Price Inflation Problems and Solutions

Price Inflation Problems and Solutions - ECON 402 Spring...

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ECON 402 – Spring 2014 Candidate Answers Homework #2 1. Here are some actual prices of goods in past years, recorded in November of the indicated year: (i) Men’s sport coat, $22.85 in 1960; (ii) Coffee (2 lbs.), $1.09 in 1965; (iii) Ford sedan (Galaxie), $3,939 in 1972; (iv) Reclining chair, $299 in 1981; Washing machine, $349 in 1988. What are their prices in November 2013 constant dollars, using CPI-U as the price index? i. Men’s sport coat -- $22.85 in 1960 Nov. 2013 CPI = 233.887; Nov. 1960 CPI = 29.780 (233.887/29.780)* $22.85 = $179.46 ii. Coffee (2lbs.) -- $1.09 in 1965 Nov. 2013 CPI = 233.887; Nov. 1965 CPI = 31.750 (233.887/31.750)* $1.09 = $8.03 iii. Ford Sedan (Galaxie) -- $3,939 in 1972 Nov. 2013 CPI = 233.887; Nov. 1972 CPI = 42.400 (233.887/42.400)* $3,939 = $21,728.32 iv. Reclining Chair -- $299 in 1981 Nov. 2013 CPI = 233.887; Nov. 1981 CPI = 93.800 (233.887/93.800)* $299 = $745.55 v. Washing Machine -- $349 in 1988 Nov. 2013 CPI = 233.887; Nov. 1988 CPI = 120.300 (233.887/120.300)* $349 = $678.53 2. Over the past five months, the civilian unemployment rate (U3 rate) has declined from 7.2% to 6.7%. Does this necessarily indicate an improvement in the U.S. employment situation? There are a number of shortcomings of the U-3 unemployment rate as a measure of the “true” state of the labor market in the U.S. Among them, it doesn’t reflect individuals who
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