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Unformatted text preview: . Consumers in the economy like two goods: hot dogs and hamburgers. Prices and quantities consumed are the same as before: Year 2010 2011 2012 Price of Hot Dogs $1 $2 $4 Quantity of Hot Dogs 4 5 5 Price of Hamburgers $2 $4 $5 Quantity of Hamburgers 3 4 5 As a first step in computing the consumer price index (CPI), the Bureau of Labor Statistics surveys consumers to determine the “basket of goods” purchased by a typical consumer. Suppose that the BLS chooses 2010 as its base year and, consistent with the data shown in the table, decides that the basket of goods in this economy should consist of four hot dogs and three hamburgers. a. What is the cost of the basket in each year: 2010, 2011, and 2012? b. Still using 2010 as the base year, what is the CPI in each year: 2010, 2011, and 2012? c. What is the inflation rate in 2011 and 2012? 7. In the example from questions 5 and 6, and in the actual US economy as well, the inflation rate as measured using the CPI sometimes differs both from the inflation rate measured by the rate of change in the GDP deflator and from the rate of change in the true cost of living. This discrepancy arises because the CPI holds the basket of goods being purchased fixed, whereas in both the example and in the actual US economy, consumers often adjust the amount of each good they purchase when the prices of different goods rise at different rates. a. What is the name that macroeconomists give to distortions in the CPI, as an imperfect measure of the true cost of living, that arises because consumers adjust their purchases in this way? b. In general, does this distortion cause increases in the CPI to overstate or understate increases in the true cost of living? 8. In 1993, the Consumer Price Index in the United States was about 144; in 2012, the CPI was 230. Use the fact that 230/144 = 1.6 (this is a close approximation that doesn’t hold exactly, but please use the rounded off quotient of 1.6 to help simplify the calculations) to answer the following questions. a. Consider first a work...
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- Spring '09