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Chapter 9: Q 20. (page 243)
What is indexing?
Price index is an indicator that shows changes in the price level of a select basket of goods. Its a financial tool used to make policies.
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The total price of purchasing a basket of goods in the United Kingdom over four years is year , year , year , and year . Calculate two price indices, one using year as the base year (set equal to ) and the other using year as the base year (set equal to ). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.
Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.
The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer.
If inflation rises unexpectedly by , indicate for each of the following whether the economic actor is helped, hurt, or unaffected:
a. A union member with a COLA wage contract
b. Someone with a large stash of cash in a safe deposit box.
c. A bank lending money at a fixed rate of interest.
d. A person who is not due to receive a pay raise for another months.
Construct the price index for a 鈥渇ruit basket鈥� in each year using 2003 as the base year.
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