Practice Ch 8 SP23

In 1976, the cost of a movie was $4. In 2012, it's $9. If the CPI for 1976 is 56, and 228 for 2012, then we could say the cost of a 1976 movie in 2012 would be:

$16.29, so the cost of movies has not increased as much as general inflation. To covert the 1976 price of $4 into 2012 dollar value, we multiply $4 by the ratio of 228/56 or 4.07. We can then state the cost of a 1976 movie in 2012 dollar value to be $16.29 ($4*228/56).

Using the information in the table shown, what is the 1999 salary in 2009 dollars?

$174,136

On January 1, 2004, Edward invested $10,000 at 5% interest for one year. The CPI on January 1, 2004 stood at 1.60. On January 1, 2005, the CPI was 1.76. The real rate of interest earned by Edward was ______ percent.

-5

On January 1, 2004, Anna invested $5,000 at 5% interest for one year. The CPI on January 1, 2004 stood at 1.60. On January 1, 2005, the CPI was 1.68. The real rate of interest earned by Anna was ______ percent.

0

Until Congress began to periodically raise benefit levels to adjust for inflation, the first recipients of Social Security checks:

All of these statements are true.

An unexpected increase in the rate of inflation would have the effect of redistributing wealth from

An unexpected increase in the rate of inflation would have the effect of redistributing wealth from savers to borrowers because we would expect savers to lend money at interest rates based on the expected rate of inflation. If the rate of inflation increased beyond expectations, the money savers received for repayments of debts would be worth less than what they had planned. The money borrowers use to repay the debts costs less in real terms than what they expected. Thus, the unexpected inflation causes savers to lose some wealth and borrowers to gain some wealth.

If the growth rate in nominal income is larger than the inflation rate (as measured by the change in the CPI or the GDP deflator), the real value of income has:

Any time a nominal value is rising faster than the inflation rate, the real value will be rising. The intuition is that real income is rising by the rate of nominal income growth but falling by the rate of inflation. As long as nominal income growth outpaces inflation, real incomes will be rising. To convince yourself of this, try a simple numerical example. Think back to the equation earlier in the chapter for the value of 1969 income in 2014 dollars: 1969real2014 = 1969nominal × (CPI2014/CPI1969) To make the calculations easier, suppose 1969nominal = 10,000 and CPI1969 = 100. Now suppose 2014nominal rises by 10% over 1969nominal and CPI2014 rises 5% over CPI2014: 2014nominal = 11,000 (10% higher than 1969) and CPI2014 = 105 (5% higher than 1969). Now calculate 1969real and see whether it is higher or lower than 2014real: 2014real = 2014nominal = 11,000 1969real = 10,000 × (105/100) = 10,500So, real income has risen between 1969 and 2014. You can try this with any combination of numbers.As long as nominal income is rising faster than the CPI, 2014real will be greater than 1969real.

Using the data in the table below, calculate the CPI and the inflation rate in each year, using 2013 as a base year.

CPI year x = (Cost of basketyear x /Cost of basketbase year) × 100. Inflation rate = Percent change in CPI = [(CPInew - CPIold)/CPIold] × 100. Note: When calculating the inflation rate it is best to use the calculated CPI values and not the rounded values to avoid a rounding error.

Jack recently took out a loan from Diane at an interest rate of 6 percent. Diane expected this year's inflation rate to be 3 percent and the real interest rate to be 3 percent. The loan is due at the end of this year. Complete the table below by computing the real interest rate for each possible inflation rate. For each situation, determine whether the unexpected inflation level benefits Jack or Diane.

The expected real interest rate on the loan is 6 percent - 3 percent = 3 percent. If the actual real interest rate is above 3 percent, Diane benefits. Otherwise, Jack benefits.

Subscribing to the theory that life is indeed a beach, the residents of La Playa spend all of their money on three things: Every year, they collectively buy 225 bathing suits, 620 bottles of sunscreen, and 380 beach towels. Use the data in the table above to calculate the following. a. The total cost of this basket each year from 2015 through 2018. b. How much the cost of this basket has changed from year to year in percentage terms.

To find the price of each basket, multiply the quantities in the first column by the corresponding price in each of the other columns and then sum the results. To find the change in the price of the baskets, simply subtract each year's sum from the previous year's sum. To find the percentage change from year to year, subtract the current year's sum from the previous year's sum, and then divide this amount by the previous year's sum. To convert a decimal to a percentage, simply multiply the decimal by 100.

Using the table below, find: a) the real value (in 2015's dollar value) of a nominal payment of $2,400 to be received each year given the following CPI values. b) the amount that this $2,400 should be adjusted to in order to keep its real value from 2015 at $2,400.

To find the purchasing power of $2,400 in various years, use the equation from the chapter and calculate the real value in 2015 dollars. Example: Value of $2,400 received in 2016 in 2015 dollars: 2016real2015 = $2,400 × (CPI2016/CPI2015). Use 2015 as the base year. To find the cost of living adjusted payment, one simply needs to increase the payment at the same rate as the CPI. This can be done by multiplying the original $2,400 payment by the current year CPI and then dividing by the 2015 CPI.

Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows: 20 pizzas at $10 each Apartment rent, $600 per month Gasoline and car maintenance, $100 Phone service (basic service plus 10 long-distance calls), $50 In the year following the base year, the survey takers determine that pizzas have risen to $11 each, apartment rent is $640, gasoline and maintenance have risen to $100, and phone service has dropped in price to $40. a) Find the CPI in the subsequent year and the rate of inflation between the base year and the subsequent year. CPI is Rate of inflation is b) The family's nominal income rose by 5 percent between the base year and the subsequent year. Are they worse off or better off in terms of what their income is able to buy? The family is

a) The cost of the basket in the base year is $20 × 10 + $600 + $100 + $50 = $950. In the subsequent year the same basket of goods costs $20 × 11 + $640 + $100 + $40 = $1000. The CPI in the subsequent year equals the cost of the basket in that year relative to the base year: %media:1formula3.mml%\ Since the CPI in the base year is 100, the rate of inflation (equal to the percentage increase in the CPI) between the base year and the subsequent year is 5.3%. b) The family's nominal income rose by 5%, which is less than the increase in the family's cost of living. The family is thus worse off in terms of real purchasing power.

Suppose a typical American consumer purchases three goods, creatively named good A, good B, and good C. The prices of these goods are listed in the table below. a. If the typical consumer purchases two units of each good, the percentage increase in the price paid by the consumer for this basket between 2017 and 2018 is: b. If the typical consumer purchases 10 units of good B and 2 units of both good A and good C, the percentage increase in the price paid by the consumer for this basket is: c. The percentage price change is:

a. Cost of basket in 2017 = 2($10) + 2($5) + 2($1) = $32. Cost of basket in 2018 = 2($15) + 2($4) + 2($2) = $42. Prices have increased by [($42 − $32)/$32] × 100 = 31.25%. b. Cost of basket in 2017 = 2($10) + 10($5) + 2($1) = $72. Cost of basket in 2018 = 2($15) + 10($4) + 2($2) = $74. Prices have increased by [($74 − $72)/$72] × 100 = 2.78%. c. The overall change in the cost of the market basket is affected by how many units of each good one purchases. If two goods are rising in price at different rates, but the market basket contains more of good A than good B, then the rate of increase of the overall market basket will be closer to the rate of increase of A rather than B. In part a, the market basket contains the same number of units of each good, so the price changes are weighted equally. In this case, the rate of inflation is just the average of the percentage change in the three prices. In part b, the market basket contains more units of good B, so the large increase in the price of good A does not carry as much weight as it did in part a. As a result, the inflation rate is much lower.

Suppose the median household earned $9,199 in 1976 and $52,188 in 2016. During that time, also suppose the CPI rose from 54.7 to 210.09. a. The total growth rate in nominal median household income from 1976 to 2016 was b. The total growth rate in real median household income from 1976 to 2016 (use the 2016 year's dollar values in your computations) was

a. Nominal growth rate = (52,188 - 9,199)/9,199 = 4.673, or 467.3%. b. First one needs to calculate the real income in 1976 and 2016 in 2016 dollars.1976real2016 = 1976nominal × (CPI2016/CPI1976) = 9,199 × (210.09/54.7) = 35,331.Real income in 2016 in 2016 dollars is by definition the same as nominal income.Alternatively, it may help to see the numbers:2016real2016 = 2016nominal × (CPI2016/CPI2016) = 52,188 × (210.09/210.09) = 52,188.Next, one needs to calculate the increase in real income.Real growth rate = (52,188 - 35,331)/35,331 = 0.477, or 47.7%.

Three goods are consumed monthly in an economy during years 1 and 2. The table shows prices (Price1 and Price2) for each good, and it shows the number of units of each good is included in the market basket that is used to calculate the consumer price index. The base year in this example is year 1. a. The cost of the basket in year 1 is $ Numeric Response 1.Edit Unavailable. not attempted, incorrect.and the cost of the basket in year 2 is $ Numeric Response 2.Edit Unavailable. not attempted, incorrect.. b. The value of the consumer price index (CPI) in year 1 is Numeric Response 3.Edit Unavailable. not attempted, incorrect.and in year 2 is Numeric Response 4.Edit Unavailable. not attempted, incorrect.and the percentage change in the CPI (the overall inflation rate) is: Numeric Response 5.Edit Unavailable. not attempted, incorrect.%. c. The nominal (percentage) change in the price of milk is: Numeric Response 6.Edit Unavailable. not attempted, incorrect.% and the relative or real (percentage) change in the price of milk is: Numeric Response 7.Edit Unavailable. not attempted, incorrect.%. The nominal change in the price of chicken is: Numeric Response 8.Edit Unavailable. not attempted, incorrect.% and the relative or real change in the price of chicken is: Numeric Response 9.Edit Unavailable. not attempted, incorrect.%. The nominal change in the price of onions is: Numeric Response 10.Edit Unavailable. not attempted, incorrect.% and the relative or real change in the price of onions is: Numeric Response 11.Edit Unavailable. not attempted, incorrect.%.

a. The cost of the basket in year 1 is ($4.00 × 5) + ($2.00 × 9) + ($3.00 × 2) = $44. The cost of the basket in year 2 is ($4.20 × 5) + ($2.20 × 9) + ($3.60 × 2) = $48. b. The CPI for any year X is calculated as the cost of the basket in year X divided by the cost of the basket in the base year, all times 100. The CPI in year 1 is ($44/$44) × 100 = 100. The CPI in year 2 is ($48/$44) × 100 = 109.09, so we round to 109. So the percentage change in the CPI or inflation rate is [(109 - 100)/100] × 100 = 9%. c. Percentage change is calculated as [(New value - Old value)/Old value] × 100, while real or relative price changes are computed as the nominal change (in %) - the rate of inflation (in %). The nominal (percentage) change in the price of milk is [($4.20 - $4.00)/$4.00] × 100 = 5% and the relative or real (percentage) change in the price of milk is -4% (5% - 9%). The nominal change in the price of chicken is [($2.20 - $2.00)/$2.00] × 100 = 10% and the relative or real change in the price of chicken is 1% (10% - 9%). The percentage change in the price of onions is [($3.60 - $3.00)/$3.00] × 100 = 20% and the relative or real change in the price of onions is 11% (20% - 9%).

An employee asks her boss whether she can transfer offices, so that she can work in a different part of the country. The boss responds positively and says that the employee can choose to work in Cleveland, Miami, or New York City. The boss then hands the employee a list, as shown in the table below, of the salaries that she would earn in the different cities and the average price levels in those same cities. a. From the standpoint of maximizing the employee's consumption possibilities, she should choose b. The minimum salary in New York City the boss could offer the employee to make her indifferent between moving to Cleveland or New York City is $

a. We cannot just compare the salaries in the three locations directly because the price levels are different. We need to calculate the real salary in each location and we will choose to do this by adjusting all salaries to Cleveland dollars. Using the equation from the chapter: 1969real2009 = 1969nominal × (CPI2009/CPI1969),switch 1969 for New York City or Miami and 2009 for Cleveland.Now the value of New York City income in Cleveland dollars is NYCrealCleveland = NYCnominal × (CPICleveland/CPINYC).Cleveland = $84,000 × (100/100) = $84,000.Miami = $122,000 × (100/150) = $81,333.New York City = $145,000 × (100/212) = $68,396. The employee makes the most money in Cleveland after adjusting for the cost of living. b. The manager needs to offer a nominal salary in New York City such that the real salary in "Cleveland dollars" is at least $84,000. Using the equation from part a:NYCrealCleveland = NYCnominal × (CPICleveland/CPINYC).Substitute in $84,000 for NYCrealCleveland and solve for NYCnominal.84,000 = NYCnominal × (100/212).Multiplying each side by 212/100 yields $178,080 = NYCnominal.

In general we may note that inflation:

doesn't necessarily harm purchasing power.

When we consider our savings, interest rates _________ and inflation rates ___________ the value.

increase; decrease

The table shown displays CPI data for 2015 to 2019. Between 2015 and 2019, the cost of living:

increased 11.6 percent.

One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 15%. After five years, this family's nominal income ______, and their real income ______.

increased; did not change

The substitution bias in the CPI arises because the CPI:

is based on a fixed basket of goods and services.

A college graduate in 1972 found a job paying $7,200. The CPI was 41.8 in 1972. A college graduate in 2005 found a job paying $28,000. The CPI was 168 in 2005. The 2005 graduate's job paid ____ in nominal terms and ______ in real terms than the 1972 graduate's job.

more; less The 2005 college graduate is clearly receiving a higher nominal income as $28,000 is more than $7,200. However, to determine the change in real income, we must first convert the two incomes into the same years' dollar value. Choosing 2005 as our YEAR Y, we can convert the 1972 income of $7,200 into 2005's dollar value by multiplying $7,200 by the ratio of 168/41.8, which is $28,937.8 We can now state the 2005 graduate's Real income (in 2005 dollar value) was less than the 1972's graduate ($28,000 is less than $28,938).

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car also includes additional safety features. In this situation the CPI will tend to _____ inflation as a result of _____ bias.

overstate; quality/technological improvement

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 41.8. The cost of a gallon of gasoline is $2.15 in 2020 when the CPI equaled 257. The real cost of a gallon of gasoline between 1972 and 2020:

remained constant. To covert the 1972 price of gasoline into 2020 dollar value, we multiply $0.35 by the ratio of 257/41.8 or 6.15. We can then state the cost of 1972 gasoline in 2020 dollar value to be $2.15 ($0.35*257/41.8). In other words, the real price of gasoline has remained constant.

If the prices included in CPI increased by 3% on average, and your nominal wage also increased by 3%, then your relative income has ______ and inflation _____.

remained constant; has occurred

Because Congress fixes the minimum wage in nominal terms, when there is inflation, the nominal minimum wage _____ and the real minimum wage _____.

remains constant; falls

If CPI in the year 2000 was 100, then a CPI that equals 134 in 2015 means that:

the average level of prices is 34 percent higher in 2015 than in 2000, which was the base year. CPI in a given year x is compute as the cost of a basket of goods in that year x divided by cost of the same basket in the base year (times 100). Note also that CPI is always 100 for the base year, so here the year 2000 is the base year.