Chapter 6, Measuring the Cost of Living Video Solutions, Principle Of Macroeconomics

Problem 1

Suppose that people consume only three goods, as shown in this table:a. What is the percentage change in the price of each of the three goods? What is the percentage change in the overall price level?
b. Do tennis racquets become more or less expensive relative to Gatorade? Does the well-being of some people change relative to the well-being of others? Explain.
$$\begin{array}{|l|c|c|c|}
\hline & \begin{array}{c}
\text { Tennis } \\
\text { Balls }
\end{array} & \begin{array}{c}
\text { Tennis } \\
\text { Racquets }
\end{array} & \text { Gatorade } \\
\hline 2014 \text { price } & \$ 2 & \$ 40 & \$ 1 \\
\hline 2014 \text { quantity } & 100 & 10 & 200 \\
\hline 2015 \text { price } & \$ 2 & \$ 60 & \$ 2 \\
\hline 2015 \text { quantity } & 100 & 10 & 200 \\
\hline
\end{array}$$

Oluwadamilola Ameobi

Numerade Educator

05:17

Problem 2

Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2014 they buy 100 heads of cauliflower for $\$ 200,50$ bunches of broccoli for $\$ 75,$ and 500 carrots for $\$ 50 .$ In 2015 they buy 75 heads of cauliflower for $\$ 225,80$ bunches of broccoli for $\$ 120,$ and 500 carrots for $\$ 100 .$ If the base year is $2014,$ what is the CPI in both years? What is the inflation rate in $2015 ?$

Jesse Neumann

Numerade Educator

02:04

Problem 3

Go to the website of Statistics Canada (www.statcan gc.ca) and find data on the consumer price index. By how much has the index including all items risen over the past year? For which categories of spending have prices risen the most? The least? Have any categories experienced price declines? Can you explain any of these facts?

Doris Bennett

Numerade Educator

07:51

Problem 4

A small nation of ten people idolizes the TV show Canadian Idol. All that the ten people produce and consume are karaoke machines and $\mathrm{CDs}$, in the following amounts:
$$\begin{array}{|c|c|c|c|c|}
\hline \multirow{2}{*} {} & \multicolumn{2}{|c|} {\text { Karaoke Machines }} & \multicolumn{2}{|c|} {\text { CDs }} \\
\)\cline { 2 - 5 } & \( \text { Quantity } & \text { Price } & \text { Quantity } & \text { Price } \\
\hline 2014 & 10 & \$ 40 & 30 & \$ 10 \\
\hline 2015 & 12 & 60 & 50 & 12 \\
\hline
\end{array}$$
a. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2014 as the base year, and fix the basket at 1 karaoke machine and 3 CDs.
b. Using a method similar to the GDP deflator, compute the percentage change of the overall price level. Also use 2014 as the base year.
c. Is the inflation rate in 2015 the same using the two methods? Explain why or why not.

Oluwadamilola Ameobi

Numerade Educator

04:21

Problem 5

Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.
a. The invention of the iPad
b. The introduction of air bags in cars
c. Increased personal computer purchases in response to a decline in the price
d. More scoops of raisins in each package of Raisin Bran
e. Greater use of fuel-efficient cars after gasoline prices increase

Kaylee Mcclellan

Numerade Educator

02:57

Problem 6

A single copy of the Ottawa Citizen cost $\$ 0.10$ to purchase in 1970 and $\$ 0.50$ in $1990 .$ The average wage in manufacturing was $\$ 3.01$ per hour in 1970 and $\$ 14.19$ in 1990. a. By what percentage did the price of a newspaper rise?
b. By what percentage did the wage rise?
c. In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?
d. Did workers' purchasing power in terms of newspapers rise or fall?

Christopher Dzorkpata

Numerade Educator

01:44

Problem 7

The chapter explains that Canada Pension Plan benefits are increased each year in proportion to the increase in the CPI, even though most economists believe that the CPI overstates actual inflation.
a. If the elderly consume the same market basket as other people, does the Canada Pension Plan provide the elderly with an improvement in their standard of living each year? Explain.
b. In fact, the elderly consume more medicine than younger people, and medicine costs have risen faster than overall inflation. What would you do to determine whether the elderly are actually better off from year to year?

Nick Johnson

Numerade Educator

01:10

Problem 8

How do you think the basket of goods and services you buy differs from the basket bought by the typical Canadian household? Do you think you face a higher or lower inflation rate than is indicated by the CPI? Why?

Jennifer Stoner

Numerade Educator

02:22

Problem 9

Income tax brackets were not indexed until 2000 . When inflation pushed up people's nominal incomes during the $1970 \mathrm{s}$, what do you think happened to real tax revenue? (Hint: This phenomenon was known as "bracket creep.")

Oluwadamilola Ameobi

Numerade Educator

01:33

Problem 10

When deciding how much of their income to save for retirement, should workers consider the real or the nominal interest rate that their savings will earn? Explain.

Kaylee Mcclellan

Numerade Educator

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Problem 11

Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.
a. Is the real interest rate on this loan higher or lower than expected?
b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?
c. Inflation during the 1970 s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960 s? How did it affect the banks that lent the money?

Rashmi Sinha

Numerade Educator