Question

3. Base year 2017 Housing $13,930 $20,705 Food $9,552 $9,895 Other $17,164 $22,220 a. Above is the CPI spending of certain country in the base year and in 2017. Use this data to calculate the CPI in 2017. b. Suppose john earned $26,000 in the base year and he earned $37,500 in 2017? Have his real wages increased , decreased or stayed the same? c. If the CPI in 2018 is 142, what is the rate of inflation I'm 2018? d. If a bank was going o loan money in 2017 to be paid at the end of 2018 and they wanted a real annual interest rate of 5 percent, what should they change for a nominal rate given inflationary (or deflationary) expectations in 2018? e. Does housing make up the same percentage of the CPI in 2017 as it did in the base year? What are two things that might account for this?

Answer 1

a. CPI = (Total of prices in current year/total of prices in the base year) * 100= (20,705+9,895 + 22,220) / (13,950 + 9552 + 17,164)= 52,820/40,666 = 129.88

b. Real Wages = (Current Wages/CPI) = (37,500/129.88) * 100= 28,872

Thus, his real wages has increaed

c. The rate of inflation = 100 * (difference in CPI/current CPI) = 100 * (142 - 130/100) = 12% is thus the rate of inflation.

d). They should be charging 12+5=17% as nominal interest rate to get back 5% as real interest rate,

e). No, housing did make for the same percentage of CPI in 2017 as it did in the bae year. This is becasue as can be observed the expenditure on percentage of housing increased in 2017. Increased prices for real estate might account for this,