61809294.doc 1.

The data in Table 1 above refer to a small country that produces CDs, wheat and kiwi fruit. The data in Table 1 provide the quantities of these goods produced in 1990 and 1991 as well as the prices of these goods in those years. Suppose the average household as defined by Statistics Canada purchases a bundle of goods consisting of: o o o 8 CDs 5 bushels of wheat 3 pounds of kiwi fruit

a) Use this information and the prices from Table 1 to construct a Consumer
Price Index for 1991 when the value of the Consumer Price Index in 1990 is 100. 142 b) What is the inflation rate between 1990 and 1991? 42% Table 1 1990 Base year P Q P 1991

CDs

$20

$17

12

Wheat

$5

$5.50

10

Kiwi Fruit

$0.75

$1

2.

If the CPI this year is 175.2 and next year the CPI is 176.1, what was the inflation rate over the year? 0.5% A ham and cheese sandwich at the local deli cost $3.79 in 1991. If the CPI in 1991 was 90.0 and the CPI today is 110.0, what is the equivalent price for a ham and cheese sandwich today? 4.63 What is the largest component of the CPI market basket? food Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain. food Compute how much each of the following is worth in terms of todays dollars using 177 as the price index for today. a) b) c) In 1926 the CPI was 17.7 and the price of a movie ticket was $0.25 (2.5) In 1932 the CPI was 13.1 and a cook earned $15.00 a week (202) In 1943 the CPI was 17.4 and a gallon of gas cost $0.19 (1.93)

3.

4. 5. 6.

61809294.doc 7. Table 2, gives the CPI basket for 2000 and 2001. Table 2 Quantity Item [2000] [base] [2001] Oranges Bananas Chicken Beef Bread 50 100 200 100 300 Price [2000] $0.90 $0.50 $2.00 $5.00 $1.75

Price [2001] $0.75 $0.95 $2.50 $4.80 $2.00

a) b) c) d)

What is the cost of the CPI basket in 2000? 1520 What is the cost of the CPI basket in 2001? 1712.5 What is the CPI for 2000? 100 What is the CPI for 2001? 112.7

8. Discuss the types of biases in the CPIs measurement. Substitution bias this is the bias occurred when the price of the goods and service in the basket change, and consumers tend to buy more some other goods and services to substituate for the goods and service original bought Unmeasured quality of goods and service if the price for one goods and service stay the same and its quality has been made better, each dollar of the consumre becomes more valuable Introduction of new goods and service more choice the consumers has, this make the dollar of the consumers more valuable. 9. Under which of the following conditions would you prefer to be the lender? a) b) c) The nominal rate of interest is 20% and the inflation rate is 25% The nominal rate of interest is 15% and the inflation rate is 14% The nominal rate of interest is 12% and the inflation rate is 9% The nominal rate of interest is 5% and the inflation rate is 1%

d)

10. You know that a candy bar costs sixty cents today. You also know the CPI for
1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

61809294.doc

a) b) c) d)

Sixty cents x (todays CPI 1962 CPI) Sixty cents x (1962 CPI todays CPI) Sixty cents x (todays CPI/1962 CPI) Sixty cents x (1962 CPI/todays CPI)

61809294.doc Use the following information to answer Questions 11, 12 and 13:

Grant Smith was a doctor in 1944 and made about $12,000 a year. His daughter Lisa Smith also is a doctor and she made about $175,000 in 2001. The price index in 1944 was 17.6 and the price index in 2001 was 177.

11.What is Grants income in 2001 dollars? a) b) c) d) $19,128 $21,240 $120,682 $173,600

12. What is Lisas income in 1944 dollars?

a) b) c) d) $15,667 $17,401 $19,322 None of the above are correct

13.What was the ratio of Grants real income to Lisas real income? a) b) c) d) 2:15 3:5 7:10 1:1

14.Go to the Statistics Canada website: http://www.statcan.gc.ca/start-debut-eng.html Determine the CPI annual inflation rate.