These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD); all prices are fictional. The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Assumptions: the market basket is fixed; a four-function calculator is enough; round percentages to 2 decimal places and money to VD 0.01.
Question 1 (multiple choice · foundation)
A fixed market basket costs VD 400 in the base year and VD 460 in the current year. What is the consumer price index for the current year?
- (A) 15
- (B) 60
- (C) 86.96
- (D) 115
Answer and explanation
Answer: (D). CPI = (460 ÷ 400) × 100 = 1.15 × 100 = 115.
- (A) is the percentage rise in prices since the base year (15%), not the index level. The index is 100 + 15.
- (B) is the difference in cost, VD 460 − VD 400 = VD 60, which is not an index.
- (C) inverts the ratio: (400 ÷ 460) × 100. The given year’s cost goes on top.
Question 2 (multiple choice · core)
Valdoria’s CPI rises from 125 in one year to 130 in the next. What is the inflation rate between the two years?
- (A) 3.85%
- (B) 4.00%
- (C) 5.00%
- (D) 30.00%
Answer and explanation
Answer: (B). Inflation rate = (130 − 125) ÷ 125 × 100 = 5 ÷ 125 × 100 = 4.00%.
- (A) divides by the new index: 5 ÷ 130 × 100 = 3.85%. The percentage change uses the earlier value.
- (C) treats the 5 index points as 5%. That only works when the earlier index is 100.
- (D) is the total rise in prices since the base year (130 − 100), not the change between these two years.
Question 3 (multiple choice · core)
Valdoria’s inflation rate falls from 6% in one year to 2% in the next. Which statement is correct about the second year?
- (A) Valdoria had deflation: the price level fell.
- (B) Valdoria had disinflation: the price level rose, but more slowly than before.
- (C) The price level fell by 4%.
- (D) The CPI fell from 6 to 2.
Answer and explanation
Answer: (B). An inflation rate of 2% is still positive, so prices rose. They rose more slowly than in the year before, which is disinflation.
- (A) confuses a falling inflation rate with a falling price level. Deflation needs a negative inflation rate.
- (C) subtracts the two inflation rates as if the result were a change in prices. The price level actually rose by 2%.
- (D) confuses the inflation rate (a percentage change) with the CPI (an index level).
Question 4 (multiple choice · core)
Which of the following best explains why the CPI may overstate the true increase in the cost of living?
- (A) The basket is fixed, so it ignores consumers switching towards goods whose prices have risen relatively less.
- (B) The CPI includes the prices of imported consumer goods, which are not produced in the country.
- (C) The base year is set equal to 100, which makes the index in later years larger than prices really are.
- (D) Consumers buy more of the goods whose prices have risen the most, and the CPI does not capture this.
Answer and explanation
Answer: (A). This is substitution bias. When some prices rise relatively more, households switch to relatively cheaper substitutes, so their real cost of living rises by less than the fixed basket suggests.
- (B) confuses the CPI with a measure of domestic production. The CPI is meant to measure what consumers pay, so including imported consumer goods is correct, not a bias.
- (C) misunderstands the base year. Setting it to 100 only fixes the scale; it does not exaggerate later values.
- (D) reverses the direction of substitution. Consumers buy less of goods whose relative prices rise.
Question 5 (calculation · core)
A Valdorian nurse earned VD 660 a week in 2024, when the CPI was 120, and VD 750 a week in 2025, when the CPI was 125.
(a) Calculate the nurse’s real weekly wage in each year, in base-year valdas. (b) Calculate the percentage change in the nurse’s real wage. Did her purchasing power rise or fall?
Worked solution
(a) 2024: 660 ÷ 120 × 100 = VD 550. 2025: 750 ÷ 125 × 100 = VD 600.
(b) (600 − 550) ÷ 550 × 100 = 9.09%. Her purchasing power rose.
Check with the shortcut. Nominal wage change = (750 − 660) ÷ 660 × 100 = 13.64%. Inflation = (125 − 120) ÷ 120 × 100 = 4.17%. 13.64% − 4.17% = 9.47%, which is close to the exact 9.09%. The shortcut is an approximation; the exact answer comes from comparing real wages.
Suggested mark points (3): 1 for both real wages; 1 for the percentage change using 550 as the denominator; 1 for the conclusion that purchasing power rose. Accept 9.47% from the shortcut only if it is labelled as an approximation.
Question 6 (constructed response · core)
Valdoria’s statistics office uses a simple basket of 10 mangoes and 4 cinema tickets. The base year is 2024.
| Year | Price of a mango | Price of a cinema ticket |
|---|---|---|
| 2024 | VD 2.00 | VD 7.50 |
| 2025 | VD 2.30 | VD 8.00 |
| 2026 | VD 2.20 | VD 9.00 |
(a) Calculate the cost of the basket in each year. (b) Calculate the CPI for each year. (c) Calculate the inflation rate for 2025 and for 2026. (d) Identify whether Valdoria experienced inflation, deflation or disinflation in 2026. Explain. (e) In 2026, mangoes became cheaper and cinema tickets more expensive. Explain how this could make the CPI overstate the rise in households’ cost of living.
Worked solution and suggested Marlbridge rubric
(a) 2024: 10(2.00) + 4(7.50) = 20 + 30 = VD 50. 2025: 10(2.30) + 4(8.00) = 23 + 32 = VD 55. 2026: 10(2.20) + 4(9.00) = 22 + 36 = VD 58.
(b) 2024: 50 ÷ 50 × 100 = 100. 2025: 55 ÷ 50 × 100 = 110. 2026: 58 ÷ 50 × 100 = 116.
(c) 2025: (110 − 100) ÷ 100 × 100 = 10%. 2026: (116 − 110) ÷ 110 × 100 = 5.45%.
(d) Disinflation. The price level still rose in 2026 (inflation was positive, 5.45%), but the inflation rate fell from 10% to 5.45%.
(e) Because cinema tickets became relatively more expensive and mangoes relatively cheaper, households are likely to buy fewer tickets and more mangoes (substitution). The CPI still prices exactly 4 tickets and 10 mangoes, so it gives too much weight to the good whose price rose. The true rise in the cost of keeping the same standard of living is therefore smaller than the CPI shows: this is substitution bias.
| Point | What earns it |
|---|---|
| 1 | Correct basket costs for all three years |
| 1 | Correct CPI values with 2024 = 100 |
| 1 | Correct 2026 inflation rate of 5.45%, dividing by 110 (2025 rate of 10% also correct) |
| 1 | Disinflation, explained by a positive but falling inflation rate |
| 1 | Links switching from tickets to mangoes with the fixed basket to explain the overstatement |
Accept values carried forward from an earlier error. In (d), “inflation” alone does not earn the point; the answer must recognise the falling rate.
Question 7 (constructed response · stretch)
In 2010, when Valdoria’s CPI was 80, a bicycle cost VD 150. Today the CPI is 140 and a bicycle of the same model costs VD 240.
(a) Calculate the 2010 price of the bicycle expressed in today’s valdas. (b) Has the real price of the bicycle risen or fallen since 2010? Support your answer with a calculation. (c) A newer bicycle model also costs more than VD 150 but is lighter and has better brakes. Explain why counting the whole price rise of the new model as inflation would overstate inflation.
Model answer and suggested Marlbridge rubric
(a) 150 × (140 ÷ 80) = 150 × 1.75 = VD 262.50 in today’s valdas.
(b) The real price has fallen. Today’s price (VD 240) is less than the 2010 price in today’s money (VD 262.50). Alternative: in base-year valdas the real price fell from 150 ÷ 80 × 100 = VD 187.50 to 240 ÷ 140 × 100 = VD 171.43. Another check: the price level rose by 75% while the bicycle’s price rose by only 60%.
(c) Part of the higher price pays for a better product. If the whole price rise is counted as inflation, the index treats the extra quality as a rise in the cost of buying the same thing. The real cost of a given level of quality has risen by less, so the measured inflation is too high. This is the quality-change bias.
| Point | What earns it |
|---|---|
| 1 | VD 262.50, using the ratio of the indices |
| 1 | Correct conclusion (fallen) supported by a valid comparison |
| 1 | Explains that part of the price rise reflects higher quality |
| 1 | Links this to the CPI measuring a higher price for the “same” item, so inflation is overstated |
Any of the three comparisons in (b) is acceptable. In (c), naming “quality bias” with no explanation earns only the third point.
How did you do?
- Q1 or Q6(a)–(b) wrong: re-read “The consumer price index (CPI)” and Worked example 1 in the study guide.
- Q2 or Q6(c) wrong: check the denominator; see the “Check” in Worked example 1.
- Q3 or Q6(d) wrong: re-read the definitions of inflation, deflation and disinflation.
- Q5 or Q7(a)–(b) wrong: revisit “Using an index to compare values across years” and Worked example 2.
- Q4, Q6(e) or Q7(c) wrong: revisit “Why the CPI may overstate inflation”.
Then tick off the topic checklist.