Question 1

Since the recession in the early 1990s, inflation in Australia has been:
A) volatile.
B) low and stable.
C) high but stable.
D) zero.

Accepted Answer

Inflation in Australia has been low and stable since the recession in the early 1990s. This can be seen from the fact that the Reserve Bank of Australia has consistently targeted an inflation rate of 2-3% per year, and has largely been successful in keeping inflation within that range. While there have been periods of volatility in food and energy prices, overall inflation has remained relatively stable. Both high but stable (option C) and zero (option D) are incorrect, as these do not accurately reflect the trend in Australian inflation over the past few decades.

Question 2

One way the consumer price index (CPI) differs from the GDP chain price index is that it:
A) is based on all final goods and services.
B) uses only current-year quantities.
C) includes preferences of all consumers.
D) includes purchases of items bought by typical urban consumers.

Accepted Answer

The consumer price index (CPI) includes purchases of items bought by typical urban consumers, while the GDP chain price index includes all final goods and services, regardless of the intended consumer. Additionally, the CPI uses a fixed basket of goods and services from a base year, while the GDP chain price index uses current-year quantities. Preferences of all consumers are not a factor in either index.

Question 3

The CPI is called a fixed-weight price index because:
A) people do not change their purchasing preferences over time.
B) the composition of the market basket changes from one period to the next.
C) the composition of the market basket remains unchanged from one period to the next.
D) the CPI does not change over time.

Accepted Answer

The CPI is a fixed-weight price index because it uses a fixed market basket of goods and services whose composition remains constant over time. However, the prices of the items in the market basket are updated periodically to reflect changes in prices from one period to the next.

Question 4

The CPI is used to determine:
A) how higher quality products increase the wellbeing of consumers.
B) how the cost of living changed from one period to another.
C) the changes in prices of all consumer goods and services.
D) how changing prices affect the export of goods and services.

Accepted Answer

The CPI (Consumer Price Index) is a measure of the change in the cost of living over time. It tracks the prices of a basket of goods and services that are typical of a consumer's spending, and compares the cost of that basket of goods and services over time. The CPI is used to determine how the cost of living has changed from one period to another, making option B the correct choice. Option A is incorrect because the CPI only measures changes in prices, not changes in quality. Option C is partially incorrect, as the CPI only tracks the prices of specific goods and services included in the basket, not all consumer goods and services. Option D is also incorrect as the CPI is not directly related to the export of goods and services.

Question 5

Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI) is currently 125. This indicates the price of the market basket of goods is now:
A) $275.
B) $425.
C) $500.
D) $525.

Accepted Answer

The CPI of 125 means that the cost of the market basket has increased by 25% from the base year. Therefore, the new cost is $400 * 1.25 = $500.

Question 6

During the 1970s, inflation in Australia:
A) reached its lowest rate (0.2 per cent) since the end of the Second World War.
B) approached hyperinflation proportions.
C) declined to 0.5 per cent as a result of the first oil price shock.
D) reached a peak of 16 per cent in 1976, then subsided during the 1980s.

Accepted Answer

In the 1970s, inflation in Australia reached a peak of 16 per cent in 1976 and then subsided during the 1980s. Option A is incorrect as it states that inflation reached its lowest rate since the end of the Second World War, which is not supported by the information given. Option B is incorrect as there is no mention of hyperinflation proportions. Option C is incorrect as it states that inflation declined to 0.5 per cent as a result of the first oil price shock, which is not supported by the given information.

Question 7

The CPI measures:
A) changes in the prices of imported goods and services.
B) changes in the prices of exported goods and services.
C) changes in the production of imported goods and services.
D) changes in the production of exported goods and services.

Accepted Answer

The Consumer Price Index (CPI) measures changes in the prices of goods and services purchased by consumers, including imported goods and services.

Question 8

The consumer price index (CPI) compares the prices of:
A) all goods and services in the economy compared to the prices of those goods and services in a base year.
B) consumer goods and services that a household purchases to the prices of those goods and services purchased in a base year.
C) producer goods and services that are made for consumers to the prices of those goods and services in a base year.
D) goods and services that are purchased by producers to the prices of those goods and services in a base year.

Accepted Answer

The CPI is a measure of the average change over time in the prices that consumers pay for a basket of goods and services. This basket represents the goods and services that a typical household purchases, so option B is the most accurate description.

Question 9

The spending patterns over the last 50 to 60 years:
A) are the same.
B) have changed significantly.
C) have decreased.
D) have increased.

Accepted Answer

The spending patterns have changed significantly over the last 50 to 60 years due to various factors such as changes in technology, lifestyles, and economic conditions.

Question 10

One way the consumer price index (CPI) differs from the GDP chain price index is that the CPI:
A) uses current-year quantities of goods and services.
B) includes separate market baskets of goods and services for both base and current years.
C) includes only goods and services bought by typical urban consumers.
D) is bias-free.

Accepted Answer

The CPI only includes goods and services bought by typical urban consumers, while the GDP chain price index covers all goods and services produced in an economy. The other choices are incorrect; A is incorrect because the CPI uses quantities from a base year as well as current year, B is incorrect because the CPI only uses a market basket for the current year, and D is incorrect because no measure of inflation is completely bias-free.

Question 11

Which of the following would understate the consumer price index?
A) Substitution bias.
B) Deteriorating quality of products.
C) Improving quality of products.
D) Law of demand bias.

Accepted Answer

Improving quality of products would understate the consumer price index because it would make it appear as if prices had stayed the same when in reality consumers are getting better quality products for the same price.

Question 12

Deflation is defined as a decrease in:
A) the real wages of workers.
B) real GDP compared with the CPI.
C) the average price level of goods and services in the economy.
D) the price of all consumer products.

Accepted Answer

Deflation is a decrease in the average price level of goods and services in the economy. It is the opposite of inflation, which is an increase in the average price level. Deflation can lead to lower profits for businesses and lower economic growth, as consumers postpone spending in anticipation of lower prices in the future.

Question 13

Deflation means a decrease in:
A) the rate of inflation.
B) the prices of all products in the economy.
C) homes, cars and basic resources.
D) the general level of prices in the economy.

Accepted Answer

Deflation refers specifically to a decrease in the general level of prices in the economy. It is the opposite of inflation, which refers to an increase in prices. Therefore, options A, B, and C are incorrect.

Question 14

Inflation in Australia since the early 1990s has been:
A) higher than at any time since the 1960s.
B) more volatile than in the 1970s.
C) lower than at any time since the 1960s.
D) higher than it was in the 1980s.

Accepted Answer

Inflation in Australia since the early 1990s has been lower than at any time since the 1960s. This is due to various factors such as the introduction of inflation-targeting as a monetary policy tool by the Reserve Bank of Australia and strong competition in the economy.

Question 15

The consumer price index is also called:
A) the price of living index.
B) the cost of surviving index.
C) the cost of living index.
D) the price of underemployment.

Accepted Answer

The consumer price index (CPI) is also called the cost of living index as it measures the average change in prices over time of goods and services commonly used by households, thus reflecting the cost of maintaining a certain standard of living. Choice A and B are similar to the correct choice but not the commonly used term for CPI. Choice D is not related to CPI.

Question 16

As the price of petrol rose during the 1970s, consumers cut back on their use of petrol relative to other consumer goods. This situation contributed to which bias in the consumer price index?
A) Substitution bias.
B) Transportation bias.
C) Quality bias.
D) Indexing bias.

Accepted Answer

The situation described in the question is an example of substitution bias, which occurs when consumers switch to cheaper alternatives as the prices of certain goods rise. In this case, as the price of petrol rose, consumers likely reduced their consumption of petrol and substituted it with other goods, leading to a lower weight for petrol in the CPI and potentially understating the overall inflation rate.

Question 17

Price indexes like the CPI are calculated using a base year. The term 'base year' refers to:
A) the first year that price data are available.
B) any year in which inflation was higher than 5 per cent.
C) the most recent year in which the business cycle hit the trough.
D) an arbitrarily chosen reference year.

Accepted Answer

A base year is an arbitrarily chosen reference year used for comparison to measure changes in the prices of goods and services over time. It is selected as a benchmark year against which the prices in subsequent years can be compared to evaluate the change in the price level and inflation. The choice of the base year is usually determined by the availability and consistency of price data, and it is often updated periodically to reflect changes in the economy's structure and composition.

Question 18

If the consumer price index (CPI) in 2001 was 200 and the CPI in 2002 was 215, the rate of inflation was:
A) 215 per cent.
B) 15 per cent.
C) 5 per cent.
D) 7.5 per cent.

Accepted Answer

The rate of inflation is calculated as the percentage change in the CPI from one year to the next. In this case, the CPI increased from 200 in 2001 to 215 in 2002, an increase of 15 points. The rate of inflation is therefore 15 / 200 * 100 = 7.5%.

Question 19

An increase in the average price level of goods and services is called:
A) deflation.
B) disinflation.
C) inflation.
D) cost-push deflation.

Accepted Answer

Inflation is the term used to describe a rise in the average price level of goods and services. Deflation is the opposite of inflation, meaning a decrease in the average price level, while disinflation refers to a slower rate of inflation, but still involves an increase in the average price level. Cost-push deflation is not a commonly used term and is not a correct answer choice.

Question 20

The problem with measuring inflation using the CPI is:
A) that inflation may be understated for people who buy mainly goods and services whose prices are stable.
B) that inflation may be overstated for people who buy mainly goods and services whose prices are rising faster than the average.
C) that the CPI has difficulty in accounting for changes in the prices of goods and services.
D) that the CPI uses a fixed basket of goods and services, and so cannot allow for people substituting towards cheaper goods and services.

Accepted Answer

The CPI uses a fixed basket of goods and services, and so cannot allow for people substituting towards cheaper goods and services. This means that if the price of a good that is included in the CPI basket increases, but people start buying a similar but cheaper alternative, the CPI will not reflect this change in consumer behavior and may overstate the inflation rate.

Quiz 14: Inflation and Unemployment

Since the recession in the early 1990s, inflation in Australia has been:

One way the consumer price index (CPI) differs from the GDP chain price index is that it:

The CPI is called a fixed-weight price index because:

The CPI is used to determine:

Suppose a market basket of goods and services costs $400 in the base year and the consumer price index (CPI) is currently 125. This indicates the price of the market basket of goods is now:

During the 1970s, inflation in Australia:

The CPI measures:

The consumer price index (CPI) compares the prices of:

The spending patterns over the last 50 to 60 years:

One way the consumer price index (CPI) differs from the GDP chain price index is that the CPI:

Which of the following would understate the consumer price index?

Deflation is defined as a decrease in:

Deflation means a decrease in:

Inflation in Australia since the early 1990s has been:

The consumer price index is also called:

As the price of petrol rose during the 1970s, consumers cut back on their use of petrol relative to other consumer goods. This situation contributed to which bias in the consumer price index?

Price indexes like the CPI are calculated using a base year. The term 'base year' refers to:

If the consumer price index (CPI) in 2001 was 200 and the CPI in 2002 was 215, the rate of inflation was:

An increase in the average price level of goods and services is called:

The problem with measuring inflation using the CPI is: