Macro. Chapter 11 【Measuring the cost of Living】, Assignments of Microeconomics

Download Macro. Chapter 11 【Measuring the cost of Living】 and more Assignments Microeconomics in PDF only on Docsity! Macro. Chapter 11 【Measuring the cost of Living】 1. Calculating inflation using a simple price index Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's ..... 1. Calculating inflation using a simple price index Consider a ‘ictional price index, the Colleae Student Price Index (CSPI), based cn a typical college student's annual purchases. Suppese th= following table shows information on the market besket for the C5P! and the prices of each of the goods in 2010, 2011, and 2012. The cost of each tem in the basket and the total cest of the basket are shown for 2010 Quantity in Basket * Price = Cost Perform these same caleulatians for 2011 ard 2012, and enter the results in the following table. ani0 ait 2m12 Price Cost‘ [Price Cost Trice Cost Quantity in Basket] (Dollars) (Dollars) Dollars) (Dollars) \( Dollars) (Dollars) Notebooks 10 2 20 1 1c \v a 30 wv Caleultors 1 se 50 » |Cs= v |» | Cs 1 | L20_v Large coffees 200 1 Energy drinks 100 : + | (Lao _v Textbooks 10 100 150 1,500 |W Sum of Cost above = Total cost v total cort. Price index 2205, Tao ‘100 = aso Suppose Une base yeet for Unis price index is 2010 In the last row of the table, calculate and enter the value of the CSFI for the remaining years. - Between 2011 and 2012, the CSPI increased by Between 2010 end 2011, the CSPI increased by Cxplanaton: You can calaulste the percentage change ir the CSFI Letween 2010 and 2011 in the following way: CSPI in 2011 = CSPI in 2010 Tin 2010 1201 ~~ 100” Inflation between 2010 and 2011 = 100% — 100%. 20% Using similar calculations, you can find the inflation cate in the CSPI between 2011 and 2012: Inflation between 2011 and 2012 = 10 GSELin 2012—CSPLin 2011 10x 805120 xo 120 25% Which of tne folowing, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college” check all that apply. v Anew, cafe method of memory enhancement became available for purchase. Anew mobile device fer personal computing became available for purchase. A new type of perscnal transporter, which madc it easier te get around places like university campuses, became available for purchase. Prefessors sequired each student to ouy 10 notebcoks, regarcless of the pi As the price of textbooks increased, more and more students tumec to the used-book market or chose not to ouy textbooks at all instead using the copies on reserve in the library. As die price of catculalors ruse, fener students decided lo Luy Ure, opting insleed lo use Lie free calculaLurs int Uneit cell phonies or on their computers. As the price of eneray drinks increased relative ta the price of coffee hetween 291 and 012, students decreased their consumnplion of energy drinks aiid ing eased Uieir corisumplon of coe. The quality and design of calculators improved dramateally from 2010 to 2012. For example, calculators mace in 2012 accept memory cards, whereas those made n 2010 do not. The quality of texcbcoks increased dramatically from 2010 to 2012, with textbock companies bundling new online study aids with their books. Energy drinks became increasingly popular on ccllege campuses between 2010 and 2012 due to significant improvements in flavor. 5. Interest, inflation, and purchasing power Suppose Latasha is an avid reader and buys only comic books. Latasha deposits $ Interest, inflation, and purchasing power nual nominal interest rate of |Assume this interest rate is ficed—that is, it won't change over time. At the time of her deposit, a comic book is priced a| se Latasha is an avid reader and buys only comic books. Latasha depos! a bank account that pays an Initially, the purchasing power of Latasha’s $2,000 deposit comic books. Explanation: Close Explanation A ‘The initial value of the deposit is $3,000, and the initial price of a camid\pook is $15.00. You can compute the purchasing power of Latasha's initial deposit in the folloviing way: Purchasing Power = !aittal Deposit Price $3,000 $15.00 per comic book = 200comies Annual Inflation Rate 09 50 Number of Comics Latasha Can Purchase after One Year 210 200 ¥ Real Interest Rate 5% to. 0% = 5% Explanation: Close Explanation © In the absence of any inflation, the price of a comic book remains at $15.00 after one year, while the value of Latasha's deposit increases to $3,000 x (1-40.05) = $3,150. With zero inflation, the purchasing power of the one-year-old deposit rises to 210 comics. The percentage change in purchasing power reflects the real interest rate; therefore, you can calculate the first entry in the final rowr of the table in the following way: Percenine Chaney ts Bachlie Paver New Quansity of Comics— Original Quantity of Comics a ‘Original Quantity of Comics 2 x i gS x = 5% '596 over the course of the year as wall. After one year, the deposit has the power te purchase rate is equal to the interest rate on the deposit, the purchasing power of the daposit does nat change over time, so the real interest rate is 0%. ‘At an annual rate of inflation of 8%, the price of @ comic book rises to $15.00x (140,08) =316.20.|The value of the deposit rises by only 1H £94 comics (TIT . ‘5%, After one year, the purchasing power of the deposit is approximately ee Again, the real interest rate can either be approximated as the difference between the nominal interest rate and the rate of inflation (S{% — 8% = —3%%) or by ealeulating the percentage change in purchasing power: When the rate of inflation he interest rate on Latasha's deposit, the purchasing power of her deposi over the course of the year. equal remains the same ~ greater