Chapter 19 The Price Level and Inflation
Chapter 19 - THE PRICE LEVEL AND INFLATION
PROBLEM SET
2. a. The total percentage change in nominal weekly earnings for the period 2000-2005 is ($751-$581)/$581 = 29.3%.
b. The total percentage change in the price level = (196.8 – 174.0)/174.0 = 13.1%.
4. Using Table 2, the percentage change in the real wage was (343-334)/334 = 2.7%. This result is more accurate because it is a direct calculation rather than an approximation (as in Problem #3).
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 End1 / 105
2 / 110.25
3 / 115.76
4 / 121.55
5 / 127.63
6 / 134.01
7 / 140.71
8 / 147.75
8. a. The CPI in December, 2010 = ((100 x $1) + (50 x $3))/((100 x $1) + (50 x $3)) = ($250/$250) ´ 100 = 100. Since December 2010 is our base period, the CPI must be 100, as with any index.
The CPI in December, 2011 = ((100 x $1) + (50 x $4))/((100 x $1) + (50 x $3)) = ($300/$250) ´ 100 = 120.
b. The annual inflation rate for 2011 = (120 – 100)/100 = 20%.
c. The answer in part (b) overstates the actual inflation rate in 2006, since it does not reflect the substitution of fruit for nuts when the price of nuts rose.
10. a. Jodie’s real wage in year 1 was $5,434.78 = ($25,000/460) x 100. Solving for X in the equation $5,434.78 = ($X/504) x 100, we find that Jodie would have to earn $27,391.30 to maintain a constant wage rate.
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 for X, we find that Jodie would have to earn $28,760.86 to obtain a 5% increase in her real wage.
12. a. The nominal benefit payment with overstated CPI would be $25,000*1.0420 =$54,778. To find the real benefit payment is 2026, we adjust the nominal payment using the actual CPI and get $54,778*100/148.59 = $36,865.20.
b. The total percentage increase in the real benefit payment would be ($36,865.20 – $25,000)/$25,000 = 47.5%
MORE CHALLENGING QUESTIONS
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)1970 / 39.8 / 22.8
1980 / 86.3 / 49.6
1990 / 133.8 / 76.9
2000 / 174.0 / 100.0
2005 / 196.8 / 113.1
2006 / 201.8 / 116.0
2007 / 210.0 / 120.7
2008 / 210.2 / 120.8
2009 / 215.9 / 124.1
2010 / 219.2 / 126.0