Exercise A: Use of CPI data to calculate the rate of inflation Table 2: Consumer Price Index Year Index Annual (1982-84 = 100) Percent Change 2004 188.9 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 1. What was the annual rate of inflation during 2006? What was the annual rate of inflation during 2009? 2. How much higher was the general level of prices in 2009 than 2005? How much higher were prices in 2009 than during the 1982-1984 base year? 3. How does unanticipated inflation in the U.S. negatively impact the economy? Consider its impact on people living on fixed incomes, business investments and the amount exported from and imported to the U.S.Exercise B: Placing data from an earlier period into the price level of a later period. Use Table 1 above to answer the following questions: 1. Measured in terms of the general level of prices in April of 2009, derive the real price of a gallon of gasoline for the years 1976, 1985, 1990, 1995, and 2005. Show your calculations. 2. Was the real price of a gallon of gas higher in April 2009 than in 1980? Was the real price of gas higher in April 2009 than in 1973? Why would you want to convert current prices into real prices when making comparisons over time?Table 1: Price of a Gallon of Regular Unleaded Gasoline Nominal Price CPI (1982-84 = 100) Real Price Year (1) (2) (3) 1973 $0.39 44.4 $1.87 1976 $0.61 56.9 1980 $1.25 82.4 $3.23 1985 $1.20 107.6 1990 $1.16 130.7 1995 $1.15 152.4 2000 $1.51 172.2 $1.87 2005 $2.30 195.3 2009 (April) $2.31 212.7 $2.31 Source: U.S. Energy Information Administration, Monthly Energy Review The data for regular unleaded gasoline were unavailable prior to 1976. Thus, the 1973 observation is for regular leaded gasoline, which was slightly cheaper during that period Both crude oil prices and gasoline prices rose sharply throughout the 1970s. By 1980, the nominal price of gasoline had risen to $1.25. This would make the real price of gasoline measured in 2009 dollars equal to $3.23 ($1.25 times 2.6, the ratio of 212.7/82.4), even higher than the price in 2009