1303AFE Lecture Notes - Lecture 4: Real Wages, Negative Number, Nominal Interest Rate

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harlequingnat161

30 May 2018

School

Griffith University

Department

Economics & Econometrics

Course

1303AFE

Professor

n/a

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Economics for decision making week 4 lecture notes

CPI and the Cost of Living

Low inflation= RBA has the tendency to cut interest rates

High inflation= RBA tends to increase interest rates

Low inflation→ below 2-3%

Consumer price index

• Consumer price index (CPI) is a measure of the average of the prices paid by urban

consumers for a fixed market basket of consumer goods and services

• CPI is calculated quarterly (every 3 months) by ABS

• Essentially, we use the CPI figures to compare what a fixed basket of goods costs this

quarter with what it cost in some previous quarter or period

• Reading the CPI figures

o The CPI is defined to equal 100 for a period called the reference base period

o Base period is a period for which the CPI is defined to equal 100. Currently,

the reference base period is 2011/12

o In Dec. 2014, the CPI was 106.6

o This number tells us that the average of the prices paid for the fixed market

basket of consumption on goods and services was 6.6 per cent higher in Dec

2014 than it was on the average during 2011/12

• Constructing the CPI

o Three stages:

▪ Select the CPI basket

• In the process, weight is assigned on each item on the basis of

relative importance of each item to average urban household

• To assign the weights, a survey is conducted to determine how

much of each item an average urban household purchases

▪ Conduct the quarterly price survey- each quarter, ABS employees

check the prices of the goods and services in the 11 large groups

shown in the CPI basket in all major cities

▪ Calculate the CPI

o CPI basket in 2015 → the basket is filled with the items that an average

household buys (below)

o CPI= Cost of basket at current period prices/ cost of basket at base period

prices x 100

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Document Summary

Economics for decision making week 4 lecture notes. Low inflation= rba has the tendency to cut interest rates. High inflation= rba tends to increase interest rates. In dec. 2014, the cpi was 106. 6: this number tells us that the average of the prices paid for the fixed market basket of consumption on goods and services was 6. 6 per cent higher in dec. 2014 than it was on the average during 2011/12: constructing the cpi, three stages, select the cpi basket. Inflation rate ( ) is the percentage change in the price level from one period to the next. If a negative number, the prices are falling (deflation) Inflation rate= cpi in current period cpi in previous period/ cpi in previous period x100. It does not measure all the components of the cost of living: some components are not measured exactly, so, the cpi is possibly a biased measure.

Related Questions

The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year.

Year	Consumer Price Index	Inflation Rate
2005	100
2006	115	B
2007	125	C
2008	140	D
2009	A	10%
2010	160	E

8.7%

120

25%

12%

The price index was 170 in the first year, 180 in the second year, and 195 in the third year. The inflation rate was about

5.9 percent between the first and second years, and 8.3 percent between the second and third years.

5.6 percent between the first and second years, and 7.7 percent between the second and third years.

10 percent between the first and second years, and 15 percent between the second and third years.

80 percent between the first and second years, and 95 percent between the second and third years.

0.1 points

QUESTION 17

The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced

		5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years.
		7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years.
		5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years.
		7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years

0.1 points

QUESTION 18

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 real interest rate is the nominal interest rate times the rate of inflation.

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

The real interest rate is the nominal interest rate divided by the rate of inflation.

0.1 points

QUESTION 19

If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is

4 percent.

-4 percent.

3 percent.

8 percent.

0.1 points

QUESTION 20

If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is

9.5 percent.

4.5 percent.

-4.5 percent.

-9.5 percent.

. From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010?

0.9%

9.0%

2.5%

90%

If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?

20.0%

45.5%

16.7%

9.1%

. Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basketâs cost was $80; in 2014, the basketâs cost was $86; and in 2015, the basketâs cost was $90. The value of the CPI in 2015 was

104.6 and the inflation rate was 4.6%.

112.5 and the inflation rate was 4.6%.

112.5 and the inflation rate was 12.5%.

104.6 and the inflation rate was 12.5%.

Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basketâs cost was $80; in 2008, the basketâs cost was $92; and in 2010, the basketâs cost was $108. The base year must be

The base year cannot be determined from the given information.

2002

2008

one of the years between 2008 and 2010.

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basketâs cost was $80.00; in 2013, the basketâs cost was $84; and in 2014, the basketâs cost was $87.60. The value of the CPI was

All of the above are correct.

109.5 in 2014.

105 in 2013.

100 in 2012.

Which of the following is correct?

The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.

The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.

The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.

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

The inflation rate is defined as the

percentage change in the price level from the previous period.

price level in an economy.

change in the price level from one period to the next.

price level minus the price level from the previous period.

Economists use the term inflation to describe a situation in which

the economy's overall price level is rising.

some prices are rising faster than others.

the economy's overall price level is high, but not necessarily rising.

the economy's overall output of goods and services is rising faster than the economy's overall price level.

Base Year (2006) 2013
Product	Quantity	Price	Price
Cokes	100	$0.50	$0.75
Hamburgers	200	2.00	2.50
CDs	10	20.00	21.00

1) Refer to the table above. Assume the market basket for the consumer price index has three products: Cokes, hamburgers, and CDs.

The consumer price index for 2013 equals ______.

Product	Quantity	Base Year Price (2001)	Price (2012)	Price (2013)
Burritos	10	$1.00	$1.50	$1.75
Flashlights	15	5.00	7.00	6.75
Golf balls	8	2.00	3.00	3.50

2) Refer to the table above. Consider a simple economy that produces only three products: burritos, flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2013 (vs. 2012), as measured by the consumer price index.

Year	Nominal Average Hourly Earnings	CPI
2011	$10	100
2012	10	105
2013	12	110

3) Refer to the table above. Real average hourly earnings were equal to ________ in 2012.

4) Looking at the table above, real average hourly earnings between 2012 and 2013 changed by ______%.

5) Matt's real wage in 2014 is $26.80. If the price level is 104, what is Matt's nominal wage?

lavenderdinosaur371

Below are some income and Consumer Price Index data for Bill living in Utopian. (Utopian calculates CPI numbers the same was done by the USA.)

Year	Billâs Nominal Income	CPI
2010	$70,000	218.1
2011	$71,000	224.9
2012	$72,000	229.6

(a) Using the base year as the comparison year, calculate the Real Value of Bill's Income for 2010 measured in base-year dollars. Please show the work done to get your answer. Please calculate your answer to the nearest dollar.

(b) Using the base year as the comparison year, calculate the Real Value of Bill's Income for 2011 measured in base-year dollars. Please show the work done to get your answer. Please calculate your answer to the nearest dollar.

(c) Using the base year as the comparison year, calculate the Real Value of Bill's Income for 2012 measured in base-year dollars. Please show the work done to get your answer. Please calculate your answer to the nearest dollar.

(d) In what year was Bill's Real Income the highest?

(e) Using the information above calculate the inflation rate from 2010 to 2011. Please show the work done to get your answer. Please calculate your answer to the second decimal place (hundredths place)

(f) In one factual sentence please state what information your answer the inflation rate in (e) above tells us. (I did not want any opinion of whether you think your answer is high or low.)

(g) If Sue lent Bill $20,000 at the start of 2010 for 1 year and charged Bill a nominal interest rate of 4.00%, then please calculate the real interest rate that Sue earned for this 1-year loan. Please show how you got your answer. Please calculate your answer to the second decimal place (hundredths place)

(h) If Sue wanted to earn a real interest rate (return) of 4.00% for the loan mentioned in (g) above, then what nominal interest rate should she have charged Bill? Please show how you got your answer. Please calculate your answer to the second decimal place (hundredths place).

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1303AFE Lecture Notes - Lecture 4: Real Wages, Negative Number, Nominal Interest Rate

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