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Unformatted text preview: .20 $12.85 Real Wage $4.94 Solutions a) Increasing CPI indicates that the price level has steadily increased from a base year with a CPI of 100. b) June 2010 Inflation = [ (207.2 – 201.9) / 201.9 ] x 100 = 2.63% June 2011 Inflation = [ (217.4 – 207.2) / 207.2 ] x 100 = 4.92% c) Any two of the three: 1. Substitution bias – when a cheaper good is introduced but not included in the basket of goods, consumers may substitute away from a more expensive good in the basket, thereby causing the CPI to be overstated. 2. New goods – new goods which are introduced but not included in the basket of goods may cause consumers to buy more of these novel goods rather than the goods of the basket. Because the actual quantities consumed of the goods in the basket are less than the perceived basket of goods, the CPI is overstated. 3. Quality – An increase in the quality of a good may not be reflected in the price of the good, so the money in your pocket is more valuable. d) Formulas: (Nominal Wage ÷ CPI ) x 100 = Real Wage [(CPI year (t) – CPI year (t‐...
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This note was uploaded on 02/20/2013 for the course ECON 002 taught by Professor Eudey during the Spring '08 term at UPenn.
- Spring '08