Homework 2

In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 237 for 2015. President Hoover's 1931 salary was equivalent to a 2015 salary of about

$1,169,408.

Suppose the consumer price index was 184 in Year 1 and 198.17 in Year 1. The nominal interest rate during this period was steady at 5.8 percent. What was the real interest rate during this period?

-1.9 percent

Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was

110.0.

The inflation rate you are likely to hear on the nightly news is calculated from the

CPI.

In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the

Consumer Price Index Rises Much more than GDP deflator

Suppose that in 2018, the producer price index increases by 1.5 percent. As a result, economists most likely will predict that

the consumer price index will increase in the future.

If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is

−2 percent.

The following table shows the value of the consumer price index and the nominal interest rate for three consecutive years. Refer to Table 24-5. What was the real interest rate in Year 3?

2.0%

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

fails to account for the introduction of new goods.

When the consumer price index rises, the typical family

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

By far the largest category of goods and services in the CPI basket is

housing.

The nominal interest rate tells you

how fast the number of dollars in your bank account rises over time.

In the CPI, goods and services are weighted according to

how much consumers buy of each good or service.

When the quality of a good improves while its price remains the same, the purchasing power of the dollar

increases, so the CPI OVERstates the change in the cost of living if the quality change is not accounted for.

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy

more milk and more T-shirts.