is the inflation rate in between 2017 and 2018?

If the CPI changes from 125 to 120 between 2017 and 2018, how did prices change between 2017 and 2018?

The most widely used measure of inflation is based on which of the following price indices?

The formula for calculating the CPI is:

Weekly expenditures for a family of four in 2017 averaged $1 500. In 2018, the cost of the same purchases was $1 600. If 2017 is the base year, what was the CPI in 2018?

Suppose an economy has only three goods and the typical family purchases the amounts given in the following table. If 2012 is the base year, then what is the CPI for 2017?

Of the market basket that makes up the CPI, which of the following is the smallest portion?

Which of the following describes the accuracy of the Consumer Price Index (CPI) ?

When does 'inflation' occur?

Suppose that the data in the following table reflects the prices in the economy. What is the inflation rate in between 2017 and 2018?

'Inflation' is an increase in the:

Of the market basket that makes up CPI, which of the following is the largest portion?