Exam 11: Measuring the Cost of Living: Part A

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

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

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?

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

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?

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

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?

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

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.

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?

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

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?

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

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

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

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?

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?

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

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

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.