Review of Chapter 24

If the price of petrol rises

• Only CPI will rise

• Only GDP Deflator will rise

• Both CPI and GDP deflator will rise

If a local manufacturer raises the price of hydraulic cleaners (for industrial use)

• Only CPI will rise

• Only GDP Deflator will rise

• Both CPI and GDP deflator will rise

If Honda raises the price of their cars in Abu Dhabi

• Only CPI will rise

• Only GDP Deflator will rise

• Both CPI and GDP deflator will rise

If all I care about is purchasing power, when did I make more money? $100,000 in 2000 or $147,000 in 2013? CPI in 2000 = 89 and CPI in 2013 = 120

Inflation can be measured using either the GDP deflator or the consumer price index

• True

• False

If the consumer price index is 120 in 2009 and 139.2 in 2010, then the rate of inflation for 2010 is 39.2 percent

• True

• False

The consumer price index is

• not very useful as a measure of the cost of living

• a perfect measure of the cost of living.

• a useful measure, but not a perfect measure, of the cost of living

• not used as a measure of the cost of living

Solve the following questions:

CPI basket (water 100 liters, bread 50 kg):

The CPI basket cost $200 in 2010, the base year.

a.     Compute the CPI in 2011.

b.     What was the inflation rate from 2011-2012?

Which problem in the construction of the CPI might be illustrated by:

The invention of cell phones

• Unmeasured quality change

• Introduction of new goods

• Substitution Bias

• Others

Which problem in the construction of the CPI might be illustrated by:

Greater use of fuel-efficient cars after gas prices increase

• Introduction of new goods

• Unmeasured quality change

• Substitution Bias

• Others