Question

1. Which of the following describe the consumer price index (CPI)? It:

1. compares the cost of the typical basket of goods consumed in period 1 to the cost of a basket of goods typically consumed in period 2.
2. compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.
3. measures the increase in the prices of the goods included in GDP.
4. is the ratio of the average price of a typical basket of goods to the cost of producing those goods.

Table 15.0

Base Year (2006)                    2013
Product	Quantity	Price	Price
Milk	50	$1.20	$1.50
Bread	100	1.00	1.10

2. Refer to Table 15.0. Assume the market basket for the consumer price index has two products — bread and milk — with the following values in 2006 and 2013 for price and quantity: The Consumer Price Index for 2013 equals:
   1. 118.
   2. 116.
   3. 86.
   4. 85.

3. Suppose the CPI last year is 121 and the CPI this year is 137. The CORRECT method to calculate the inflation rate is:
   1. (137 - 121)/100 = 0.16.
   2. 137 × 121 = 258.
   3. [(137 - 121)/121] × 100 = 13.2.
   4. (137/121) × 100 = 113.2.
      
4. Which of the following describe the substitution bias that exists in the calculation of CPI? It:
   1. takes into account the substitution of goods by consumers when relative prices change.
   2. takes no account of the substitution of goods by consumers when relative prices change.
   3. substitutes quality changes whenever they occur without taking account of the cost of the quality changes.
   4. substitutes relative prices for absolute prices of goods
5. Suppose that over a period of years Country B switched from being an agriculturally-based economy to a technologically-based economy. As a result, many people lost jobs because they lacked the correct skills. As they search for new jobs, these people are part of:
   1. frictional unemployment.
   2. structural unemployment.
   3. cyclical unemployment.
   4. discouraged workers.
      

Answer 1

• Option b.

CPI compares the change in prices of basket of goods of a typical customer from base period to current period.

• Option b.

CPI for 2013 is calculated as -

=( 50×1.5 + 100 ×1.1 )/(50 × 1.2 +100× 1)

= 115.6 or 116

• Option c

Inflation is % age change in price level of CPI.

or, ( 137 -121)/121 ×100 = 13.2

• Option b.

Substitution bias in CPI takes no account of substitution of goods when relative price changes and thus overestimates inflation.

• Option b.

When the unemployment in the economy arises due to lack of correct skills, because of paradigm shift in the production process making existing labour redundant it is a case of structural unemployment.