1.
Item / Quantity (2005) / Price (2005) / Quantity (2006) / Price (2006)Limes / 20 / $1.00 / 15 / $1.00
Biscuits / 30 / $1.00 / 45 / $0.75
Wine / 10 / $10.00 / 8 / $11.00
The survey above shows what people are consuming, and its base year is 2005.
a. What and how much is in the CPI market basket?
b. What did the market basket cost in 2005? 2006?
c. What was the CPI in 2005? 2006?
d. What was the inflation rate between 2005 and 2006?
a. Limes, Biscuits and Wine: 20 Limes, 30 Biscuits, 10 Wine
b. (use 2005 Q since that’s the base year)
2005: (20 x 1) + (30 x 1) + (10 + 10) = $150/ 2006: (20 x 1) + (30 x 0.75) + (10 x 11)= $152.50
c. CPI in 2005: (150/150) x 100 =100
CPI in 2006: (152.50/150) x 100 = 101.7
d. [(101.7-100)/100] x 100= 1.7 percent
2. The table below shows the minimum wage and the CPI for six different years. The reference base period is 1982-84.
Year / Minimum Wage ($ per hour) / CPI1955 / 0.75 / 26.7
1965 / 1.25 / 31.6
1975 / 2.10 / 56.7
1985 / 3.35 / 107.5
1995 / 4.25 / 152.4
2005 / 5.15 / 194.1
a. Calculate the real minimum wage in each year in 1982-84 dollars.
b. In which year was the minimum wage the highest in real terms?
c. In which year was the minimum wage the lowest in real terms?
a. To convert nominal into real, remember to take (nominal of that year/CPI of that year) x 100
1955: (.75/26.7) x 100= 2.81
1965: (1.25/31.6) x 100=3.96
1975: (2.10/56.7) x 100=3.70
1985: (3.35/107.5) x 100=3.12
1995: (4.25/152.4) x 100=2.79
2005: (5.15/194.1) x 100=2.65
b. The wage was highest in real terms in 1965 when it equaled $3.96.
c. The wage was lowest in real terms in 2005 when it equaled $2.65.
3. Sally worked hard all year so that she could go to school full time the following year. She put her savings into a mutual fund that paid a nominal interest rate of 7 percent a year. The CPI was 165 at the beginning of the year and 177 at the end of the year. What was the real interest rate that Sally earned?
The inflation rate during the year that Sally was working was [(177-165) / 165] x 100 = 7.3 percent.
She earned a nominal rate of 7 percent.
Thus, 7 – 7.3 = -0.3. Sally’s real interest rate was negative. (Sally would have been worse off if she hadn’t invested in the mutual fund. She would have lost -7.3 % on her money.)