Seminar 2: Question

By Le Thanh Ha
Type I: True/False question (give a brief explanation)
1. When the consumer price index falls, the typical family has to spend fewer dollars
to maintain the same standard of living.
True, CPI falls indicate that the price of goods fall.
2. Economists use the term inflation to describe a situation in which the economy’s
overall price level is rising.
True.
3.
True
4. When the consumer price index is computed, the base year is always the first year
among the years being considered.
False, the base year is usually chosen by the GSO
5. If the current year CPI is 140, then the price level has increased 40 percent since the
base year.
True, inflation rate = (140 – 100)/100=40%
6. Inflation can be measured using either the GDP deflator or the consumer price
index.
True, both can be used to measure GDP, depending on what you interested in.
7. The CPI for 2008 is computed by dividing the price of the basket of goods and
services in 2008 by the price of the basket of goods and services in the base year,
then multiplying by 100.
True
8. If the current year CPI is 90, then the price level has decreased 10 percent since the
base year.
True
9. If the value of the consumer price index is 110 in 2005 and 121 in 2006, then the
inflation rate is 11 percent for 2006.
 False, assume that the base year is 2005, inflation rate = (121-110)/110= 10%
10. Changes in the consumer price index are useful in predicting changes in the
producer price index.
True, Because firms eventually pass on their costs to consumers in the form of
higher consumer prices, changes in the PPI are often thought to be useful in
predicting changes in the CPI
11. The CPI and GDP deflator usually tell two different stories about how quickly
prices are rising.
False, Usually, these two statistics tell a similar story, except for price of oil
changes, and some other situations because of the fixed basket of the Cpi.
12. When the price of Italian wine rises, this change is reflected in the U.S. CPI but not
in the U.S. GDP deflator.
True, as the wine is imported, consumption and net export will cancel out each
others in GDP, but it is counted as a goods in the fixed basket of CPI (the CPI
takes what consumer buy into the basket.)
13. The group of goods and services used to compute the GDP deflator changes
automatically over time, but the group of goods and services used to compute the
CPI does not.
True, the GDP calculted all goods and services produced in a year, which
change through years, while CPI uses a fixed basket of a typical customer to
calculate.
14. If the CPI today is 120 and the CPI five years ago was 80, then something that cost
$1 five years ago would cost $1.50 in today's prices.
True
Inflation rate=(120-80)/80=62,5%
Value of dollar today=1*120/80=1.5 dollar

Type II: Discussion questions

1. Which of the problems in the construction of the CPI might be illustrated by each of
the following situations? Explain.
a. the invention of cell phones
b. the introduction of air bags in cars
c. increased personal computer purchases in response to a decline in their price
d. more scoops of raisins in each package of Raisin Bran
e. greater use of fuel-efficient cars after gasoline prices increase
 2. In a simple economy, people consume only 2 goods, food and clothing. The market
basket of goods used to compute the CPI consists of 50 units of food and 10 units of
clothing.
Food Clothing

2002 price per unit $4 $10

2003 price per unit $6 $20

a. What are the percentage increases in the price of food and in the price of clothing?
b. What is the percentage increase in the CPI?
c. Do these price changes affect all consumers to the same extent? Explain.

3. List the three major problems in using the CPI as a measure of the cost of living.

4. Why does the GDP deflator give a different rate of inflation than the CPI?

5. Suppose that people consume only three goods, as shown in this table (the base year
is 2017):

a. What is the percentage change in the price of each of the three goods? Compute the
nominal and real GDP; and their percetage changes?
b. Using a method similar to the CPI, compute the percentage change in the overall price
level.
c. If you were to learn that a bottle of Gatorade increased in size from 2017 to 2018, should
that information affect your calculation of the inflation rate? If so, how?
d. If you were to learn that Gatorade introduced new flavors in 2018, should that
information affect your calculation of the inflation rate? If so, how?

Type III: Multiple Choice

1. The consumer price index is used to
a. monitor changes in the level of wholesale prices in the economy.
b. monitor changes in the cost of living over time.
c. monitor changes in the level of real GDP over time.
d. monitor changes in the stock market.
2. Which of the following is not correct?
a. The consumer price index gives economists a way of turning dollar figures into
meaningful measures of purchasing power.
b. The consumer price index is used to monitor changes in the cost of living over
time.
c. The consumer price index is used by economists to measure the inflation rate.
d. The consumer price index is used to measure the quantity of goods and services
that the economy is producing.
3. When the consumer price index rises, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
4. The CPI is a measure of the overall cost of the goods and services bought by
a. a typical firm.
b. the government.
c. a typical consumer.
d. All of the above are correct.
5. The CPI is calculated
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
6. In the calculation of the CPI, coffee is given greater weight than tea if
a. consumers buy more coffee than tea.
b. the price of coffee is higher than the price of tea.
c. it costs more to produce coffee than it costs to produce tea.
d. coffee is more readily available than tea is to the typical consumer.