3. 2019 2020 Price Quantity Price Quantity $2.50 $6.00 $3.00 $6.60 Nuts 40 tons 38 tons Berries 50 tons 52 tons a. Calculate the Consumer Price Index (CPI) for 2020 and the inflation rate for 2020. b. If the nominal wage was $22.5 for both 2019 and 2020 – what is the real wage in 2020? c. If the real rate of interest is 2% and expected inflation is 4% over the next year, what nominal interest rate will the banker charge on a one-year loan? If at the end of year, the actual rate of inflation is 13%, what will be the real rate of interest the banker realizes on the loan described? Why is this outcome harmful to an economy? d. Briefly, what is the substitution bias and how does it affect the CPI?

3. 2019 2020 Price Quantity Price Quantity $2.50 $6.00 $3.00 $6.60 Nuts 40 tons 38 tons Berries 50 tons 52 tons a. Calculate the Consumer Price Index (CPI) for 2020 and the inflation rate for 2020. b. If the nominal wage was $22.5 for both 2019 and 2020 – what is the real wage in 2020? c. If the real rate of interest is 2% and expected inflation is 4% over the next year, what nominal interest rate will the banker charge on a one-year loan? If at the end of year, the actual rate of inflation is 13%, what will be the real rate of interest the banker realizes on the loan described? Why is this outcome harmful to an economy? d. Briefly, what is the substitution bias and how does it affect the CPI?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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7. 2019 2020 Price Quantity Price Quantity Rice $2.00 50 pounds $2.40 56 pounds Beans $.50 100 pounds $.90 89 pounds a. Assume that 2019 is the base year and calculate the consumer price index (CPI) for 2020. Show yourwork. b. The nominal wage was $28 in 2019, if it stayed the same in 2020, what is the real wage rate in 2020? c. Use the CPI to calculate the inflation rate for 2019? Show your work. d. What are the major flaws of using the CPI to measure inflation? List at least three.
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