SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. The consumer price index measures the overall cost of the goods and services
2. Since Henry Ford paid his workers $5 a day in 1914 and the consumer price index
Chapter Quick Quiz
1. c
Questions for Review
1. A 10% increase in the price of chicken has a greater eect on the CPI than a 10%
2. The three problems in the CPI as a measure of the cost of living are: (1)
3. If the price of imported French wine rises, there is little eect on the CPI, because
4. Because the overall price level doubled, but the price of the candy bar rose
5. The nominal interest rate is the rate of interest paid on a loan in dollar terms. The
Problems and Applications
1. Answers will vary. Students should multiply $100 by the CPI for the year in which
400
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 24/Measuring the Cost of Living ❖ 401
2. a. Find the price of one unit of each good in each year:
Year Cauli)ow
er
Broccoli Carrots
b. If 2016 is the base year, the market basket used to compute the CPI is 100
heads of cauli9ower, 50 bunches of broccoli, and 500 carrots. We must now
calculate the cost of the market basket in each year:
c. We can use the CPI to compute the in9ation rate for 2017:
(146 – 100)/100 × 100 = 46%
3. a. The percentage change in the price of tennis balls is ($2 – $2)/$2 × 100 = 0%.
b. The cost of the market basket in 2017 is (100 x $2) + (100 x $4) + (200 x $1)
Using 2017 as the base year, we can compute the CPI in each year:
We can use the CPI values to compute the percentage change in the overall
price level:
c. This would lower my estimation of the in9ation rate because the value of a
d. More 9avors enhance consumers’ well-being. Thus, this would be considered a
4. Answers will vary.
5. a. The cost of the market basket in 2017 is (1 × $40) + (3 × $10) = $70.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 24/Measuring the Cost of Living ❖ 402
Using 2017 as the base year, we can compute the CPI in each year:
We can use the CPI to compute the in9ation rate for 2018:
b. Nominal GDP for 2017 = (10 × $40) + (30 × $10) = $400 + $300 = $700.
c. No, it is not the same. The rate of in9ation calculated by the CPI holds the
6. a. introduction of new goods; b. unmeasured quality change; c. substitution bias;
7. a. ($2.11 – $0.88)/$0.88 × 100 = 140%.
8. a. If the elderly consume the same market basket as other people, Social
b. Because the elderly consume more health care than younger people do, and
9. a. When in9ation is higher than was expected, the real interest rate is lower than
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 24/Measuring the Cost of Living ❖ 403
b. Because the real interest rate is lower than was expected, the lender loses
c. Homeowners in the 1970s who had Oxed-rate mortgages from the 1960s