Econ Chapter 11

In 1983, one could buy a model radio-controlled airplane for $11.50 each. Those same planes are available today and the price increased at exactly the rate of inflation. If the CPI today is 220.5 and in 1983 was 105, what is the price of the airplane today?

$24.15

David earned a salary of $43,500 in 1994 and $89,000 in 2010. The consumer price index was 148.2 in 1994 and 215.3 in 2010. David's 1994 salary in 2010 dollars is

$63,195.34

The table below pertains to Iowan, an economy in which the typical consumer's basket consists of 4 pounds of pork and 3 bushels of corn. Year Price of Pork Price of Corn 2012 $20 per pound $12 per bushel 2013 $25 per pound $18 per bushel Refer to Table 24-3. If 2012 is the base year, then the CPI for 2012 was

100.0

If the nominal interest rate is 5 percent, and the rate of inflation is 3 percent, then the real interest rate is equal to

2 percent.

Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this one-year period?

3.3 percent for Canada and 9.1 percent for Mexico

The table below applies to an economy with only two goods — hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs. Year Price of hamburgers Price of hot dogs 2009 $5.00 $3.00 2010 5.50 3.30 2011 5.61 3.63 Between 2010 and 2011, the cost of living increased by

6.36 percent

The table below lists the per gallon prices of gas and milk for the months of April, May, and June. Assume that the typical consumer buys 60 gallons of gas and 4 gallons of milk each month, and that April is the base period. Month Price of Gas Price of Milk April $2.00 $3.50 May $3.50 $3.25 June $3.85 $3.58 What is the inflation rate for May?

66.4%

John just graduated law school and has two competing job offers. The first is in Phoenix and pays a salary of $150,000. He has a similar job offer in Cleveland that pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?

70 in Phoenix and 42 in Cleveland

The table below pertains to Iowan, an economy in which the typical consumer's basket consists of 4 pounds of pork and 3 bushels of corn. Year Price of Pork Price of Corn 2012 $20 per pound $12 per bushel 2013 $25 per pound $18 per bushel Refer to Table 24-3. If 2013 is the base year, then the CPI for 2012 was

75.3

The price index was 220 in one year and 238.2 in the next year. What was the inflation rate?

8.3 percent

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

a typical consumer

For any given year, the CPI is the price of the basket of goods and services in the

given year divided by the price of the basket in the base year, then multiplied by 100.

When the consumer price index rises, the typical family

has to spend more dollars to maintain the same standard of living.

Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent, so she decides to buy some peppermint tea instead. To which problem in the construction of the CPI is this situation most relevant?

substitution bias

One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called

substitution bias.

Suppose that over the past year, the nominal interest rate was 5 percent, the CPI was 150.3 at the end of the year, and the CPI was 144.2 at the beginning of the year. It follows that

the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 0.8 percent.

Economists use the term inflation to describe a situation in which

the economy's overall price level is rising