Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows:

10 pizzas at $12 each

Rent of apartment, $750 per month

Gasoline, car insurance, and maintenance, $150

Phone service (basic service plus 10 long-distance calls), $50

In the year following the base year, the survey takers determine that pizzas have risen to $15 each, apartment rent is $810, gasoline, car insurance, and maintenance have risen to $170, and phone service has dropped in price to $40.

a)Find the CPI in the subsequent year and the rate of inflation between the base year and the subsequent year.

Instructions: Round your CPI answer to 3 decimal places and Rate of inflation to 1 decimal place.

Products Government survey takers [ Family Expenditures]

Base year or Year of origin

Subsequent year or the following year

Pizza

120/10= 12

10 * 12= $ 120

150 / 10 = 15

10 * 15 = $ 150

Rent of apartment

750 / 10 = 75

10 * 75 = $ 750

810 / 10 = 81

10 * 81 = $ 810

Gasoline, auto insurance, and upkeep

150 / 10 = 15

10* 15 = $150

170 / 10 = 17

10 * 17= $ 170

Access to telephone service

50 / 10 = 5

10 * 5 = $ 50

40 / 10 = 4

10 * 4 = $ 40

Work out.

Basket cost in the base year:

120 + 750 + 150 + 50 = $ 1070

Basket cost in the subsequent year

150 + 810 + 170 + 40 = $ 1170

CPI in the subsequent year = Basket cost in the subsequent year * 100 / Basket cost in the base year

CPI = 1170 * 100 / 1070 = $ 109.3457 =

3 decimal places = 109.346

Inflation =

[[ CPI in the subsequent year] - [ CPI in the base year]] * 100

/

CPI in the base year

In the base year, the CPI was equal to 100.

Inflation = [[ 109.346 - 100]] * 100 / 100

= 9.346 %

1 decimal places = 9.3%

Notes :

Consumer price Index in the following or Subsequent year = 109. 346

Inflation in the subsequent year = 9.3

b)The family's nominal income rose by 10 percent between the base year and the subsequent year. Are they worse off or better off in terms of what their income is able to buy?

The rate of growth in the family's nominal income between the base year and the following year = 10% inflation rate between the base year and the following year= 9.3%

Because the rate of nominal income growth is lower than the rate of inflation, the family is better off because their real purchasing power has increased between the base year and the following year.

c)Question Two (30 points)

Here are values of the CPI (multiplied by 100) for each year from 1990 to 2000.

Notes :

CPI stands for Consumer Price Index. CPI is a price index that compares the cost of a fixed basket of goods and services for urban consumers to the price of the same basket in the previous year.

The price level refers to the range of prices for goods and services in the economy, as measured by the price index.

The rate of inflation, on the other hand, is the rate at which the price level in the economy changes.

a)For each year beginning with 1991, calculate the rate of inflation from the previous year.(15 points)

Round your answers to 1 decimal place.

Year

CPI

Inflation Rate (%) = [ CPI 2- CPI1] / CPI * 100

1990

130.7

--------------

1991

136.2

[136.2 - 130.7] / 130.7 *100 = 4.20 %=

4.2 %

1992

140.3

[ 140.3 - 136.2 ] / 136.2 * 100 =3.00%=

3.0%

1993

144.5

[ 144.5 - 140.3] / 140.3 * 100 = 2.99 %

= 2.9 %

1994

148.2

[ 148.2 - 144.5] / 144.5 * 100 = 2.56 %

= 2.6 %

1995

152.4

[152.4 -

1996

156.9

1997

160.5

1998

163

1999

166.5

2000

172.2

b)What happened to inflation rates over the 1990s? Compared to 1990-1991, the inflation rates remained ...................throughout the 1990`s.

Select the right answer:

a)the same

b)higher

c)lower

As can be seen, the inflation rate in the 1990s was mostly constant, ranging between 2% and 3%.

Explain and justify your answer. (15 points)

Question Three (40 points)

How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line?

a)There is an increase in demand for the plant's.

b)Many commuters are switching to public transportation due to a sharp increase in the price of gasoline.

c)People are less willing to work in factories as a result of alternative opportunities.

d)Plant management implements new assembly-line methods that increase the number of cars unskilled workers can produce per hour while lowering defect rates.

e)Robots are introduced to assist with the majority of assembly-line tasks.

(select the right answer, then explain and justify your answer).

1.Demand for the type of car made by the plant increases.

a.Real wage and employment decrease

b.Real wage and employment increase

c.Real wage increase and employment decrease

d.Real wage decrease and employment increase

Explain and justify: Increases in real wages and employment.

When demand for the type of car produced by the plant grows, more workers will be needed to expand production to meet the increased demand. Eventually, the demand for workers will rise. Wages will have to be raised to hire more people. As a result, both the real wage and the number of people employed will rise.

2.A sharp increase in the price of gasoline causes many commuters to switch to public transportation.

a.Real wage and employment decrease

b.Real wage and employment increase

c.Real wage increase and employment decrease

d.Real wage decrease and employment increase

Explain and justify: Wages and employment are falling in real terms.

This will reduce demand for automobiles, resulting in a decrease in revenue. While revenue declines, the plant would cut costs by laying off workers and lowering wages in order to make a profit. Workers will also be readily available to take jobs at lower wages as demand for workers declines. As a result, real wages and employment have been declining.

3.Because of alternative opportunities, people become less willing to do factory work.

a.Real wage and employment decrease

b.Real wage and employment increase

c.Real wage increase and employment decrease

d.Real wage decrease and employment increase

Explain and Justify : Increase in real wages and decrease in employment

Because of the increased number of alternatives, the reservation wage (which is the lowest wage at which a worker will accept a specific type of job, such as a job at a plant) rises. Workers will also migrate to better options, making it difficult for the plant to retain its employees. In this case, overall employment in the economy increases. Employees at the plant, on the other hand, may suffer. Wages are expected to rise.

4.The plant management introduces new assembly-line methods that increase the number of cars unskilled workers can produce per hour while reducing defects.

a.Real wage and employment decrease

b.Real wage and employment increase

c.Real wage increase and employment decrease

d.Real wage decrease and employment increase

Explain and Justify: Increases in real wages and employment.

If employees can produce more in an hour, then their productivity has increased. Wages rise in tandem with labor productivity. As productivity rises, so does the number of people employ.

5.Robots are introduced to do most basic assembly-line tasks.

a.Real wage and employment decrease

b.Real wage and employment increase

c.Real wage increase and employment decrease

d.Real wage decrease and employment increase

Explain and Justify: Wages and employment are falling in real terms.

If robots are used to replace workers, the demand for workers will decrease, and the plant may have to lay off employees. Workers' reservation wages will be reduced as a result of this. As a result, when robots are used, both employment and wages are reduced.

Best wishes