Question 1: In each of the questions below, only one of the options is TRUE (1 point each, total 06/15)

1. While computing CPI, which of the following does not change from year to year?
a) Prices of consumer’s basket.
b) Quantities of goods and services in the consumer’s basket.
c) Both prices and quantities are in the consumer’s basket.
d) None of the above is correct.
2. The CPI is a measure of the overall:
a) cost of the goods and services bought by typical consumers.
b) cost of the goods and services bought by producers.
c) cost of the goods and services bought by the government.
d) None of the above is correct.
3. Which of the following is excluded from the consumer price index?
a) imported consumer goods.
b) capital goods.
c) foods and beverages.
d) None of the above is correct.
4. By not considering consumer substitution, CPI
a) overstate the cost of living.
b) understate the cost of living.
c) justify the cost of living.
d) None of the above is correct.
5. If the nominal interest rate is 8% and the inflation rate is 4%, then the real interest rate is
a) 4%
b) 3%
c) -3%
d) None of the above is correct.
6. The Central Statistical Bureau of Kuwait collects the prices of about ______ goods and services from
about 470 sources and outlets and uses _______ as the base year.

a) 1,1400 goods and services, 2010

b) 1,400 goods and services, 2012
c) 1,400 goods and services, 2013
d) None of the answers is correct.

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Question 2: Give at least two differences between CPI and GDP deflator. (0.5 point for each
difference, total 02/15)
Answer: CPI GDP Deflator
Imported goods included excluded
Capital goods (if produced domestically) excluded included
currently produced goods &
Basket of goods and services fixed basket
services in a period

Question 3: Determine each scenario's effects on the CPI and GDP deflator. (1 point for each, total
03/15)
CPI GDP Deflator
Cases Increase, decrease, Increase, decrease,
no change no change
If the price of gas rises. Increase Increase
Toyota has increased prices in line with rising
Increase no change
material costs.
Zara raises the price of its consumer product (in
your own country). Increase no change

Question 4: Complete the table below using the information provided and compute the following:
(total 4/15)
a) CPI in 2012, 2013, and 2014. (1 point for each year)
b) CPI inflation rate between 2013 and 2014. (1 point)

CPI BASKET: {10 lbs. lamb, 20 lbs. chicken} and 2012 base year
Years Price of lamb Price of chicken
2012 $4 $4
2013 $5 $5
2014 $9 $6

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Show all necessary steps of calculation.
Cost of the basket (2012) = $4 x 10 + $4 x 20 = $120
Cost of the basket (2013) = $5 x 10 + $5 x 20 = $150
Cost of the basket (2014) = $9 x 10 + $6 x 20 = $210

cost of the basket ∈current year

Cpi= × 100
cost of the basket ∈base year

a) CPI 2012 = 120/120 *100 = 100

CPI 2013 = 150/120*100 = 125

CPI 2014 = 210/120*100 = 175

CPI current year −CPI last year

Cpi Inflation= ×100
CPI last year

b) Inflation= {(175 – 125) / 125} x 100

Inflation 2013-2014 = 40%