Instructions: After reading the appropriate chapter and watching the videos in this module, answer all of the questions listed below. Please write your answers using pen/pencil, write your name on the sheet of paper, take a picture of your assignment, and upload your work into Canvas. Please show all of your work on all calculations for full credit.
Grading: This assignment is worth a maximum of 15 points. Grades will be based on the degree to which the assignment is complete, the degree to which students show understanding of the material, and the accuracy a student’s response. Of the questions here, one question will be selected at random and graded closely for accuracy.
1. Over the last century, during what periods was the U.S. inflation rate highest and lowest?
2. Why is the GDP deflator a flawed measure of inflation as it impacts a household?
3. 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.
4. What is the difference between the price level and the rate of inflation?
5. Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate than using the GDP deflator.
6. Why do you think the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries?
7. Identify several parties likely to be helped and hurt by inflation.
If, over time, wages and salaries on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?
8. Why does “substitution bias” arise if we calculate the inflation rate based on a fixed basket of goods?Why does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of goods?.
9. Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time payment of $20,000. However, if the inflation rate is 6% per year, how much buying power will that $20,000 have when measured in today’s dollars? Hint: Start by calculating the rise in the price level over the 16 years.
10. The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=£940, year 2=£970, year 3=£1000, and year 4=£1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). 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.
11. If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:
A union member with a COLA wage contract
Someone with a large stash of cash in a safe deposit box
A bank lending money at a fixed rate of interest
A person who is not due to receive a pay raise for another 11 months
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