Question

The consumer price index increases from 129.7 to 136.4. By how much percentage wise should your employer increase your wage if he wants to keep your purchasing power constant? Round to two decimal places and do not enter a % sign.

If the Federal Reserve were to purchase government bonds in the open market, we would expect interest rates in the economy to (increase/decrease)_______ and therefore spending in the future is likely to (increase/decrease)_______.

Answer 1

We know that the Consumer Price Index(CPI) simply represents the inflation or changes in the general price level,during a period in an economy.If the employer wants to keep the purchasing power constant,then he should must ascertain the percentage change in the general price level.And he should increase the wages by same percentage.

Change in CPI=136.4-129.7=6.7If the Federal Reserve were to purchase government bonds in the open market,we would expect interest rates in the economy to decrease and therefore spending in the future is likely to increase.

Interest rate in the economy is expected to 'decrease' because purchasing of government bonds in the open market operation would increase the money supply in the economy.This will make the availability of credit more easier.This will bring the borrowing cost down and interest rates decreases.Purchasing of such bonds by Federal Reserve is a part of expansionary monetary policy.when interest rates are decreased,more credit is availed by the consumers which increases their purchasing or spending power and expenditure in the future is likely to increase.