Short Answer

Short Answer #2

9/5/13

Questions:

1. List the three largest categories that make up the market basket that is used to compute CPI

- The CPI is a measurement of range for pricing to the consumer product. The largest categories used to compute CPI are food, housing and transportation.

2. Suppose the market basket of goods and services purchased by an average urban household

consists of only X, Y, Z, three consumer products.

Calculate the CPIs for each year and the inflation rate for the Year 1‐Year 2 period.

Year 1 CPI – 100

* CPI = 100(11/11)

Year 2 CPI – 118

* CPI = 100(13/11)

Inflation Rate – 18%

* IR = (18/100)*100

3. If the CPI was 130.7 in 1990 and was 136.2 in 1991, compute the rate of inflation for 1991.

* The rate of inflation for 1991 is 6%.

* ((136.7-130.7)/(100))*(100) = 6%

4. GDP in 1997 was $8,318 billion. GDP in 1998 was $8,719 billion. What was Real GDP in 1997, adjusted to the 1998 price level?

CPI in 1997 was 160.5. CPI in 1998 was 163.0.

* The real GDP adjusted to the 1998 price level is $8,447.56

* CPI = 8318 (163/160.5) = $ 8447.56

5. Sylvia had income of $25,000 in 1973, when the CPI was 44.4. Sylvia had income of $100,000 in 2001, when the CPI was 177.1.

What was Sylvia’s real income for 2001, adjusted to the 1973 price level?

* The real income in 2001 adjusted to the 1973 price is $25,070.58.

* RI = 100,000(44.4/177.1) = $25,070.58