Assignment 4

Sue Lewis was an accountant in 1943 and earned $12,000 that year. Her son is an accountant too and he earned $220,000 this year. Suppose the price index was 18.9 in 1943 and 20.5 in the current year.

$202,829.

Suppose the consumer price index is 8.5 percent higher in Year 3 than in Year 1. Then Lee's food expenditures for Year 2 in Year 3 dollars amount to

$8,327.

The following table lists the per gallon prices of gas and milk for the months of September, October, and November. Assume that the typical consumer buys 30 gallons of gas and 15 gallons of milk each month, and that September is the base period. Refer to Table 24-3. What is the consumer price index for October?

106.86

If the price index was 90 in Year 1, 100 in Year 2, and 95 in Year 3, then the economy experienced

11.1 percent inflation between Years 1 and 2, and 5 percent deflation between Years 2 and 3.

The following table pertains to Wiskancia, an economy in which the typical consumer's basket consists of 15 pounds of apples and 7 teddy bears.Refer to Table 24-2. If the base year is Year 1, then the CPI in Year 3 was

111.2.

Price index was 130 in Year 2, and the inflation rate was 14.0 percent between Year 1 and Year 2. The price index in Year 1 was

114.0.

Lee's expenditures on food for three consecutive years, along with other values, are presented in the following table.Refer to Table 24-4. Suppose Lee's Year 2 food expenditures in Year 3 dollars amount to $9,030. Then x, the consumer price index for Year 3, has a value of

166.5.

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the

CPI better reflects the goods and services bought by consumers.

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?

Substitution bias and introduction of new goods

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

The real interest rate is the nominal interest rate minus the rate of inflation.

The consumer price index tries to gauge how much incomes must rise to maintain

a constant standard of living.

If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals

a. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100.

An increase in the price of bread produced domestically will be reflected in

both the GDP deflator and the consumer price index.

The producer price index measures the cost of a basket of goods and services

bought by firms.

Core CPI is

c. the CPI excluding food and energy.

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.

The nominal interest rate tells you

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

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.

Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that

neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.

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.

Social Security payments are indexed for inflation using

the CPI.

Two common measures of the overall level of prices are

the GDP deflator and the consumer price index.

As long as prices are rising over time, then

the nominal interest rate exceeds the real interest rate.

Indexation refers to

using a law or contract to automatically correct a dollar amount for the effects of inflation.

During periods of deflation, the nominal interest rate will be​

​lower than the real interest rate.