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**Quiz 560**

Subjective Short Answer

1. List the five steps for calculating the consumer price index and inflation rate.

2. Write the formula for computing the cost of a basket of goods in a given period assuming you only have two goods, X and Y, which are bought in quantities Qx and Qy, and sold at prices of Px and Py.

3. Write the formula for finding the rate of inflation in 2011 if you have only the CPI for the years 2010, 2011, and 2012.

4. Suppose that the CPI in 2009 is 220 and that the inflation rate is 5% in 2010. What is the CPI in 2010?

5. Suppose that the CPI in 1990 was 150, that the inflation rate in 1991 was 6%, and that the inflation rate in 1992 was 4%. What was the CPI in 1991 and 1992?

6. If the CPI was 170 in 1998 and was 187 in 1999, what was the inflation rate in 1999?

Scenario 24-5

Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year.

7. Refer to Scenario 24-5. What are the prices of books, CDs, and DVDs in 2009?

8. Refer to Scenario 24-5. What are the prices of books, CDs, and DVDs in 2010?

9. Refer to Scenario 24-5. Using 2009 as the base year, what is the CPI in each year?

10. Refer to Scenario 24-5. Using 2009 as the base year, what is the inflation rate in 2010?

11. Refer to Scenario 24-5. Using 2010 as the base year, what is the CPI in each year?

12. Refer to Scenario 24-5. Using 2010 as the base year, what is the inflation rate in 2010?

Scenario 24-6

A small economy produced and consumed goods X and Y in 2010 and 2011 in the amounts shown in the table below. Assume that the market basket for the CPI is defined in the base year.

Good X Good Y

Quantity Price Quantity Price

2010 50 $100 100 $10

2011 60 $120 120 $12

13. Refer to Scenario 24-6. Using 2010 as the base year, what is the CPI in each year?

14. Refer to Scenario 24-6. Using 2010 as the base year, what is the inflation rate in 2011?

15. Refer to Scenario 24-6. Using 2011 as the base year, what is the CPI in each year?

16. Refer to Scenario 24-6. Using 2011 as the base year, what is the inflation rate in 2011?

Table 24-14

The table below lists the per pound prices of meat and potatoes for the months of January, February, and March. Assume that the typical consumer buys 25 pounds of meat and 15 pounds of potatoes each month, and that January is the base period.

Month Price of Meat Price of Potatoes

January $3.50 $1.50

February $3.38 $0.60

March $4.00 $1.40

17. Refer to Table 24-14. Calculate the cost of a basket of goods for each month.

18. Refer to Table 24-14. Calculate the consumer price index for February and March.

19. Refer to Table 24-14. Calculate the inflation rate for February.

20. Refer to Table 24-14. Calculate the inflation rate for March.

Table 24-15

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period.

Month Price of Chips Price of Salsa

October $2.50 $2.50

November $2.40 $2.55

December $2.60 $2.75

21. Refer to Table 24-15. Calculate the inflation rate for November.

22. Refer to Table 24-15. Calculate the inflation rate for December.

Table 24-16

The table below lists annual consumer price index and inflation rates for a country over the period 2010-2013. Assume the year 2010 is used as the base year.

Year Consumer Price Index Inflation Rate

2010 100

2011 120 B

2012 A 15%

2013 134 C

23. Refer to Table 24-16. Calculate the missing value that belongs in space B.

24. Refer to Table 24-16. Calculate the missing value that belongs in space A.

25. Refer to Table 24-16. Calculate the missing value that belongs in space C.

26. What is the difference between the Consumer Price Index and the Producer Price Index?

27. Explain how the prices of goods and services used in the CPI differ from the prices used in the PPI.

28. What measure reflects the overall cost of goods and services produced domestically?

29. Explain how the prices of goods and services used in the CPI differ from the prices reflected by GDP deflator.

30. Consumer spending in what category is the largest component of the CPI?

31. Explain how the introduction of new goods might bias the calculation of the consumer price index.

32. If the price of beef rises and consumers buy more chicken and less beef, what kind of bias does the consumer price index exhibit?

33. For a country like the United States, explain why the CPI would increase at a faster rate than the GDP deflator during periods of oil and gasoline price increases.

34. If the CPI was 120 in 1994, was 126 in 1995, and was 134.82 in 1996, what was the inflation rate in 1995 and in 1996?

35. Suppose the typical basket for the calculation of the CPI includes one computer. Since computers have gotten better over time as a result of technological change, what problem does this create for calculating the CPI?

36. The CPI assumes a fixed basket of goods over time. In fact, consumers are likely to change purchasing behavior over time by purchasing less of the goods whose prices have risen by relatively large amounts and by buying more of the goods whose prices have risen less or maybe even fallen. What problem does this cause for measuring the cost of living?

37. If the real value of an item bought ten years ago is less than it’s nominal value at that time, what can one infer about the change in the overall price level during this ten year period?

38. Suppose that the price of one gallon of milk was $0.25 in 1950, that the CPI in 1950 was 25, and that in 2000 the CPI was 200.What is the price of a 1950 gallon of milk in 2000 dollars?

39. Suppose that the price of one ear of corn was $0.05 in 1920, that the CPI in 1920 was 10, and that in 1990 the CPI was 180. What is the price of a 1920 ear of corn in 1990 dollars?

40. Suppose Stan Musial earned $115,000 in 1947. If the CPI was 82 in 1947, and was 246 in 1990, what is Stan Musial’s 1947 salary in 1990 dollars?

41. In 1954, Mickey Mantle earned $21,000 playing for the New York Yankees. The CPI in 1954 was 26.9, and the CPI in 2010 was 218.06. What is Mickey Mantle’s 1954 salary in 2010 dollars?

42. Michael Jordan’s rookie salary in 1984 was $550,000. The CPI in 1984 was 103.9, while the CPI in 2010 was 218.1. What is Michael Jordan’s rookie salary in 2010 dollars?

43. Suppose the Tooth Fairy paid 50 cents for a tooth in 1970. The CPI in 1970 was 38.8, while the CPI in 2010 was 218.1. What is the value of the Tooth Fairy’s payment in 2010 dollars?

44. What do real interest rates account for that nominal interest rates do not?

45. If the real interest rate is 10.3% and the nominal interest rate is 12.6%, what is the inflation rate?

46. If the real interest rate is 6.8% and the inflation rate is 3.9%, what is the nominal interest rate?

47. If the nominal interest rate is 8.3% and the inflation rate is 4.4%, what is the real interest rate?

48. Suppose the nominal interest rate this year is 6.5% and that the economy experiences 2.3% deflation. What is the real interest rate?

49. If the CPI increased from 215 to 218 between the years 2012 and 2013, while the nominal interest rate increased from 3.25% to 3.80%, what is the real interest rate in 2013?

50. If the inflation rate decreased from 3.33% to 2.90% between October and November, while the nominal interest rate increased from 4.75% to 4.80%, what is the real interest rate in November?

51. In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing.

Food Clothing

2002 price per unit $4 $10

2003 price per unit $6 $20

a. What are the percentage increases in the price of food and in the price of clothing?

b. What is the percentage increase in the CPI?

c. Do these price changes affect all consumers to the same extent? Explain.

52. Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain.

53. List the three major problems in using the CPI as a measure of the cost of living.

54. Why does the GDP deflator give a different rate of inflation than the CPI?

55. Compute how much each of the following items is worth in terms of today’s dollars using 177 as the price index for today.

a. In 1926, the CPI was 17.7 and the price of a movie ticket was $0.25.

b. In 1932, the CPI was 13.1 and a cook earned $15.00 a week.

c. In 1943, the CPI was 17.4 and a gallon of gas cost $0.19.

56. Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan.

a. What was the expected real interest rate?

b. What was the actual real interest rate?

c. Who benefited and who lost because of the unexpected inflation?