Problems and application chapter 3 : Measuring the cost of living

1.It would cost 162,44$

2.a)Price of one unit of vegetable

Vegetable 2020 2021

Cauliflower 2$ 3$
Broccoli 1.5$ 1.5$
Carrot 0.1$ 2$

b)

CPI of 2020 = 100 ( base year )

CPI of 2021 = 136

c)

Inflation rate in 2021 = CPI 2021 – CPI 2020/CPI 2020 x 100 = 36%

3.

a)

Percentage change in price of each products

Tennis ball = 0%

Golf balls = 50%

Gatorade = 100%

b)

Percentage change overall = 50% = change in cost of market in two years

c)

It would lower the estimation of inflation rate because as the bottle get bigger in size means

that it would worth more than what it used to = unmeasured quality change

d)

Change in quality would also lower the inflation rate estimation, new flavor = make people feel

better

5.

a)

2020 CPI = 100

2021 CPI = 137.14

Percentage change in overall price level = 37,14% ( CPI )

b)

2020 2021
Nominal gdp 700 1320
Real gdp 700 980
Gdp defaltor 100 134,69
Percentage change in overall price level = 34.69% ( GDP deflator )

c)

They are not the same and in this case there is a 3% difference.The rate of inflation by CPI was

calculated based on a constant basket while GDP deflation was not constant.

6.

a)Not affected – improve the standard of living

b) Not affected – improve the standard of living

c)CPI increased

d)Not affected – too hard to calculate/measure

e)Not included – substitutional bias

7.

a) Percentage of price of eggs rises = 101%

b) Percentage of wage rises = 240%

c)1980: 8 minutes

2018: 4 minutes

d) Purchase power eventually rises

8.

a)

Yes, the living standard will be better for the elderly as the CPI overexagerate the cost of

living.CPI increase = SS increase

b)Change in insurance system

9.

a)
Real interest = Nominal interest – inflation

=> if inflation was higher , the real interest would be lower than expected.

b)

Because the real interest is lower => the lender would get back less money than expected which

means they lose and the gain is on the borrower.

c)

Home owners were better of since real interest was lower because inflation was higher

Banks were worse because they were receiving less real interest