Download Problem Sheet 1

Spring Term 2017
Yaşar University
Introduction to Economics II (Econ 102)
Problem Sheet 2
Measuring the cost of living
1)
Explain briefly what the consumer price index (CPI) is trying to measure and how it is constructed?
2)
Describe the three problems that make the consumer price index an imperfect measure of the cost of
living.
3)
Which do you think has a greater effect on the CPI: a 10% increase in the price of a chicken or a 10%
increase in the price of caviar? Why?
If the price of a Navy submarine rises, is the CPI or the GDP deflator affected more? Why?
4)
5)
The following table shows the prices and quantities consumed in the country known as the University
States. Suppose the base year is 2001. (This is also the year the typical consumption basket was
determined).
Year
Price of books
Quantity of
Price of
Quantity of
Price of
Quantity of
books
pencils
pencils
pens
pens
2001
$50
10
$1
100
$5
100
2002
$50
12
$1
200
$10
50
2003
$60
12
$1,5
250
$20
20
a)
b)
c)
d)
e)
f)
g)
6)
7)
8)
Year
What is the value of the basket in the base year?
What are the value of the CPI in 2001,2002,2003?
What is the inflation rate for 2002?
What is the inflation rate for 2003?
What type of bias do you observe in the CPI of 2003 and corresponding inflation rate? Explain.
Suppose the base year is changed in the table from 2001 to 2003(now use the 2003 consumption basket).
What is the new value of the CPI in 2002?
If you personally only consume pens (no paper or pencils), would your standart of living be likely to
increase, decrease or stay the same over the years 2001-2003? Why?
Over a long period of time, the price of a candy bar rose from $1 to $6. Over the same period, CPI rose
from 150 to 300. Adjusted overall inflation, how much did the price of candy bar change?
Which of the following statements are not true and why?
a) If your wage rises from $500 to $600, while CPI rises from 112 to 121, you should feel an
increase in your standard of living.
b) It is impossible for real interest rate to be negative.
c) If the nominal interest rate is 12%, and the rate of inflation is 7%, then the real rate of
interest is 5%.
d) If lenders demand a real rate of return 4% and they expect inflation to be 5% then they should
charge 9% interest when they extend loans.
e) If borrowers and lenders agree on a nominal interest rate and inflation turns out to be greater
than they had anticipated, lenders will gain at the expense of borrowers.
Suppose that the residents of Vegopia spend all off their income on tomatoes, broccoli and carrots. The
following table shows the prices and quantities consumed in this country:
Price of
Quantity of
Price of
Quantity of
Price of
Quantity of
tomatoes
tomatoes
broccoli
broccoli
carrots
carrots
2003
$2
100
$1,5
50
$0,1
500
2004
$3
75
$1,5
80
$0,2
500
a)
b)
If the base year is 2003, what is the CPI in both years?
What is the inflation rate in 2004?