ECON2301: HW 6: Chapter 7

If a basic input like oil goes up in price by 20 percent and accounts for 3 percent of total costs in the economy, how much cost-push inflation results?

(.2 x .03 = 0.006) then multiply by 100 = .6

Use the item weights in the figure to determine the percentage changes in the CPI that would result from a (a) 20 percent increase in entertainment prices. (b) 8 percent decrease in transportation costs. (c) Doubling of clothing prices.

(a) 1% Multiply item weight by the increase/decrease in price (convert to decimal first!) then multiply by 100 (b) -1.4% (c) 3.3%

College gets more expensive - again. Tuition at public four-year colleges rose 2.9 percent this year, to an average of $8,893 per year. Out-of-state students pay an average of $22,203 to attend. Private four-year colleges also saw tuition increases of 2.9 percent - to an average of $30,094. These tuition hikes come on the heels of a 4.5 percent jump in 2012-13 and 8.5 percent in 2011-12. Tuition prices have been outpacing general inflation rates for many years. Source: The College Board If tuition for private four-year colleges was $12,359 in 2010-2011, how much was it in:

(a) 2011-12? $ 13409.52 (b) 2012-13? $ 14012.95 (c) 2013-14? $ 14419.33

Asset Change in value (%), 1991-2001 Stocks +250% Diamonds +71 Oil +66 Housing +56 U.S. farmland +49 Average price level +32 Silver +22 Bonds +20 Stamps -9 Gold -29 Instructions: Enter your answer as a whole number in percent form. What happened during the period shown to the (a) Nominal price of gold? (b) Real price of gold?

(a) Nominal price of gold? fell by 29% (b) Real price of gold? fell by 61% (add number above to the average price level)

World View: Zimbabwe's Trillion-Dollar Currency Imagine the price of coffee doubling every day. Or the price of a textbook soaring from $100 to $12,800 in a single week! Sounds unbelievable. But that was the day-to-day reality in Zimbabwe in 2008-09, when the inflation rate reached an astronomical 231 million percent. The Zimbabwean currency lost so much value that people needed a sackful to buy a loaf of bread. To facilitate commerce, the Zimbabwe central bank printed the world's first $100 trillion banknote. Within a week that $100 trillion note was worth about 33 U.S. dollars - enough to buy 6 loaves of bread. Source: News reports, January 2009. What was the price of a loaf of bread in Zimbabwe, measured in:

(a) U.S. dollars? $5.5 (b) Zimbabwe dollars? $16.67 trillion

On the accompanying graph, illustrate the real interest rate (adjusted for same-year CPI inflation) for each year.

Subtract nominal interest rate by CPI inflation rate (a) In what year(s) was the official goal of price stability met? the longest answer choice (b) In what year was the inflation rate lowest? 2009 (c) What was the range of (i) nominal and (ii) real interest rates for the years 2000 to 2013? (i) 3.3-9.2 (ii) 1.8-2.8 (d) On a year-to-year basis, which varies more—nominal or real interest rates? NOMINAL

Use the following GDP deflator data to compute real GDP in 2000 at 2013 prices. Nominal GDP in the year 2000 was $9,817 billion. Year GDP Deflator 2000 81.9 2013 106.7

Subtract the deflators from each other (106.7-81.9= 24.8) & do change/old deflator (24.8/81.9= 0.302). Multiply this number by 9817, then add the new number to 9817 again

Suppose you borrow $600 of principal that must be repaid at the end of two years, along with interest of 4 percent a year. If the annual inflation rate turns out to be 8 percent, (a) What is the real rate of interest on the loan? (b) What is the real value of the principal repayment? (c) Who loses, the debtor or the creditor?

a) -4 b) 552 (600 minus 48 since that's what's after the 2 years) c) Creditor

In the News: College Tuition Up Again College gets more expensive - again. Tuition at public four-year colleges rose 2.9 percent this year, to an average of $8,893 per year. Out-of-state students pay an average of $22,203 to attend. Private four-year colleges also saw tuition increases of 2.9 percent - to an average of $30,094. These tuition hikes come on the heels of a 4.5 percent jump in 2012-13 and 8.5 percent in 2011-12. Tuition prices have been outpacing general inflation rates for many years. Source: The College Board If tuition keeps increasing at the same rate as in 2013-2014, what will be the total cost of completing a degree at a private college over the next four years?

a) 30094+ (30094x.029) = 30966.73 b) 30966.73+ (30966.73x.029) = 31864.77 c) 31864.77+ (31864.77x.029) = 32788.85 d)32788.85+ (32788.85x.029) = 33788.85 Add it all up, final answer: 129360

College gets more expensive - again. Tuition at public four-year colleges rose 2.9 percent this year, to an average of $8,893 per year. Out-of-state students pay an average of $22,203 to attend. Private four-year colleges also saw tuition increases of 2.9 percent - to an average of $30,094. These tuition hikes come on the heels of a 4.5 percent jump in 2012-13 and 8.5 percent in 2011-12. Tuition prices have been outpacing general inflation rates for many years. Source: The College Board Prices That Rose (%) in 2013 Prices That Fell (%) in 2013 Oranges + 9.1% Televisions - 13.5% Bacon + 7.7 Lettuce - 11.7 Eggs + 6.1 Coffee - 7.6 Donuts + 3.6 Peanut butter - 7.5 College tuition + 2.9 Apples - 6.9 Cigarettes + 3.4 Air fares - 4.8 Text books + 2.8 Ice cream - 1.5 Average inflation rate: +1.6% By how much did the pace of tuition hikes exceed the 2013 average rate of inflation?

1.6%

Use the table below to answer the following question: Prices That Rose (%) in 2013 Prices That Fell (%) in 2013 Oranges +10% Televisions -13.5% Bacon +7.7 Lettuce -11.7 Eggs +6.1 Coffee -7.6 Donuts +3.6 Peanut butter -7.5 College tuition +3.5 Apples -7.9 Cigarettes +3.4 Air fares -4.8 Text books +2.8 Ice cream -1.5 Average inflation rate: +1.6% If apples and oranges have identical weights in the "fruit price index", by how much did fruit prices rise in 2013?

2.1 (subtract oranges & apples)

Suppose you'll have an annual nominal income of $35,000 for each of the next 3 years, and the inflation rate is 5 percent per year. (Hint: Use the following formula): I0 / (1 + r)t where I0 is the nominal income, r is the inflation rate and t is the number of years. (a) Find the real value of your $35,000 salary for each of the next 3 years. (b) If you have a COLA in your contract, and the inflation rate is 5 percent per year, what is the real value of your salary of 35,000 for each year?

A) Year 1: $ 33333.3 Year 2: $ 31746 Year 3: $ 30234.3 B) Year 1: $ 35000 Year 2: $ 35000 Year 3: $ 35000 (There's no inflation so you don't count the percentage)

Suppose prices changed from one year to the next as shown in columns 3 and 4 of the following table. Fill in the rest of the table to calculate the average inflation rate.

Item Quantity Unit Price Last Year Unit Price This Year Total Last Year Total This Year % Change in Price Last Year Item Weight Inflation Impact Coffee 20 pounds $6 $8 $ 120 $ 160 33 % .019 .627 % Tuition 1 year 4,000 5,000 $ 4000 $ 5000 25 % .642 16.05 % Pizza 150 pizzas 10 12 $ 1500 $ 1800 20 % .24 4.8 % Cable TV 12 months 30 36 $ 360 $ 432 20 % .057 1.14 % Vacation 1 week 250 300 $ 250 $ 300 20 % .04 .8% Total Budget $6230 $7692 Average inflation: 23.47% (To calculate average inflation, divide last year's total budget by this year's total budget, then multiply by 100)

Assuming that the following table describes a typical consumer's complete budget, compute the item weights for each product. Item Quantity Unit Price Coffee 20 pounds $6 / lb. Tuition 1 year 4,000 / yr Pizza 150 pizzas 10 / ea. Cable TV 12 months 30 Vacation 1 week 250 / week Instructions: 1. Calculate the total price for each budget item. 2. Calculate the total budget and enter your responses rounded to the nearest whole dollar. 3. Enter the item weight rounded to three decimal places. (Leave your answer in decimal values, do not enter your answer as a percentage.) 4. All dollar values should be rounded to the nearest whole dollar.

Item Quantity Unit Price Total (P × Q) Item weight Coffee 20 pounds $6 $120 .019 Tuition 1 year $4,000 $4000 .642 Pizza 150 pizzas $10 $1500 .241 Cable TV 12 months $30 $360 .058 Vacation 1 week $250 $250 .040 Total Budget $6230 (To find weight, divide the total of each product by the actual total budget, in this case 6230)