ECON 214 Problem Set 3 solutions complete answers

ECON 214 Problem Set 3 solutions complete answers 

 

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If the CPI today is 230, then what is the inflation rate since the base year?

 

Today, Jennifer earns $45000 at her first job. Her mom used to make $15,000 at her first job in 1975. Jennifer is of the opinion that she makes more than her mom would have made if she started working today. Her mom thinks Jennifer would have earned less than she if Jennifer had started working in 1975. If the CPI today is 237 and the CPI in 1975 was 82, then 

 

The table shown here gives a cost-of-living index for 14 different cities. Currently, you are living and working in Phoenix and earning $75000 per year, but you are considering a move to Washington DC.  In order to have the same standard of living in Washington DC, you would need to earn

 

Question 1

 

Suppose you want to calculate a university price index (UPI). Let’s keep things simple and assume that a typical student buys seven textbooks, nine pizzas, and twelve six-packs of energy drinks in a year. The table below shows this market basket and the price of each good in 2015 and 2016. For the questions below, assume that 2015 is the base year for the UPI.

 

Part 1

 

If 2015 is the base year, the price index in 2016 was       . (Enter your answer to two decimal places.)

 

Part 2

 

The inflation rate from 2015 to 2016 was %       . (Enter your answer to two decimal places.)

 

Question 2

 

Imagine that after completing your economics course (you get an A, of course) you are at a family gathering. Your grandmother asks you about a news story she read this morning. The story explained that when the government adjusts Social Security payments for inflation, it generally uses the CPI-W, which is the Consumer Price Index for Urban Wage Earners and Clerical Workers. Because senior citizens spend a lot more than average on medical care, adjustments to their Social Security payments are not keeping up with their cost of living.

 

Your grandmother has two questions:

 

1. Last year I received $15,000 per year from the government. The story said that the CPI increased from 144 to 162. How much will I get this year?

 

2. Why might this additional money not allow me to maintain my standard of living?

 

Part 1

 

Before you answer your grandmother's questions, you first need to explain how the BLS (Bureau of Labor Statistics) calculates the CPI. "Well, Grandma, there are four basic steps. First, . . ."

 

Rank the following steps in order, from the first step to the last.

 

Part 2

 

Now explain how much money your grandmother will receive.

 

"Because the CPI increased from 144 to 162, you will now get $      ."

 

Part 3

 

Next, you need to explain the weights assigned to the different categories of expenditures, which are based on the spending patterns of the typical American.

 

Rank the following categories in order from highest to lowest weight in the CPI.

 

Part 4

 

Finally, you want to explain why adjustments to Grandma's Social Security payments might not be enough to cover the increase in her cost of living. Select the best explanation.

 

Question 3

 

You might have heard your grandmother say, “When I was your age, candy bars cost a nickel.” Like candy bars, the price of fast food has increased over time. In 1968, the year McDonald's introduced its Big Mac, the price was $0.49. In 2015, a Big Mac costed $4.79.

 

Suppose the CPI in 1968 was 35, and the CPI in 2015 was 240. The base year for the CPI is 1983.

 

Part 1

 

In real terms, a Big Mac was more expensive in       .

 

Part 2

 

If the price of a Big Mac had kept up with the rate of inflation, its price in 2015 would have been $      .

 

Question 4

 

In 1938 the Fair Labor Standards Act (FLSA) established an hourly minimum wage of 25 cents per hour. Since then, the minimum wage has increased 22 times, and it currently stands at $7.25 per hour. The table below shows the minimum wage and the CPI for various years since 1938. Refer to the information in the table to answer the questions below.

 

Part 1

 

In which year was the real minimum wage the highest? The lowest? Rank the real minimum wage fom highest to lowest.

 

Part 2

 

If the minimum wage in 2016 had kept up with the increase in the cost of living since 1938, the minimum wage would have been $      .

 

Part 3

 

If the minimum wage in 2016 had kept up with the increase in the cost of living since 1990, the minimum wage would have been $      .

 

Question 5

 

Inflation imposes many costs on the economy: shoe-leather costs, money illusion, menu costs, wealth redistribution, price confusion, future price level uncertainty, and tax distortions. For each of the following statements, determine the associated cost. Be careful! Some of the statements may not go into any of the categories because two categories are missing.

 

Question 6

 

Please read the article below, and use the information in the article to answer this question.

 

You Want the CPI? Or the DPI? What Consumer Prices Look Like Sliced by Peter Coy

 

Refer to the graph titled "Two Measures of Sporting Goods Inflation." According to the graph, which index is more stable over time?

 

Question 7

 

The figure below shows the growth in the money supply and average inflation rates for 160 countries from 1991–2011. For most countries, there is a one-to-one ratio between money growth and inflation. For example, both the growth in the money supply and the average inflation rate was close to 100% in Belarus.

 

Refer to the figure to answer the following questions.

 

Part 1

 

Consider the countries that lie on the line, which shows a one-to-one ratio of the money supply growth rate to the average rate of inflation. For these countries, the percentage change in velocity is        the percentage change in real GDP.

 

Part 2

 

Look at Armenia. The money supply growth rate and the average rate of inflation are 120%. If the growth rate in real GDP was 80%, the percent change in velocity would be       %.

 

Part 3

 

Look at Nicaragua. The money supply growth rate is 90%, and the average rate of inflation is 25%. If the growth rate in real GDP was 30%, the percent change in velocity would be       %.

 

Part 4

 

Finally, look at Brazil. The money supply growth rate is 340%, and the average rate of inflation is 325%. If the growth rate in real GDP was 40%, the percent change in velocity was       %.

 

Question 8

 

Suppose that the residents of Greenland play golf incessantly. In fact, golf is the only thing that they spend their money on. They buy golf balls, clubs, and tees. In 2010, they bought 2,000 golf balls for $3.00 each, 200 clubs for $80.00 each, and 1,000 tees for $0.10 each. In 2011, they bought 2,100 golf balls for $3.50 each, 250 clubs for $90.00 each, and 1,500 tees for $0.15 each. Using 2010 as the base year, answer the following questions. Give all answers to one decimal.

 

a. What was the CPI for 2010?   

 

b. What was the CPI for 2011?   

 

c. What was the inflation rate in 2011?   

 

Question 9

 

Which of the following are problems with the Digital Price Index?

 

Question 10

 

The table shown here gives a cost-of-living index for 14 different cities. Currently, you are living and working in Atlanta and earning $115000 per year, but you are considering a move to Manhattan.  In order to have the same standard of living in Manhattan, you would need to earn $      .  (Note:  Round this to the nearest dollar.)

 

Question 11

 

Your friend currently works as an accountant at a public accounting firm in the small town of LaFontaine, Indiana. He is offered a job in New York City for $60,000. Your friend calls you and tells you that he is excited about the new job offer, which gives him a raise from his current salary of $50,000. Based on your knowledge of economics, you think that  

 

Question 12

 

Today, Jennifer earns $55000 at her first job. Her mom used to make $15,000 at her first job in 1975. Jennifer is of the opinion that she makes more than her mom would have made if she started working today. Her mom thinks Jennifer would have earned less than she if Jennifer had started working in 1975. If the CPI today is 237 and the CPI in 1975 was 82, then 

 

Question 13

 

If the CPI today is 250, then what is the inflation rate since the base year?

 

Question 14

 

Refer to the table. This country produces only two goods, CDs and books. You are told that the CPI for this country in 2012 was 141. If the base year is 2011, how many books should be present in the basket of goods and services that was used to calculate the CPI?

 

Question 15

 

In 2015, the Consumer Price Index (CPI) was 238, whereas it was about 100 in 1982. Suppose that one of your parents had a job that paid $28,000 annually in 1982 and a job that paid $60,000 annually in 2015. Relative to 1982, we could say that your parent's nominal income        in 2015 and that your parent's real income        in 2015.