Measuring the Cost of Living

Question 1

What is Consumer Price Index (CPI)

Answer 1

The CPI is a measure of the overall cost of the goods and services bought by a typical consumer.

Question 2

What is the inflation rate

Answer 2

The inflation rate is the percentage change in the price index from the preceding period.

Question 3

What are the problems in measuring the cost of living

Answer 3

1. Commodity substitution bias
2. Introduction of new goods
3. Unmeasured quality change

Question 4

What is a nominal interest rate

Answer 4

The nominal interest rate is the interest rate that is usually reported without a correction for the effects of inflation

Question 5

What is Real interest rate

Answer 5

The real interest rate is the interest rate that is corrected for the effects of inflation.

Question 6

The formula for CPI is:

Cost of Basket in current year
________________________________× 100

Cost of Basket in base year

A. True
B. False

Answer 6

True

Question 7

What is the formula for Inflation rate

Answer 7

Inflation in yr2=CPI Year2-CPI Year1
_____________________ x 100

                                 CPI Year1

Question 8

What is Core inflation

Answer 8

Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors.

Question 9

The real interest rate (r) is the nominal interest rate (i) corrected for inflation (π)
A. True
B. False

Answer 9

True