1.

1. Calculating inflation using a simple price index Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2017, 2018, and 2019. The cost of each item in the basket and the total cost of the basket are shown for 2017. Perform these same calculations for 2018 and 2019, and enter the results in the following table. 2017 2018 2019 Price Cost Price Cost Price Cosl: Quantity in Basket (Dollars) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars) Notebooks 10 3 3o 3 4 : Calculators 1 75 75 80 104 [: Large coffees 300 2 600 2 2 C Energy drinks 75 2 150 4 5 : Textbooks 8 90 720 110 120 I: Total cost 1,575 : Price index 100 Suppose the base year for this price index is 2017. In the last row of the table, calculate and enter the value of the CSPI for the remaining years. Between 2017 and 2018, the CSPI increased by . Between 2018 and 2019, the CSPI increased by . Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply. [3 A new, safe method of memory enhancement became available for purchase. [3 The quality and design of calculators improved dramatically from 2017 to 2019. For example, calculators made in 2019 accept memory cards, whereas those made in 2017 do not, but this quality change is hard to measure. [3 As the price of textbooks increased, more and more students turned to the usedbook market or chose not to buy textbooks at all, instead using the copies on reserve in the library. [3 Professors required each student to buy 10 notebooks, regardless of the price. 2. Alternative price indexes Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. The GDP deflator for this year is calculated by dividing the V using V by the V using V and multiplying by 100. However, the CPI reflects only the prices of all goods and services V . Indicate whether each scenario will affect the GDP def/ator or the CPI for the United States. Check all that apply. Shows up in the... GDP Scenario Deflator CPI An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep C] C] sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Japanese-made phone that is popular among U.S. consumers C] C] 2. Alternative price indexes Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. The GDP deflator for this year is calculated by dividing the V using V by the V using V and multiplying by 100. value of all goods and services produced in the economy in the base year V value of all goods and services produced in the economy this year cost of a given market basket of goods and services United States. ChECk all that apply. Shows up in the... GDP Scenario Deflator CPI An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep C] C] sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Japanese-made phone that is popular among U.S. consumers C] C] 2. Alternative price indexes Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. The GDP deflator for this year is calculated by dividing the V using V by the V using V and multiplying by 100. However, the CPI reflects only the prices of all goods and services thls years prices the base year's prices Indicate whether each scenario will affect the GDP def/ator or the CPI for the United States. Check all that apply. Shows up in the... GDP Scenario Deflator CPI An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep C] C] sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Japanese-made phone that is popular among U.S. consumers C] C] 2. Alternative price indexes Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. The GDP deflator for this year is calculated by dividing the v using V by the v using v and multiplying by 100. value of all goods and services produced in the economy in the base year cost of a given market basket of goods and services value of all goods and servuces produced In the economy this year Shows up in the... GDP Scenario Deflator CPI An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep C] C] United States. Check all that apply. sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Japanese-made phone that is popular among U.S. consumers C] C] 2. Alternative price indexes Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. The GDP deflator for this year is calculated by dividing the V using V by the V using V and multiplying by 100. However, the CPI reflects only the prices of all goods and services the base year's prices Indicate whether each scenario will affect the GDP def/ator or the CPI for the United States. Ch thls year 5 prices Shows up in the... GDP Scenario Deflator CPI An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep C] C] sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Japanese-made phone that is popular among U.S. consumers C] C] 2. Alternative price indexes Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. The GDP deflator for this year is calculated by dividing the V using V by the V using V and multiplying by 100. However, the CPI reflects only the prices of all goods and services V . bought by consumers produced domestically Indicate whether each scenario will affect the GDP def/ator or the = Check all that apply. Shows up in the... GDP Scenario Deflator CPI An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep C] C] sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Japanese-made phone that is popular among U.S. consumers C] C] 3. Comparing salaries from different times Consider golfers who led the Professional Golfers' Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal figures (unadjusted for inflation). To convert the original earnings of Palmer, Trevino, and Norman, use the formula for converting dollar figures from an earlier era into year 2016 U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar. Nominal Winnings U.S. CPI Year Golfer (Dollars) (1983 = 100) Winnings in 2016 Dollars 1963 Arnold Palmer 128,230 30.6 1970 Lee Trevino 157,037 38.8 1986 Greg Norman 653,296 109.6 2016 Dustin Johnson 9,365,185 240.0 9,365,185 True or False: According to the previous table, the golfer with the highest PGA winnings in nominal dollars is not the same as the golfer with the highest PGA winnings after adjusting for inflation. O True O False3. Comparing salaries from different times Consider golfers who led the Professional Golfers' Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal figures (unadjusted for inflation). To convert the original earnings of Palmer, Trevino, and Norman, use the formula for converting dollar figures from an earlier era into year 2016 U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar. Nominal Winnings U.S. CPI Year Golfer (Dollars) (1983 = 100) Winnings in 2016 Dollars 1963 Arnold Palmer 128,230 30.6 1970 Lee Trevino 157,037 38.8 534 1986 Greg Norman 653,296 109.6 2016 Dustin Johnson 9,365,185 240.0 16,349 980,725 True or False: According to the previous table, the golfer with the highest Po nominal dollars is not the same as the golfer with the highest PGA winnings after adjusting for inflation. 1,005,725 30,775,200 O True O False3. Comparing salaries from different times Consider golfers who led the Professional Golfers' Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal figures (unadjusted for inflation). To convert the original earnings of Palmer, Trevino, and Norman, use the formula for converting dollar figures from an earlier era into year 2016 U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar. Nominal Winnings U.S. CPI Year Golfer (Dollars) (1983 = 100) Winnings in 2016 Dollars 1963 Arnold Palmer 128,230 30.6 1970 Lee Trevino 157,037 38.8 1986 Greg Norman 653,296 109.6 654 2016 Dustin Johnson 9,365,185 240.0 25,388 True or False: According to the previous table, the golfer with the highest PC 971,363 nominal dollars is not the same as the golfer with the highest PGA winnings after adjusting for inflation. 1,021,363 O True 37,688,880 O False3. Comparing salaries from different times Consider golfers who led the Professional Golfers' Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal figures (unadjusted for inflation). To convert the original earnings of Palmer, Trevino, and Norman, use the formula for converting dollar figures from an earlier era into year 2016 U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar. Nominal Winnings U.S. CPI Year Golfer (Dollars) (1983 = 100) Winnings in 2016 Dollars 1963 Arnold Palmer 128,230 30.6 1970 Lee Trevino 157,037 38.8 1986 Greg Norman 653,296 109.6 2016 Dustin Johnson 9,365,185 240.0 2,722 True or False: According to the previous table, the golfer with the highest P 298,339 nominal dollars is not the same as the golfer with the highest PGA winnings after adjusting for inflation. 1,345,575 O True 1,430,575 O False 156,791,0404. Inflation and interest rates The following table shows the average nominal interest rates on sixmonth Treasury bills between 2014 and 2018, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 2014 to 2018. (All rates are rounded to the nearest tenth of a percent.) Nominal Interest Rate Inflation Rate Year (Percent) (Percent) 2014 0.1 1.6 2015 0.2 0.1 2016 0.5 1.3 2017 1.1 2.1 2018 2.1 2.4 Source: \"FRED Economic Data,\" Federal Reserve Bank of St. Louis, last modied September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 2014 to 2018. Next, use the green points (triangle symbol) to plot the real interest rates for those years. 3.0 Nominal Interest Rate 2.0 1.0 Real Interest Rate INTEREST RATE (Percent) 0 -1.0 -2.0 2013 2014 2015 2016 2017 2018 2019 YEARAccording to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment? (3 2014 C) 2015 C) 2016 C) 2017 C) 2018 5. Interest, inflation, and purchasing power Suppose Amy is an avid reader and buys only mystery novels. Amy deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixedthat is, it won't change over time. At the time of her deposit, a mystery novel is priced at $10.00. Initially, the purchasing power of Amy's $3,000 deposit is mystery novels. For each of the annual ination rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of ination. Then enter the corresponding purchasing power of Amy's deposit after one year in the rst row of the table for each ination rate. Finally, enter the value for the real interest rate at each of the given ination rates. Hint: Round your answers in the first row down to the nearest mystery novel. For example, if you find that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 mystery novels under the assumption that Amy will not buy seventenths of a mystery novel. Annual Inflation Rate 0% 5% 8% Number of Novels Amy Can Purchase after One Year Y Y Y Real Interest Rate When the rate of inflation is equal to the interest rate on Amy's deposit, the purchasing power of her deposit Y over the course of the year. 5. Interest, inflation, and purchasing power Suppose Amy is an avid reader and buys only mystery novels. Amy deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixedthat is, it won't change over time. At the time of her deposit, a mystery novel is priced at $10.00. Initially, the purchasing power of Amy's $3,000 deposit is mystery novels. For each of the annual ination rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of ination. Then enter the corresponding purchasing power of Amy's deposit after one year in the rst row of the table for each ination rate. Finally, enter the value for the real interest rate at each of the given ination rates. Hint: Round your answers in the first row down to the nearest m ovel. For example, if you find that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 myste under the assumption that Amy will not buy seventenths of a mystery novel. nual Inflation Rate 5% 8% Number of Novels Amy Can Purchase after One Year V V V Real Interest Rate When the rate of inflation is equal to the interest rate on Amy's deposit, the purchasing power of her deposit V over the course of the year. 5. Interest, inflation, and purchasing power Suppose Amy is an avid reader and buys only mystery novels. Amy deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixedthat is, it won't change over time. At the time of her deposit, a mystery novel is priced at $10.00. Initially, the purchasing power of Amy's $3,000 deposit is mystery novels. For each of the annual ination rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of ination. Then enter the corresponding purchasing power of Amy's deposit after one year in the rst row of the table for each ination rate. Finally, enter the value for the real interest rate at each of the given ination rates. Hint: Round your answers in the first row down to the nearest mystery novel. F ple, if you find that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 mystery novels uncle umption that Amy will not buy seventenths of a mystery novel. Annual i Rate 0% 8% Number of Novels Amy Can Purchase after One Year V V V Real Interest Rate I When the rate of inflation is equal to the interest rate on Amy's deposit, the purchasing power of her deposit V over the course of the year. 5. Interest, inflation, and purchasing power Suppose Amy is an avid reader and buys only mystery novels. Amy deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixedthat is, it won't change over time. At the time of her deposit, a mystery novel is priced at $10.00. Initially, the purchasing power of Amy's $3,000 deposit is mystery novels. For each of the annual ination rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of ination. Then enter the corresponding purchasing power of Amy's deposit after one year in the rst row of the table for each ination rate. Finally, enter the value for the real interest rate at each of the given ination rates. Hint: Round your answers in the first row down to the nearest mystery novel. For example, if that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 mystery novels under the assumpti- my will not buy seventenths of a mystery novel. Annual Inflation Rate 0% 5% Number of Novels Amy Can Purchase after One Year V V V Real Interest Rate I When the rate of inflation is equal to the interest rate on Amy's deposit, the purchasing power of her deposit V over the course of the year. 5. Interest, inflation, and purchasing power Suppose Amy is an avid reader and buys only mystery novels. Amy deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixedthat is, it won't change over time. At the time of her deposit, a mystery novel is priced at $10.00. Initially, the purchasing power of Amy's $3,000 deposit is mystery novels. For each of the annual ination rates given in the following table, first determine the new price of a mystery novel, assuming it rises at the rate of ination. Then enter the corresponding purchasing power of Amy's deposit after one year in the rst row of the table for each ination rate. Finally, enter the value for the real interest rate at each of the given ination rates. Hint: Round your answers in the first row down to the nearest mystery novel. For example, if you find that the deposit will cover 20.7 mystery novels, you would round the purchasing power down to 20 mystery novels under the assumption that Amy will not buy seventenths of a mystery novel. Annual Inflation Rate 0% 5% 8% remains the same Number of Novels Amy Can Purchase after One Year V V V _ _ _ rises Real Interest Rate When the rate of inflation is equal to the interest rate on Amy's deposit, the purchasing power of her deposit V over the course of the year