Explain why the changes in the cost-of-living index of an individual are different from the official cost-of-living index.
Explanation of Solution
The individual’s cost of living index will be related to their consumption of goods and services. Since the official cost of living index is calculated using the same method, to calculate the official cost of living index, the government will set a base year price to calculate the inflation. However, the individual may reduce or increase their consumption than the previous period, which would not directly reflect on the official cost of living index. If the price of wheat increases than the previous period, the cost of living for an individual who purchases more wheat than a typical household will increase more than the
Consumer price index (CPI): The consumer price index refers to the relative value of the goods and services to the value of the same basket in the base year. The consumer price index measures the price level of goods and services.
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Chapter 6 Solutions
PRINCIPLES OF MACROECONOMICS-CONNECT ACC
- The world price of oil has risen recently. For Australia (which is a net exporter of oil), this development will imply that the CPI will increase by much more than the GDP deflator.arrow_forwardFrank agrees to lend his friend Sammy $1000 for one year so that Sammy can buy a new computer. Suppose at the beginning of the loan, the CPI was 2.25. At the end of the loan, when Franki was repaid, the CPI was 2.3. What nominal rate should Frank have charged if he wanted to receive a 0% real return? a) 3.1% b) 2.2% c) 1.6%arrow_forwardSuppose the nominal median household income for a family of four in the United States was $24,618.00 in 1985, $36,678.00 in 1995, $50,326.00 in 2005, and $53,276.00 in 2010.You will need to know that the CPI (multiplied by 100, 1982–1984 = 100) was 108.6 in 1985, 153.4 in 1995, 196.3 in 2005, and 219.1 in 2010.Instructions: Enter your responses rounded to two decimal places. Year Real Income 1985 $ 1995 $ 2005 $ 2010 $ Between 1985 and 2005, the real median household income (Click to select) rose declined stayed constant . Between 2005 and 2010, the real median household income (Click to select) .arrow_forward
- Suppose the nominal median household income for a family of four in the United States was $24,618.00 in 1985, $36,678.00 in 1995, $50,326.00 in 2005, and $53,276.00 in 2010.You will need to know that the CPI (multiplied by 100, 1982–1984 = 100) was 108.6 in 1985, 153.4 in 1995, 196.3 in 2005, and 219.1 in 2010.Instructions: Enter your responses rounded to two decimal places. Year Real Income 1985 $ 1995 $ 2005 $ 2010 $ Between 1985 and 2005, the real median household income (Click to select) rose declined stayed constant . Between 2005 and 2010, the real median household income (Click to select) rose declined stayed constant . rev: 01_31_2019_QC_CS-155719arrow_forwardAccording to the U.S. Census Bureau (www.census.gov), the median household income in the United States was $23,618 in 1985, $34,076 in 1995, $46,326 in 2005, and $49,276 in 2010. In purchasing power terms, how did family income compare in each of those four years?You will need to know that the CPI (multiplied by 100, 1982–1984 = 100) was 107.6 in 1985, 152.4 in 1995, 195.3 in 2005, and 218.1 in 2010. Instructions: Enter your responses rounded to two decimal places. Year Real Income 1985 $ 1995 $ 2005 $ 2010 $arrow_forwardAs a first step in computing the consumer price index (CPI), a survey of consumers is done to determine the “basket of goods” purchased by a typical consumer. Suppose that 2009 is given as the base year and, consistent with the data shown in the table above, it was decided that the basket of goods in this economy should consist of one unit of food and two units of clothing. I. Using 2009 as the base year,what is the CPI in each year: 2009, 2010, and 2011? ii. What is the inflation rate in 2010 and 2011?arrow_forward
- On January 1, 2012, Albert invested $8,000 at 5 percent interest per year for three years. The CPI (times 100) on January 1, 2012, stood at 100. On January 1, 2013, the CPI was 108 on January 1, 2014, it was 115; and on January 1, 2015, the day Albert’s investment matured, the CPI was 117. Find the real rate of interest earned by Albert in each of the three years and his total real return over the three-year period. Assume that interest earnings are reinvested each year and themselves earn interest.Hint: Calculate inflation and real interest for each year and then calculate it for the three years as a whole.Instructions: Enter your responses rounded to one decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Year Real rate of interest 2012 % 2013 % 2014 % Total real rate of return: %.arrow_forwardOn January 1, 2012, Albert invested $10,000 at 6 percent interest per year for three years. The CPI (times 100) on January 1, 2012, stood at 100. On January 1, 2013, the CPI was 105 on January 1, 2014, it was 110; and on January 1, 2015, the day Albert's investment matured, the CPI was 118. Find the real rate of interest earned by Albert in each of the three years and his total real return over the three-year period. Assume that interest earnings are reinvested each year and themselves earn interest. (Hint Calculate inflation and real interest for each year and then calculate it for the three years as a whole.) Instructions: Enter your responses rounded to one decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Year 2012 2013 2014 Real rate of interest 1.0 1.0 Total real rate of return; 8 %.arrow_forwardThe market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006? This question is stumping me. I thought that this answer was 124.4 but it seems that it is 24.4. I cant figure it outarrow_forward
- In each of the following cases, explain clearly how the CPI might misrepresent changes in consumer prices (Commodity substitution bias, Introduction of new goods, or Un-measured quality changes). In each case, speculate as to whether CPI overstates or understates consumer expenses. (a) By 1990, expensive personal computers became a common expenditure in consumer baskets. However, some governments were still calculating the consumer’s basket using a 1975 survey. (b) Between 2007 and 2015, there were significant improvements in smartphones. (c) Compared to 1970, households in 2015 took more vacations. (d) Food quality has deteriorated over time, even as consumers purchase the same amount.arrow_forwardThe monthly market basket for consumers consists of pizza, t-shirts, and rent. The table below shows market basket quantities and prices for the base year (Year 1) and in the following year. Product Base Year (Year 1) Quantity Price in the Base Year Price in Year 2 Pizza 25 $2.00 $2.50 T-Shirts 4 $10.00 $9.00 Rent 1 $450.00 $495.00 In Year 1, the CPI for the economy is nothing. (Round both answers to one decimal place.) In Year 2, the CPI for this economy is nothing.arrow_forwardThe monthly market basket for consumers consists of pizza, t-shirts, and rent. The table below shows market basket quantities and prices for the base year (Year 1) and in the following year Base Year (Year 1) Quantity 10 Price in the Base Year Price in Product Year 2 Pizza $3 13 $2.50 $15.00 $500.00 T-Shirts 2 $13.50 Rent 1 $550 00 In Year 1, the CPI for the economy is (Round both answers to one decimal place.) In Year 2, the CPI for this economy isarrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning