ANSWERS, SOLUTIONS, AND EXERCISES
PROBLEM SET
1. a. The inflation rate for the year 2008 = (210.0 – 210.0)/210.0 = 0%.
2. a. The total percentage change in nominal weekly earnings for the period 2000-2005
3. The total percentage change in the real wage (excluding benefits) = % in nominal
4. Using Table 2, the percentage change in the real wage was (343-334)/334 = 2.7%.
5.
Year Inaon
Rate
Real Wage
6. The price level would rise by 5% each year, to the values shown in the following table.
The total amount of inflation = (147.75 – 100)/100 = 0.4775 = 47.75%.
Year Price Index at
Year End
207
208 Instructor’s Manual for Economics: Principles and Applications, 6e
7.
Year Inaon Rate Real Interest Rate
1
If you lent your friend $200 at the beginning of year 2, for one year, you would be
paid back $200 + (0.15 $200) = $230, or 15% more dollars than you lent out.
Although the 10% inflation during the year would have eroded much of your gain, the
8. a. The CPI in December, 2010 = ((100 x $1) + (50 x $3))/((100 x $1) + (50 x $3)) =
c. The answer in part (b) overstates the actual inflation rate in 2006, since it does not
9.
Year CPI Inaon Rate Nominal Wage Real Wage
Chapter 19 The Price Level and Inflation 209
10. a. Jodie’s real wage in year 1 was $5,434.78 = ($25,000/460) x 100. Solving for X in
b. A 5% increase in her real wage would take her to $5,706.52. Substituting this into
the real wage equation for year 2, we get $5,706.52 = ($X/504) x 100, and, solving
11. Farmers (in the past and present) are most often debtors: they borrow to buy raw
materials (such as seeds and fertilizer), hire labor, and repay their debts after the crop
12. a. The nominal benefit payment with overstated CPI would be $25,000*1.0420
b. The total percentage increase in the real benefit payment would be ($36,865.20 –
MORE CHALLENGING
14. The CPI with a December 2000 base period can be calculated by dividing each
entry in the second column by the CPI for 2000 (= 174.0), and multiplying by 100:
Year CPI (Base = 7/83) CPI (Base = 12/00)
210 Instructor’s Manual for Economics: Principles and Applications, 6e
EXPERIENTIAL EXERCISES
1. How has the U.S. inflation rate compared with rates in other industrial economies in
recent years? To explore this question, go to the international economic trends Web
page of the Federal Reserve Bank of St. Louis at
2. The importance of the bias in the U.S. consumer price index is reviewed in an article in
the June 1997 issue of Finance and Development from the International Monetary
3. Data on the consumer price index are released near the middle of each month. Data on
GDP are released on the last Friday of each month (in preliminary, revised, and then
final form). Analysis of these data releases appears in the first section of the following