ECON 2010 Chapter Notes - Chapter 5: Hyperinflation, Nominal Interest Rate, Deflation
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Calculating inflation using a simple price index.
Consider a frictional price index, the College student price index (CSPI), based on a survey of annual purchases of a typical college student. Suppose the following table show information on the market basket for the CSPI and the prices for each good in 2012, 2013, and 2014.
Quantity in Basket | 2012 Price cost | 2013 Price cost | 2014 Price cost | |
Notebooks | 10 | 2 20 | 1 | 3 |
Calculators | 1 | 50 50 | 54 | 75 |
Large coffees | 200 | 1 200 | 1 | 1 |
Energy drinks | 100 | 2 200 | 3 | 4 |
Textbooks | 10 | 100 1000 | 120 | 150 |
Total cost | 1470 | |||
Price index | 100 |
The cost of each item in the basket and total cost of the basket are shown for 2012. Perform these same calculations for 2013 and 2014 and enter the results into the table.
Suppose the base year for this price index is 2012. Calculate and enter the value of the CSPI for the remaining years in the last row of the table.
Between 2012 and 2013, the CSPI increased by (120%, 20%, 25%, or 150%).
Between 2013 and 2014, the CSPI increased by (120%, 150%, 30%, or 25%).
Which of the following, if true, would illustrate why price indexes such as CSPI might overstate inflation in the cost of going to college?
A. As the price of energy drinks increased relative to the price of coffee 2012 and 2014, students decreased their consumption of energy drinks and increased their consumption of coffee.
B. Professors required each student to buy 10 textbooks, regardless of the price.
C. The quality of textbooks increased dramatically from 2012 to 2014, with textbook companies bundling new online study aids with their books.
You are given the following table of prices:
Ā
Item |
Price in 2013 |
Price in 2014 |
1 Loaf of Bread |
$ 1.00 |
$ 1.50 |
1 Pound of Chicken |
$ 6.25 |
$ 7.00 |
1 Gallon of Milk |
$ 2.00 |
$ 3.00 |
1 Gallon of Gasoline |
$ 3.00 |
$ 2.80 |
1 year of cable (TV and Internet) |
$ 840.00 |
$ 960.00 |
1 Pair of Jeans |
$ 50.00 |
$ 60.00 |
1 year of Rent for Apartment |
$ 8,400.00 |
$ 9,000.00 |
To represent the purchases of the average consumer throughout the year, the government uses the following market basket:
52 loaves of bread, 30 pounds of chicken, 35 gallons of milk, 416 gallons of gasoline, 1 year of cable, 12 pairs of jeans, 1 year of rent for an apartment.
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a.Calculate the cost of the market basket in 2013 and the cost of the market basket in 2014.
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b.Using 2013 as the base year, calculate the CPI for 2013 and 2014.
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c.Calculate the CPI inflation rate between 2013 and 2014.
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d.Now suppose the nominal wage of an individual for 2013 and 2014 is given as follows:
Ā
Year |
Nominal Wage |
2013 |
$ 56.00 |
2014 |
$ 60.00 |
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(i)What is the percentage change in the nominal wage between 2013 and 2014?
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(ii)Calculate the real wage for both years in 2013 dollars (i.e. using 2013 as the base year).
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(iii)What is the percentage change in the real wage between 2013 and 2014?
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(iv)Has the purchasing power of the worker increased or decreased between 2013 and 2014? Explain how you know this (using a previous calculation from above).