Question

The Consumer Price Index base year index value is always:

	a.	100
	b.	50
	c.	1000
	d.	0

When considering the CPI, which index type typically overstates inflation?

	a.	Laspeyres
	b.	Paasche
	c.	Reagan’s Mean
	d.	Fisher’s Mean

Suppose that your salary in 2010 was $40,000 and $43,000 in 2018. If the CPI index was 218.1 in 2010 and 250.5 in 2018, what is your 2018 salary in 2010 dollars?

	a.	$40,000
	b.	$49,388.
	c.	none of the answers are correct.
	d.	$37,438.
	e.	$43,000

Answer 1

Question 1

Base year refers to a year which is used as reference year with which prices in other years be compared to estimate the inflation rate in each successive or previous year.

In base year, the value of CPI is always 100.

Hence, the correct answer is the option (a).

Question 2

When CPI is calculated using Laspeyres Index Method then in such case inflation is typically overstated.

Hence, the correct answer is the option (a).

Question 3

2018 salary = $43,000

CPI in 2010 = 218.1

CPI in 2018 = 250.5

Calculate the 2018 salary in 2010 dollars -

Salary = 2018 salary * (CPI in 2010/CPI in 2018)

Salary = $43,000 * (218.1/250.5)

Salary = $43,000 * 0.87065 = $37,438

Thus,

The 2018 salary in 2010 dollars would be $37,438

Hence, the correct answer is the option (d).