Question 1: Year Price of tortilla Price of Wine 2016 $10.50 $15.00 2017 $13.00

Question

Question 1:

Year

Price of tortilla

Price of Wine

2016

$10.50

$15.00

2017

$13.00

$17.00

The basket contains 150 tortillas and 45 bottles of wine.

[1 point] Suppose that 2016 is the base year. Calculate the CPI in 2016. Round your answer to the first decimal.

[1 point] Suppose that 2016 is the base year. Calculate the CPI in 2017. Round your answer to the first decimal.

[1 point] Calculate the inflation rate between 2016 and 2017. Round your answer to the first decimal.

Question 2: [1 point] In 2000, most cell phones had black and white screens. By 2005, almost all cell phones had color screens and a built-in camera. The CPI basket did not capture this change in cell phone features. Which CPI bias does this event most closely relate to?

Question 3: Suppose that a borrower and a lender agree on the terms of a car loan. Six months later, inflation numbers are announced and inflation turns out to be higher than expected.

[1 point] Does the lender gain or lose from the unexpectedly high inflation?

[1 point] Does the borrower gain or lose from the unexpectedly high inflation?

Question 4: Classify the below workers as cyclically unemployed, frictionally unemployed, or structurally unemployed. [1 point each].

Worker A: “I am a stand-up comedian. Well, I was a stand-up comedian. I lost my job during the last recession, and I still haven’t found work. This isn’t a joke.”?

Worker B: “I used to repair portable CD players, like the Sony Walkman. Do you remember the Sony Walkman? Well, anyways, I used to repair those. But there isn’t much demand for that skillset anymore.”

Worker C: “I just graduated from Ohio State with a double major and pretty serious resume. I’m applying for a bunch of jobs....and waiting to be called back. This is so frustrating.”

Question 5: [1 point] How would you react to a politician who, in their campaign, are promising to “fix the labor market and reduce the unemployment rate to 0”?

Question 6: [1 point] What is a discouraged worker? How do they affect the unemployment rate?

Year

Price of tortilla

Price of Wine

2016

$10.50

$15.00

2017

$13.00

$17.00

Explanation / Answer

1. CPI = Cost of basket in current year/Cost of basket in base year x 100

CPI in 2016 = Cost of basket in 2016/Cost of basket in 2016 x 100

= (10.5 x 150 + 15 x 45)/(10.5 x 150 + 15 x 45) x 100

= (1575 + 675)/(1575 + 675) x 100 = 2250/2250x 100 = 100

CPI in 2017 = Cost of basket in 2017/Cost of basket in 2016 x 100

= (13 x 150 + 17 x 45)/(10.5 x 150 + 15 x 45) x 100

= (1950 + 765)/(1575 + 675) x 100 = 2715/2250x 100 = 120.67

Inflation rate = (CPI in 2017 - CPI in 2016)/CPI in 2016 x 100 = (120.67 - 100)/100 x 100 = 20.67%

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