Week+3+-+Ch24 - Chapter 24 Measuring the Cost of Living...

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Chapter 24 Measuring the Cost of Living Suggested solution Questions for Review 2. The three problems in the consumer price index as a measure of the cost of living are: (1) substitution bias, which arises because people substitute toward goods that have become relatively less expensive; (2) the introduction of new goods, which are not reflected quickly in the CPI; and (3) unmeasured quality change. 5. The nominal interest rate is the rate of interest paid on a loan in dollar terms. The real interest rate is the rate of interest corrected for inflation. The real interest rate is the nominal interest rate minus the rate of inflation. Problems and Applications 2. To find the percentage change in the overall price level, follow these steps: a. Determine the fixed basket of goods: 100 heads of cauliflower, 50 bunches of broccoli, 500 carrots. b. Find the price of each good in each year: Year Cauliflow er Broccoli Carrots 2010 $2 $1.50 $0.10 2011 $3 $1.50 $0.20 c. Compute the cost of the basket of goods in each year: 2010: (100 x $2) + (50 x $1.50) + (500 x $.10) = $325 2011: (100 x $3) + (50 x $1.50) + (500 x $.20) = $475
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