Professional Documents
Culture Documents
Download Principles of Economics 7th Edition Frank Solutions Manual all chapters
Download Principles of Economics 7th Edition Frank Solutions Manual all chapters
https://testbankfan.com/product/principles-of-economics-7th-
edition-frank-test-bank/
https://testbankfan.com/product/principles-of-economics-6th-
edition-frank-solutions-manual/
https://testbankfan.com/product/principles-of-economics-6th-
edition-frank-test-bank/
https://testbankfan.com/product/principles-of-economics-5th-
edition-frank-test-bank/
Principles of Economics A Streamlined Approach 3rd
Edition Frank Solutions Manual
https://testbankfan.com/product/principles-of-economics-a-
streamlined-approach-3rd-edition-frank-solutions-manual/
https://testbankfan.com/product/principles-of-microeconomics-6th-
edition-frank-solutions-manual/
https://testbankfan.com/product/principles-of-macroeconomics-6th-
edition-frank-solutions-manual/
https://testbankfan.com/product/principles-of-economics-a-
streamlined-approach-3rd-edition-frank-test-bank/
https://testbankfan.com/product/principles-of-economics-7th-
edition-gottheil-solutions-manual/
CHAPTER 18 INFLATION AND THE PRICE
LEVEL
2. The price level measures the cost of a basket of goods and services, relative to a base
year. The CPI is one standard measure of the price level. In contrast, the rate of
inflation is the annual percentage change in the price level.
For example, suppose that the basket of goods and services on which the CPI is based
cost $100 in the base year, $150 last year, and $154.50 this year. The price level this
year is 1.545 (= $154.50/$100.00). The inflation rate from last year to this is the
percentage increase in the cost of the basket since last year,
154.50 − 150.00 4.5
= = 0.03 or 3%.
150.00 150
4. In an indexed labor contract, wages each year would automatically be increased at the
rate of inflation, preserving the purchasing power of the agreed-upon wage. For
example, if prices of consumer goods rise by 2% over the year (that is, the rate of
inflation is 2%), an indexed wage will also automatically rise by 2% so that the
quantity of goods the worker can purchase remains unchanged.
6. The first two sentences are correct; the losses that unanticipated inflation imposes on
creditors (for example) are just offset by the gains to debtors. The third sentence is
not correct, however, as there is an overall cost to society when wealth is redistributed
arbitrarily. First, the role of luck in the distribution of income is increased since the
size of one’s return depends on whether inflation is high or low; this makes people
feel worse off and is a cost to society. Second, when wealth is determined more by
2
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
random forces than by hard work and intelligent investment, the incentives to engage
in the latter are reduced, harming the efficiency of the economy. Finally, people use
up resources attempting to anticipate inflation and protect themselves against it; from
society’s point of view, these resources are wasted.
7. The real return on any asset is the nominal return (or nominal interest rate) minus the
inflation rate. The nominal return on cash is zero, so the real return equals the
nominal interest rate minus the inflation rate. That is, the return to cash is negative
whenever there is inflation, and each additional point of inflation reduces the real
return to holding cash (i.e. makes it more negative) by one point.
8. True. Suppose the borrower and lender agree on a 2% real return on the loan. If they
correctly anticipate that inflation over the life of the loan will be, say, 5%, then setting
a 7% nominal interest rate on the loan ensures that the lender receives and the
borrower pays a 2% real return, as agreed beforehand. (Note that this ignores any
complications introduced by differential in taxes between the borrower and lender.)
Answers to Problems
1. a. The cost of the goods in the base year is $200 + $600 + $100 + $50 = $950. In
the subsequent year the same goods costs $220 + $640 + $120 + $40 = $1,020.
The CPI in the subsequent year equals the cost of the goods in that year relative to
the base year: $1,020 / $950 = 1.074.
Since the CPI in the base year is 1.000, the rate of inflation (equal to the
percentage increase in the CPI) between the base year and the subsequent year is
7.4%.
b. The family’s nominal income rose by 5%, which is less than the increase in the
family’s cost of living. The family is thus worse off in terms of real purchasing
power.
3
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Learning Objective: 18-01
AACSB: Knowledge Application
Bloom’s: Apply
2. The inflation rate between 1990 and 1991 is the percentage increase in the price level
between those years: (136.2 -130.7)/ 130.7 = 4.2%. Inflation rates for the years 1991
through 2000 are presented below.
Inflation Rate
Year CPI (%)
1990 130.7
1991 136.2 4.2
1992 140.3 3.0
1993 144.5 3.0
1994 148.2 2.6
1995 152.4 2.8
1996 156.9 3.0
1997 160.5 2.3
1998 163 1.6
1999 166.6 2.2
2000 172.2 3.4
The inflation rates were relatively low throughout the 1990s, but lower at the end of the
decade than at the beginning.
3. a. Using the CPI data from problem 2, the real entry-level wage for college
graduates in 1997 was $13.65/1.605 = $8.05
b. Since the real wage fell by 8% between 1990 and 1997, the $8.50 real wage in
1997 was 92% of the real wage in 1990:
8.50 = (0.92)(real wage in 1990)
Real wage in 1990 = $9.24
c. Let W1990 stand for the nominal wage in 1990. Then, if we deflate the nominal
wage by the CPI, we have W1990/1.307 = $9.24. Solving for W1990 gives us a
nominal wage in 1990 of $12.08.
4
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4. The rate of inflation between 2014 and 2016 (the percentage increase in the price
185 − 175 10
level) is = = 0.057 = 5.7%. To keep tax brackets at the same points in
175 175
terms of real income, the nominal income categories should each be increased by
5.7%. The tax schedule for the year 2016 is:
Note: If you calculated the inflation rate to more decimal points, your answers will be
slightly different from those above.
Learning Objective: 18-02
AACSB: Knowledge Application
Bloom’s: Apply
5. The real median income is determined by dividing the nominal income by the CPI for
the given year and multiplying the result by 100. The results for each year are given
in the table below:
Nominal Real
Year Income CPI Income
1985 $23,618 107.6 $21,949.81
1995 $34,076 152.4 $22,359.58
2005 $46,326 195.3 $23,720.43
2010 $49,276 218.1 $22,593.31
Based on the information in the table, real median household income rose between
1985 and 2005, but then declined between 2005 and 2010.
In Connect the 2010 nominal income value is replaced with a 2015 nominal income
value of $57,230. CPI value for 2010 was replaced with 2015 CPI value of 237.0.
Real income for 2015 equals $24,147.68
5
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
6. a. The cost of the basket in 2015 is $90 + $60 + $80 = $230.
300 − 230 70
The official “cost of eating” has increased by = = 0.304 or 30.4%
230 230
between 2015 and 2016.
b. Since two chickens now cost more than one ham, people will switch from 30
chickens to 15 hams, for a total ham consumption of 25. The cost of the food
basket in 2016 is now (25 hams)($7 per ham) + (10 steaks)($8 per steak) = $255.
255 − 230 25
The true increase in the cost of eating is = = 0.1086 or 10.9%.
230 230
This is a much lower increase in the cost of eating than the official estimate of
30.4%. The overestimate of inflation in the cost of eating reflects substitution
bias.
7. The fourth column in the table below shows the real price of gasoline, calculated as
the nominal price of gasoline divided by the CPI. The fifth column shows the year-
to-year percentage change in the real price of gasoline, and the sixth column shows
the inflation rate (i.e. the year-to-year percentage change in the CPI).
The table shows that a large part of the fluctuations in oil prices reflected changes in
the real price of gas, rather than general inflation. Most striking, the real price of gas
fell 27% in 1986 while the inflation rate was 5.6%.
6
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Learning Objective: 18-01; 18-04
AACSB: Knowledge Application
Bloom’s: Apply
8. First, calculate inflation for each year. For 2012, inflation is the percentage increase
in the CPI over that year, equal to (105 – 100)/100 = 5%. For 2013, inflation is (110
– 105)/105 = 4.8%. For 2014, inflation is (118 – 110)/110 = 7.3%. The real return
equals the nominal interest rate minus the inflation rate. Subtracting the inflation rate
for each year from the nominal interest rate (6% in each year) gives real returns of 1%
in 2012, 1.2% in 2013, and –1.3% in 2014.
Now consider the three-year period as a whole. At the end of one year, Albert’s
$1,000 is worth $1,060. Assuming that interest is re-invested, at the end of two years
he has ($1,060)(1.06) = $1,123.60, and at the end of three years he has
($1,123.60)(1.06) = $1,191.02, for a total gain of 19.1%. The price level has risen by
18% over the three years, so Albert’s total real return over the three years is 19.1% –
18% = 1.1%.
b. To ensure a 2% annual return on the loan, Frank and Sarah should agree that Sara
will pay a nominal interest rate in each year equal to 2% plus whatever the
inflation rate turns out to be. For example, if inflation turns out to be 8% during
the first year and 10% during the second year, Sarah should pay 10% nominal
interest in the first year and 12% in the second year.
10. A consumer who spent $100 in the base year would spend $17.80 on food and
beverages, $42.80 on housing, $6.30 on apparel and upkeep, and so on. To buy the
goods and services this year, which cost $100 in the base year, the consumer would
have to increase his spending on food and beverages from $17.80 to $19.58 (a
10% increase), on housing from $42.80 to $44.94, and on medical care from $5.70 to
$6.27. Other expenditures would be the same as in the base year. The total cost of the
7
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
basket in the current year is $104.49, so the CPI for the current year is 1.0449
(104.49/100) or 1.045.
8
© 2019 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Hellé
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.
Title: Hellé
Translator: L. Onerva
Language: Finnish
Kirj.
Marcelle Tinayre
Suomentanut
L. Onerva
Michelet: nainen.
I.
Olin kahdeksan vuotias, kun tätini alkoi puhua veljellensä, miten hän
oli suunnitellut minun kasvatukseni. Eikö sopisi lähettää minut
täyshoitolaan, — jos luostari kovin kammoksutti setääni, — koska
herra de Riveyrac oli liiaksi kiinni työssään ja neiti Angélie liian
sairaloinen voidakseen ohjata opintojani?
— Olen, setä.
— Kenties…