Question

35. What is the largest component of the CPI market basket?   
                    
          Entertainment
          Food
          Health care
          Housing
          Transportation

           

36. If the CPI increases from 150.0 to 157.5 over the course of a year, what is the rate of inflation for that year?
  
                


37. Assume that in 2019 Acme sold $30 million of widgets, and in 2020 Acme sold $31.5 million of widgets. There was a 3% rate of inflation in 2020.  
    What happened to the real revenue earned from Acme widgets in 2020?   
     
          It did not change
          It decreased
          It increased
          Not enough information to determine

           

38. Assume a simple economy that produces only 3 goods.  

    In the base year: 4 units of books sold at a price of $10, 4 units of clothing sold at a price of $5, and 20 units of food sold at a price of $2.  
    In the current year: 6 units of books sold at a price of $8, 2 units of clothing sold at a price of $7, and 15 units of food sold at a price of $3.

        Calculate the Laspeyres price index (weight by base year quantities) for the current year.
  
                


39. What is the purpose of a COLA clause?   
     
          To keep nominal income constant
          To keep real income constant
          To prevent a fall in the purchasing power of the dollar
          To prevent hyperinflation
          To protect against changes in the exchange rate



40. Assuming there is expected to be inflation over the coming year, will a 1-year TIPS (Treasury inflation protected security) offer a higher or lower interest rate than a comparable non-TIPS Treasury security?   
     
          Higher
          Lower
          Rates will be the same

Answer 1

35. Housing is the largest component in CPI basket.

Other components include transportation, food and beverages and so on.

36. Rate of inflation = difference in cpi *100/ starting cpi

7.5*100/150= 5%

37. The real revenue in 2020 has increased.

This is because infalation rate is 3% and extra revenue earned this year is 1.5 million. So 3% of 30 million is 0.9 million.

Thus, 1.5 is more than 0.9 so real revenue has increased.

Please ask few questions at a time for detailed explanation. Thank you!