Use the table below to answer questions 20-23 The table below shows the ‘hypothe
ID: 1216256 • Letter: U
Question
Use the table below to answer questions 20-23
The table below shows the ‘hypothetical’ basket(s) of consumption goods for a 'typical' Penn State college student for 2012 and 2013.
Assume 2012 is the base year. The rate of inflation between 2012 and 2013 is ____%.
NOTE: calculate the rate of inflation using price indexes.
A) 12.28
B) 89.06
C) 113.38
D) 13.38
E) 12.83
21.
Now update the base year to 2013. The rate of inflation between 2012 and 2013 is now _____%.
NOTE: calculate the rate of inflation using price indexes.
A) 12.28
B) 89.06
C) 113.38
D) 13.38
E) 12.83
22.
Which rate of inflation accounts for the substitution bias?
A) the inflation rate from #20 (using 2012 as the base year)
B) the inflation rate from #21 (using 2013 as the base year)
23.
The ‘Chain Weighted’ rate of inflation is ___%.
A) 12.28
B) 89.06
C) 113.38
D) 13.38
E) 12.83
24.
Use the table below to answer questions 24 - 27
Notes:
-June 2009 is the last month of the Great recession - the official recovery, began in July of 2009 -expected inflation data is one year hence, so expected inflation for the period from June 1, 2008 to June 1, 2009 is given in June 2008. So the data in the table indicates that in June of 2008, inflation was expected to be 5.1% over the next 12 months
Use the provided CPI data to calculate the actual inflation rate that occurred between June 2008 and June 2009 (hint: just calculate the % change in the CPI).
A) 1.19%
B) -2.68%
C) -1.23%
D) 3.65%
25.
The ex-ante real rate of interest between June 2008 and June 2009 is:
A) 1.19%
B) -2.68%
C) -1.23%
D) 3.65%
26.
The ex-post real rate of interest between June 2008 and June 2009 is:
A) 1.19%
B) -2.68%
C) -1.23%
D) 3.65%
27.
We know that most decisions are in part, based on expectations of the future. Suppose we have two people who are trying to decide whether to consume today (assume it is currently June 2008) or save for the future and consume one year later, in June 2009. One person, let's call him Joe, is basing his decision on the ex-ante real rate of interest like most of us do. The other person who has a crystal ball, we'll call her Crystal, can see exactly what the actual rate of inflation is going to be and thus, has perfect foresight and bases her decision on the ex-post real rate. Look at the difference in the ex-ante and ex-post real rates you calculated in #25 and #26 above. Who would be more likely to save and who would be more likely to spend?
A) Crystal saves, Joe spends.
B) Crystal spends, Joe saves.
C) both Joe and Crystal are savers.
D) both Joe and Crystal are spenders.
Explanation / Answer
Its very easy to calculate the nominal expenditure in two years:
Year 2012:
Expenditure on Textbooks = 80*6 = 480
Expenditure on Rent = 700*1 = 700
Exp. on PSU = 15*6 = 90
Exp. on Dinner = 25*6 = 150
Nominal Exp. for 2012 = 1120
Same way, for 2013
Exp. on Textbooks = 90*6 =540
Exp. on Rent = 800*1 =800
Exp. on PSU = 20*3 = 60
Exp. on Dinner = 25*8 = 200
Nominal exp. in 2013 = 1600
1. Taking 2012 as the base year
Now take current year prices and base year quantity and multiply them
The CPI for any year is given by the formula:
Price of BASE YEAR consumption basket in any given year
---------------------------------------------------------------------------------------------------
Price of BASE YEAR consumption basket in the BASE year
= (1610/1120) = 1.4375
So CPI for this year will be 143.75
Inflation rate is nothing but % CHANGE in CPI = 43.75%
(ii) Updadate the Base Year to 2013.
Now procedure remains the same. Simply take 2012 quantities and find the nominal expenditure in 2012 using the prices of 2013
Thus CPI for year 2013 =
Price of BASE YEAR consumption basket in any given year
--------------------------------------------------------------------------------------------------
Price of BASE YEAR consumption basket in the BASE year
= (1710/1600) = 1.06875
So inflation rate = 6.8%
(iii). Using 2012 as base, we have seen that inflation is overstated. Thus using 2012 as base year leads to substitution bias. Substitution bias is simply a weakness in CPI,which overstates inflation because it does not account for the substitution effect, when consumers choose to substitute one good for another after its price becomes cheaper than the good they normally buy.
GOOD Price Quantity Expenditure Textbook 90 6 540 Rent 800 1 800 PSU 20 6 120 Dinner 25 6 150 TOTAL 1610Related Questions
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