Macroeconomics - CPI and the Cost of Living

Last month, the interest rate on a money fund averaged 0.08% a year and on 5-year CDs it was 2.6 a year. The inflation rate was 0.1% a year. The real interest rate on a money fund is

-0.02 percent a year. The real interest rate is calculated as Real interest rate=Nominal interest rate - Inflation rate. The nominal interest rate on a money fund is 0.08 percent a year and the inflation rate is 0.1 percent a year. So the real interest rate is 0.08 percent -0.1 percent, which is - 0.02 percent a year.

Imagine that you are given $1K to spend and told that you must spend it all buying items from a Sears catalog. But you have a choice of catalog. You may select from the 1903 catalog or from Sears.com today. You will pay the prices quoted in the catalog of your choice. The _______________ bias in the CPI is relevant to your choice of catalog.

New goods bias and the quality is a relevant choice. The quality change in the goods and the goods offered in the present day are better than in 1903.

The BLS reported that the CPI in July 2010 was 226. this news tells you that

the prices of consumption goods and services have risen, on average by 127 percent since the base year. CPI in the base year is 100. So the rise in the price since the base year is (226-100) / 100) x100 which is 126 percent.

Harry's CPI in Week 1 and Week 2 Week 1 -Harry's CPI in Week 1 = (5x$3.00)+ (5X$1.00)+(10x$2.00)=$40 Item Quantity Price CPI Cost of Basket Coffee 5 cups $3.00 $15.00 iTunes 5 $1.00 $5.00 Gasoline 10 gals $2.00 $20.00 Week 2 -Harry's CPI in Week 2=(5x$3.25) + (5X$1.00)+(10x$30) = $51.25 Item Quantity Price CPI Cost of Basket Coffee 5 cups $3.25 $11.25 iTunes 5 $1.00 $5.00 Gasoline 10 gals $3.00 $30.00 Harry's CPI in Week 2 is 128.1. Harry's CPI in Week 1, which is the reference base period is 100.

Harry's CPI in Week 1 = (5x$3.00)+ (5X$1.00)+(10x$2.00)=$40 Item Quantity Price CPI Cost of Basket Coffee 5 cups $3.00 $15.00 iTunes 5 $1.00 $5.00 Gasoline 10 gals $2.00 $20.00 Harry's CPI in Week 2=(5x$3.25) + (5X$1.00)+(10x$30) = $51.25 Harry's CPI in Week 2 is (Cost of CPI basket in Week 2 + Cost of CPI basket in Week 1) which is ($51.25 / $40) X 100 = 128.125 Harry's inflation rate is the percentage change in the price level from Week 1 to Week 2, which is (128.1-100)/100)x100 = 28.1

If nominal GDP increases by 5 percent a year and the GDP price index rises by 2 percent a year, then real GDP increases by 3 percent

If nominal GDP increases by 5 percent a year and the GDP price index rises by 2 percent a year, then real GDP increases by 5 percent - percent, which is 3 percent a year.

Of the alternative measures of the price level ,PCE price index, overcomes the bias of the CPI and is a better measure of the cost of living because it uses a current basket of all consumption goods.

PCE price index, overcomes the bias of the CPI and is a better measure of the cost of living because it uses a current basket of all consumption goods. The PCE price index is an average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base year prices. The PCE price index uses current information on qualities, which overcomes most of the sources of bias in the CPI. Like the CPI, the PCE price index focuses on consumption expenditures and is therefore a possible measure of the cost of living.

The base year is 2009. Real GDP in 2009 was $10 trillion (2009 dollars) The GDP deflator in 2013 was 112, and real GDP in 2013 was $11 trillion (2009) What was the percentage increase in production between 2009 and 2013? By what percentage did the cost of living rise between 2009 and 2013?

The percentage increase in production between 2009 and 2013 is 10 percent. The percentage increase in the cost of living between 2009 and 2013 is 12 percent. The percentage change in the cost of living between 2009 and 2013 is calculated as (GDP price index in 2013 - GDP price index in 2009) /GDP price index in 2009) x 100, which is (112-100) / 100 x 100 = 12 percent.

When the price level ________ the inflation rate________

When the price level rises rapidly the inflation rate is high

Box Office Mojo calculates real dos-office receipts by multiplying the movie revenue by the a)_______________________ and dividing by the b)________________________________________________

a) movie ticket price in the current year: b) movie ticket price in the year the movie revenue was earned ***Box-Office Mojo uses average ticket prices, so the real variable that it compares is the number of movie tickets sold.

When the price level _________ the inflation rate _______________

a) rises rapidly b) is high The inflation rate is the percentage change in the price level from one year to the next. When the price level rises rapidly, the inflation rate is high.

Numbers in tables that provides information about the US CPI for a time period

are price levels

When the CPI increases from 200 in 2010 to 210 in 2011 and the nominal wage rate is constant at $10 an hour, the real wage rate

decreases by 5 percent. When the nominal wage rate is $10 and the CPI is 200, the real wage rate is ($10/210) x100, which is $4.76. The change in the real wage rate between 2010 and 2011 is (4.76 - $5.00) ?$5.00) x 100, which is -5 percent.

The BLS reported that the CPI in July 2010 was 226. The news tells you that _________________

the prices of consumption goods and services have risen, on average, by 126 percent since the base year The BLS reported that the CPI in July 2010 was 226. The CPI in the base year is 100. So the rise in the price since the base year is (226-100) / 100) x100, which is 126 percentage.

When the price level is rising at

2 percent a year and the real interest rate is 1 percent a year, the nominal interest rate is 3 percent a year. Nominal interest rate=Real interest rate + inflation rate. Rearranging. Inflation rate = Nominal interest rate - Real interest rate, which is 3 percent - 1 percent = 2 percent a year

Last month, the interest rate on a money fund averaged 0.08% a year and on 5-year CDs it was 2.6 a year. The inflation rate was 0.1% a year. The real interest rate on a 5-year CD is

2.5 Percent a year The real interest rate is calculated using the formula. Real interest rate = Nominal interest rate - Inflation rate. The nominal interest rate on a 5-year CD is 2.6 percent a year and the inflation rate is 0.1 percent a year. So the real interest rate is 2.6 percent - 0.1 percent, which is 2.5 percent a year.

37. The people on Coral Island buy only juice and cloth. The CPI basket contains the qualities bought in 2010. The household spent $18 on juice and $64 on cloth in 2010 when the price of juice was $2 a bottle and the price of cloth was $ yard. In the current year, 2011 juice is $ 8 a bottle and cloth is 4 a yard. To calculate the CPI rate: To calculate the inflation rate in 2011:

2010 Item Quantity Price CPI Cost of Basket Juice $ a bottle $ Cloth $ a yard $ CPI BASKET ( + $) = $ 2011 Item Quantity Price CPI Cost of Basket Juice $ a bottle $ Cloth $ a yard $ CPI BASKET ($ +$) = $ The CPI Rate in 2011 = (/) x100 = CPI rate CPI (Cost of CPI basket in 2011 prices) + (Cost of CPI basket in base period prices) x 100. So the CPI in 2011 = (CPI in 2011 - CPI in 2010) x 100 which i 126.8 - 100)/100) x 100=26.8 percent.

The real variable that Box-Office Mojo is calculating is in terms of

movie tickets sold. For example: to convert the Gone with the Wind revenues into 2012 dollars, Box-Office Mojo multiples the dollars received each year by the 2012 ticket price and divides by the ticket price for the year in which the dollars were earned.

The CPI bias arises from all of the following items except

the goods and services bought by poor people CPI bias arises from the introduction if new goods and services consumer's responses to price changes the improved quality of goods

The CPI bias arises from all of the following items except:

the goods and services bought by poor people are not part of the source of the bias in the CPI

The people on Coral Island buy only juice and cloth. The CPI basket contains the qualities bought in 2010. The household spent $60 on juice and $30 on cloth in 2011 when the price of juice was $2 a bottle and the price of cloth was $5 yard. In the current year, 2011 juice is $4 a bottle and cloth is $6 a yard. To calculate the CPI rate: To calculate the inflation rate in 2011:

2010 Item Quantity Price CPI Cost of Basket Juice 30 $2 a bottle $60 Cloth 6 $5 a yard $30 CPI BASKET (60 + $30) = $90 2011 Item Quantity Price CPI Cost of Basket Juice 30 $4 a bottle $120 Cloth 6 $6 a yard $36 CPI BASKET ($120 +$36) = $156 The CPI Rate in 2011 = (156/90) x100 = 173.3 CPI rate CPI (Cost of CPI basket in 2011 prices) + (Cost of CPI basket in base period prices) x 100. So the CPI in 2011 is ($4x30) + ($6 x6) /($2x30)+($5x6)x 100 = 173.3 The inflation rate in 2011 = (156 - 90) / 90) x100) = 73.3 (156-90) /90) X100) = 73.3

Last month, the interest rate on a money fund averaged 0.08% a year and on 5-year CDs it was 2.6 a year. The inflation rate was 0.1% a year. To maintain these real interest rates in the coming months, the nominal interest rate will

Increase on both assets by 0.1 percent The real interest rate is calculated using the formula. Real interest rate = Nominal interest rate - Inflation rate. If the inflation rate rises 0.1 percent to 0.2 percent, a difference of 0.1 percent, then the equation tells us that the nominal interest rate must also rise by 0.1 percent to keep the real interest rate constant.

Calculate nominal GDP in 2009 and in 2013. What is the percentage increase in nominal GDP between 2009 and 2013?

Nominal GDP in 2009 is $10M Nominal GDP in 2013 is $12.32trillion. The percentage increase in nominal GDP between 2009 and 2013 is 23.2 percent. The percentage increase in the nominal GDP between 2009 and 2013 is calculated as Nominal GDP in 2013 - nominal GDP in 2009/ Nominal GDP in 2009) x 100. which is ($12.32 trillion- $10.0 trillion/x100 = 23.2 percent. GDP price index + Nominal GDP / Real GDP) x 100. Rearranging, Nominal GDP + ( GDP price index x Real GDP) / 100. Using the values for 2013, Nominal GDP + (112 x $11 trillion/100 + $12.32 trillion GDP price + (Nominal GDP / Real GDP) x 100. Rearranging. Nominal GDP + (GDP price index x Real GDP) / 100. Using the values for 2009. Nominal GDP + (100x $10 trillion) / 100 + $10 trillion. Remember that nominal GDP equals real GDP in the base year. 2009 is the base year.

The base year is 2009. Real GDP was $10 trillion (2009 dollars) The GDP deflator in 2013 was 112, and real GDP in 2013 was $11 trillion dollars. What was the percentage increase in production between 2009 and 2013? By what percentage did the cost of living rise between 2009 and 2013?

The percentage increase in production between 2009 and 2013 is 10%. Real GDP i 2013-Real GDP in 2009) / Real GDP in 2009) x 100. The percentage increase in the cost of living between 2009 and 2013 is 12%. The percentage change in the cost of living between 2009 and 2013 is calculated as: GDP price index in 2013-GDP price index in 2009) / GDP price index 2009) x 100 Which is (112-100)/100)x100 = 12 percentage.

The CPI measures the average prices paid by ______________ for _____________________.

a) urban consumers b) a fixed basket of consumption goods and services The CPI is a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services

The reference base period for the CPI is the 36 months from

from Jan. 1982 - Dec. 1984

The CPI measures the average prices paid by

urban consumers, for a fixed basket of consumption goods and services