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Measuring the Cost of Living 221
71.
In the late 1970s, U.S. nominal interest rates were high and real interest rates were low, but in the
late 1990s, U.S.
nominal interest rates were low and real interest rates were high.
a.
True
b.
False
72.
In a period of inflation real interest rates will be greater than nominal interest rates.
a.
True
b.
False
73.
It is possible to observe a positive nominal interest rate together with a negative real interest rate.
a.
True
b.
False
74.
In comparison to the situation in the late 1970s, the United States experienced lower nominal
interest rates and
higher real interest rates in the late 1990s.
a.
True
b.
False
75.
Kristine has a savings account at a bank. If the nominal interest rate she earns exceeds the rate of
inflation, then her
purchasing power increases over time.
a.
True
b.
False
76.
Archie has a savings account at a bank. If he earns 6 percent interest on his account and if there
is deflation, then
his purchasing power rises by more than 6 percent over the course of a year.
a.
True
b.
False
77.
Price indexes allow comparisons of dollar figures over time and provide us a sense of how the
economy is changing.
a.
True
b.
False
78.
Persistent increases in the overall level of prices have been the norm.
a.
True
b.
False
79.
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.
80.
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.
81.
List the three major problems in using the CPI as a measure of the cost of living.
82.
Why does the GDP deflator give a different rate of inflation than the CPI?
83.
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.
84.
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?
Measuring the Cost of Living 227
Problems
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?
Measuring the Cost of Living 229
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?
Measuring the Cost of Living 231
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?
