Question

1. The two methods of calculating the changes in the value of money and price level are

	a.	the GDP deflator and the consumer price index and both has the same results.
	b.	the inflation rate and the GDP deflator and both gives different results.
	c.	the inflation rate and the consumer price index and both gives exact results.
	d.	the GDP deflator and the consumer price index and both may have different results.

2. A typical consumer buys 15 cookies and 2 packs of coffee.

Year	Price of coffee per pack	Price of a Cookie
2019	$40	$3
2018	$45	$4
2017	$50	$3

Refer to Table. Assuming the base year is 2019, then the economy’s inflation rate in 2018 is

	a.	20 %.
	b.	12 %.
	c.	30 %.
	d.	28 %

3. Table: The table below pertains to an economy in which the typical consumer’s basket consists of 5 tennis rackets and 10 box of tennis balls.

Year	Price of a Tennis Racket	Price of a Box of Tennis Balls
2012	$24	$9
2013	$30	$11
2014	$32	$12

Refer to Table. Based on the above information the cost of the basket in 2012 was

	a.	$247.5.
	b.	$23.
	c.	$200.
	d.	$210.

4. One of the problem with CPI is

	a.	it takes into account the change in the quality of goods produced over the years.
	b.	it cannot help in figuring out the inflation.
	c.	it might not always take into account the introduction of new goods accurately.
	d.	it can only help in calculating inflation but not deflation.

Answer 1

1. d. The deflator takes into accounts the final goods and services produced in an economy i.e. the nominal and real GDP, whereas, the CPI gives the basket of goods bought by a typical consumer.

2.

Item	Quantity (base year) 2019	Price (Base year) 2019	Price (2018) $	Quantity (2018)	Price (2017) $	Quantity (2017)	market basket in base year (2019) $	market basket in ( 2018) $	market basket in ( 2017) $
Coffee per pack	15	40.00	45.00	15	10.00	50	600	675	150
Cookie	2	3.00	4.00	2	10.00	3	6	8	20
Total							606	683	170
Base year is 2019
CPI=( Cost of the base year market basket in the current period/Cost of the base year market basket in the base period)x100
CPI in base year is always 100
CPI in year 2018	(683/606)*100
CPI for year 2018 =	112
Inflation rate between 2018 and 2019
((Current period CPI-Prior period CPI)/Prior period CPI)) 100
	(112-100)/100
	12.00%
Answer is B. 3. d $210 Market basket in 2012 ($24 x 5) + ($9 x10)=$120 +$90=$210. 4. c It is new product bias of CPI.