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Exam 19: Returns, Index Numbers, and Inflation

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Question 51

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Firms A, B, and C operate in the market for computers. Each firm's product is popular in the market and is distinct from what the other firms offer. The following table shows the prices of laptops from 2005 through 2007. Which of the following is the unweighted price index for the total price of three types of laptops in 2006, using 2005 as the base year?

A) 96.63
B) 103.48
C) 91.83
D) 100.96

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Question 52

Multiple Choice

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Lindsay Kelly bought 100 shares of Google, 300 shares of Microsoft, and 500 shares of Nokia in January 2005. The adjusted close prices of these stocks over the next three years are shown in the accompanying table. Which of the following is the weighted aggregate price index for Lindsay's portfolio for 2007, using 2005 as the base year?

A) 206.32
B) 177.38
C) 116.31
D) 237.53

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Question 53

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Kim Back invested $20,000 one year in corporate bonds. Each bond sold for $1,000 and earned a coupon payment of $80 each during the year. The price of the bond at the end of the year dropped to $980. Which of the following is Kim's total dollar gain or loss on her investment?

Joanna Robertson bought a share of XYZ Corp. at $200 last year. She was paid a dividend of $30 during the same year. However, the same share is trading at $280 this year. Calculate Joanna's income percent yield from holding the share for a year.

Consider the following data on the prices of three items, A, B, and C, from 2000 through 2002. Which of the following is the unweighted aggregate price index for the three items for 2002, using 2001 as the base year?

Which of the following statements is true about the comparison between the Laspeyres and Paasche indices?

The Consumer Price Index (CPI) and the Producer Price Index (PPI) must always move in sync with each other.

Tammy Welsh has two investment options to choose from. The stocks of both ABC Inc. and XYZ Corp. are currently trading at $200. ABC Inc. is paying a dividend of $10, and is expected to trade at $215 in a year's time. XYZ Corp. is paying a higher dividend of $25. However, the price of XYZ's stock is only expected to go up to $203 a year from now. Experts are estimating inflation to be about 2% in a year's time. A) In which stock should Tammy invest and why? B) If the expected inflation rate was revised to 2.5%, would it alter Tammy's choice? Explain your answer.

The following table provides the prices of the tickets for three types of water rides at an amusement park. a. Compute the unweighted aggregate price index for 2010, using 2009 as the base year. B) Compute the unweighted aggregate price index for 2011, using 2010 as the base year.

Firms A, B, and C operate in the market for computers. Each firm's product is popular in the market and distinct from what the other firms offer. The following table shows the prices of laptops from 2005 through 2007. Suppose this data was collected from a particular town, where people have a preference for firm C's laptops. If 2005 is used as the base year, which of the following statements will be true?

Consider the following price (in dollars) and quantity data for two items during 2010 and 2011. If the value of the Laspeyres price index for 2011, using 2010 as the base year, is 89.46, find the price of item 1 in 2011.

Which of the following statements is true of investment returns?

Jake Morris invested $150 in buying a share of ABC Corp. a year back, on which he received a dividend of $20. Now when the share is trading at a different price, Jake computes his investment return to be 10%. A) Compute Jake's income yield from this investment. B) What is the current price of the share? C) Interpret the result.

Rates of return expressed in nominal terms do not represent a true picture because they are not adjusted for inflation.

Hugh Wallace has the following information regarding three investment options. Each investment option involves the same one-year period. What real percent rate of return will Hugh earn if he invests in option 2?

Three firms, X, Y, and Z, operate in the same industry, although their products have different features and are priced differently. The following table provides the prices and the quantities sold (in units) during the period 2000 to 2002. Which of the following is the Laspeyres price index for 2001, using 2000 as the base year?

An investor bought 1,000 shares of Citigroup in January 2009 for $3.55 a share. She sold all of her shares in December 2009 for $3.31 a share. The inflation rate for 2009 was −0.35%. Which of the following is the investor's real rate of return?

An unweighted price index for different types of properties will unfairly treat all property prices equally.

Because both the Laspeyres and Paasche indices are weighted aggregate price indices, they will yield the same value for a given evaluation period.

Suppose the price of a slice of pizza increased from $2 in 2009 to $2.25 in 2010, and then to $3 in 2011. A) Compute the percentage change in the price of a slice of pizza between 2009 and 2011. B) Compute the simple price index for 2011 if 2009 is the base year. C) Compute the simple price index for 2009 if 2010 is the base year.