Exam 24: Measuring the Cost of Living

Scenario 24-1 ​ Sue Lewis was an accountant in 1943 and earned $12,000 that year. Her son is an accountant too and he earned $220,000 this year. Suppose the price index was 18.9 in 1943 and 20.5 in the current year. -Refer to Scenario 24-1. Sue's son current year income in 1944 dollars is

The Bureau of Labor Statistics does not try to account for quality changes in the goods and services in the basket used to compute the CPI.

The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different times.

Consumer price index = (Price of basket of goods and services in base year / Price of basket in current year ) x 100

What do real interest rates account for that nominal interest rates do not?

The Bureau of Labor Statistics is part of the U.S. Department of Labor.

In comparison to the situation in the late 1970s, the United States experienced lower nominal interest rates and higher real interest rates in the late 1990s.

Compute how much each of the following items is worth in terms of today's dollars using 177 as the price index for today. a.In 1926, the CPI was 17.7 and the price of a movie ticket was $0.25. b.In 1932, the CPI was 13.1 and a cook earned $15.00 a week. c.In 1943, the CPI was 17.4 and a gallon of gas cost $0.19.

Scenario 24-1 ​ Sue Lewis was an accountant in 1943 and earned $12,000 that year. Her son is an accountant too and he earned $220,000 this year. Suppose the price index was 18.9 in 1943 and 20.5 in the current year. -Refer to Scenario 24-1. In real terms, the income of Sue's son amounts to about what percentage of Sue's income?

Scenario 24-2 ​ Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-2. Using 2009 as the base year, what is the inflation rate in 2010?

If the current year CPI is 140, then the price level has increased 40 percent since the base year.

Data from the Bureau of Labor Statistics show that the largest category of consumer spending is housing.

If the real interest rate is 10.3% and the nominal interest rate is 12.6%, what is the inflation rate?

The U.S. economy has never experienced deflation.

List the five steps for calculating the consumer price index and inflation rate.

A COLA automatically raises the wage when the CPI rises.

Explain how the prices of goods and services used in the CPI differ from the prices reflected by GDP deflator.

Economists use the term inflation to describe a situation in which the economy's overall price level is rising.

If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years ago would cost $1.50 in today's prices.

Scenario 24-2 ​ Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-2. What are the prices of books, CDs, and DVDs in 2009?