BUSECON F17 1. The table below shows the price index for 2 years in 3 regions. I

Question

BUSECON F17 1. The table below shows the price index for 2 years in 3 regions. Inflation and Aggregate Demand/Supply Rust SunBible Belt 100 135 Belt 50 65 Belt 150 249 1900 1950 a. Between 1900 and 1950, find the inflation rate in the: i. Rust Belt ii. Sun Belt b. In 1950, Bob made 10,000 per year and lived in the Rust Belt. How much would he have to make to have the same purchasing power if he moved to the Sun Belt? Assume that the CPI basket contains only 3 goods - Shoes, tuition and coffee. Use the following information to answer the questions . CPI basket 2010 2011 2012 price price price quantity Shoes Tuition Coffee 10 100 150 200 100

Explanation / Answer

Inflation rate = 100 x (price index in 1950 - price index in 1900)/ price index in 1900

I) Rust belt

Inflation rate = 100 x 15/50 = 30%

II) Sun belt

Inflation rate = 100 x 35/100 = 35%

III) Bible belt

Inflation rate = 100 x 99/150 = 66%

Bob would need to make = 135/65 x 10000 = 20769.23

(= Price index in sun belt/price index in rust belt x income in rust belt)

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