Question 1

Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and 180 in 2006, what's the price of a 1970 bag of groceries in 2006 prices?

Accepted Answer

To find the price of a 1970 bag of groceries in 2006 prices, we need to use the inflation rates to adjust for the changes in value. We can use the formula:
(price in year B) = (price in year A) x (index in year B) / (index in year A)

Using the formula, we get:
(price in 2006) = $8 x (180) / (38.8) = $37.11

Therefore, the price of a 1970 bag of groceries in 2006 prices is $37.11, which is option C.

Question 2

You know that a chocolate bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?

Accepted Answer

To compute the price of the candy bar in today's prices, we need to adjust the 5 cents price of 1962 using the CPI of 1962 and today's CPI. Since we want to express the price in today's CPI, we need to divide the (today's CPI/1962 CPI) and multiply it by the 5-cent price of 1962. Therefore, the correct formula is 5 cents × (today's CPI/1962 CPI), which corresponds to choice C.

Question 3

Which of the following best defines "indexation"?

Accepted Answer

Indexation refers to the automatic adjustment of dollar amounts to account for inflation. This can be done through laws, contracts, or other mechanisms that link the value of a payment to an inflation index, such as the Consumer Price Index (CPI). Indexation is intended to ensure that the real value of a payment remains constant over time despite changes in the general level of prices.

Question 4

In 1972 in Kelowna, BC, one could buy model rocket engines for $1.50. If those same engines cost $3.00 today, which of the following sets of CPI's would make the engine prices in today's dollars the same for both years?

Accepted Answer

To calculate the inflation rate, we divide the price in today's dollars by the price in 1972 dollars and multiply by 100. For option A, the inflation rate would be 100/60 * 1.5 = $2.50, which is lower than the current price of $3.00. For option B, the inflation rate would be 110/60 * 1.5 = $2.75, still lower than the current price. For option D, the inflation rate would be 130/60 * 1.5 = $3.25, higher than the current price. Only option C gives an inflation rate of 120/60 * 1.5 = $3.00, the same as the current price. Therefore, choice C is the best option.

Question 5

You know that a chocolate bar costs 60 cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

Accepted Answer

To compute the price of the candy bar in 1962 prices, we need to adjust the current price of the candy bar to account for the change in inflation over time. The correct formula for this calculation is:
1962 Price = Current Price x (1962 CPI / Current CPI)
So, we need to divide the 1962 CPI by the current CPI. Therefore, the correct answer is D, which multiplies 60 cents by (1962 CPI/today's CPI).

Question 6

Scenario 6-1
Grant Smith was a doctor in 1944 and made about $12 000 a year. His daughter Lisa Smith also is a doctor and she made about $175 000 in 2006. The price index in 1944 was 17.6 and the price index was 192 in 2006.
-Refer to Scenario 6-1. What is Lisa's income in 1944 dollars?

Accepted Answer

To convert Lisa's 2006 income to 1944 dollars, use the formula: (2006 income) * (1944 price index / 2006 price index). This gives $175,000 * (17.6 / 192) = $16,042.

Question 7

Andrew is offered a job in Calgary where the CPI is 120 and a job in Toronto where the CPI is 150. Andrew's job offer in Calgary is for $65 000. Which of the following salaries would the Toronto job have to pay so that both jobs would have the same purchasing power?

Accepted Answer

To have the same purchasing power, the salary in Toronto should be adjusted for the difference in CPI. The formula is: (Calgary Salary) * (Toronto CPI / Calgary CPI) = (Toronto Salary). So, $65,000 * (150/120) = $81,250.

Question 8

Suppose the average price of gas in 2009 was $0.95 per litre and $0.97 in 2010. The inflation rate was 3 percent in 2010. What was the 2010 price of gas in 2009 dollars?

Accepted Answer

To find out the 2010 price of gas in 2009 dollars, we need to account for inflation.

First, we need to find out the inflation rate from 2009 to 2010:

Inflation rate = (final value - initial value) / initial value x 100%

Inflation rate = ($0.97 - $0.95) / $0.95 x 100% = 2.11%

Next, we need to adjust the 2010 price of gas for inflation:

2010 price in 2009 dollars = 2010 price / (1 + inflation rate)

2010 price in 2009 dollars = $0.97 / (1 + 0.0211) = $0.95

Therefore, the 2010 price of gas in 2009 dollars was $0.941, which is answer choice B.

Question 9

In 1949 the city of Sherbrooke, Quebec, built a hospital for about $500 000. In 1987 the city restored its courthouse for about $2.4 million. A price index for nonresidential construction was 14 in 1949, 92 in 1987, and 114.5 in 2000. According to these numbers, what did the hospital cost approximately?

Accepted Answer

To find the cost of the hospital in 2000 dollars, we need to use the price index to adjust for inflation.

First, we need to find the inflation factor from 1949 to 2000:
Inflation factor = price index in 2000 / price index in 1949 
Inflation factor = 114.5 / 14 
Inflation factor = 8.18

Next, we multiply the original cost of the hospital by the inflation factor to get the cost in 2000 dollars:
Cost of hospital in 2000 dollars = $500 000 x 8.18 
Cost of hospital in 2000 dollars = $4 090 000

Therefore, the hospital cost approximately $4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars ($2.4 million). The answer is D.

Question 10

When does a cost-of-living allowance (COLA) automatically raise the wage rate?

Accepted Answer

Cost-of-living allowance (COLA) automatically raises the wage rate when the consumer price index (CPI) increases. The CPI measures the average change in prices of consumer goods and services over time, and therefore provides an indicator of inflation. When the CPI increases, it means that the cost of living has gone up, and so wages must also increase in order to maintain the same level of purchasing power.

Question 11

Tiffany is offered a job in Winnipeg that pays $90 000. She is offered a similar job in Montreal for $60 000. Which of the following sets of CPIs comes closest to giving both salaries the same purchasing power?

Accepted Answer

The answer of Tiffany is offered a job in Winnipeg...

Question 12

Ingrid takes a job in 1981 at a salary of $10 000. By 2010, she has been promoted, with a salary of $50 000. If the price index in 1981 is 50, and the price index in 2010 is 180, what is Ingrid's 2010 salary in 1981 dollars?

Accepted Answer

We need to adjust Ingrid's 2010 salary to account for inflation between 1981 and 2010. To do this, we will use the ratio of the price indices:
(Price index in 2010) / (Price index in 1981) = 180/50 = 3.6
This means that prices in 2010 were 3.6 times higher than they were in 1981.
To adjust Ingrid's salary for inflation, we need to divide her 2010 salary by this ratio:
$50 000 / 3.6 ≈ $13 889
Therefore, Ingrid's 2010 salary in 1981 dollars is approximately $13 889.

Question 13

In 1990 Professor Fellswoop made $12 000, in 2000 he earned $24 000, and in 2010 he earned $36 000. If the CPI was 40 in 1990, 60 in 2000, and 100 in 2010, then in real terms, when was Professor Fellswoop's salary highest and lowest?

Accepted Answer

The answer of In 1990 Professor Fellswoop made $12 000,...

Question 14

Scenario 6-1
Grant Smith was a doctor in 1944 and made about $12 000 a year. His daughter Lisa Smith also is a doctor and she made about $175 000 in 2006. The price index in 1944 was 17.6 and the price index was 192 in 2006.
-Refer to Scenario 6-1. What is Grant's income in 2006 dollars?

Accepted Answer

To adjust Grant Smith's income for inflation, we need to use the formula:
Adjusted income in year t = (Income in year x) x (Price index in year t / Price index in year x)
Using this formula, we can calculate Grant Smith's income in 2006 dollars as follows:
Adjusted income in 2006 = $12,000 x (192 / 17.6) = $130,909.09
Therefore, the correct answer is D) $130,909.

Question 15

Leslie is offered a job in Vancouver that pays $50 000. She is also offered a job in Halifax that pays $60 000. Which of the following sets of CPIs comes closest to giving both salaries the same purchasing power?

Accepted Answer

To compare purchasing power, adjust salaries by the CPI ratio. $50,000 * (100/83.3) ≈ $60,024, which is closest to $60,000.

Question 16

Scenario 6-1
Grant Smith was a doctor in 1944 and made about $12 000 a year. His daughter Lisa Smith also is a doctor and she made about $175 000 in 2006. The price index in 1944 was 17.6 and the price index was 192 in 2006.
-Refer to Scenario 6-1. What was the ratio of Grant's real income to Lisa's real income?

Accepted Answer

The answer of Scenario 6-1
Grant Smith was a doctor in...

Question 17

In 1964 in London, Ontario, one could buy a chili dog and a root beer for $1.25; today the same chili dog and root beer cost $3.75. Which of the following sets of CPIs would mean that the cost in today's dollars was the same as in 1964?

Accepted Answer

The answer of In 1964 in London, Ontario, one could...

Question 18

The 2002 CPI was 177 and the 1982 CPI was 96.5. If your parents put aside $1000 for you in 1982, how much would you have needed in 2002 in order to buy what you could have with the $1000 in 1982?

Accepted Answer

To calculate the inflation rate, we need to use the following formula:

Inflation rate = (CPI in later year - CPI in earlier year) / CPI in earlier year

Using the given information, we get:

Inflation rate = (177 - 96.5) / 96.5 = 0.8353

This means that prices increased by 83.53% from 1982 to 2002.

To find out how much $1000 in 1982 is worth in 2002 dollars, we need to adjust for inflation using the inflation rate we calculated:

Value in 2002 dollars = Value in 1982 dollars * (1 + inflation rate)

Value in 2002 dollars = 1000 * (1 + 0.8353) = $1834.20

Therefore, the best choice is A) $1834.20

Question 19

In 1972 in Sarnia, Ontario, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50. If the same goods today cost about $6.00, which of the following sets of CPIs would make the cost in today's dollars the same for both years?

Accepted Answer

The answer of In 1972 in Sarnia, Ontario, one could...

Question 20

In 1969 Don bought a Dodge Dart for $2500. He drove this car until 2006, when he bought a Honda Civic for $22 000. If the price index in 1969 was 36.7 and the price index in 2006 was 190, what is the price of the Dodge Dart in 2006 prices?

Accepted Answer

The answer of In 1969 Don bought a Dodge Dart...

Quiz 6: Measuring the Cost of Living