Question

37. Mavis Corporation has an agreement with its workers to index completely the wage of its employees to the CPI. Mavis currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently about 130 and was 120 a year ago, Mavis should increase the hourly wages of its workers by about...

38. Thomas earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 for 2001 and 265.5 for 2006. Thomas’s 2001 salary in 2006 dollars is...

39. Suppose the CPI was 95 in 1955, and suppose currently the CPI is 475. According to the CPI, $100 today purchases the same amount of goods and services as...

40. Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person?

41. Assume the consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Please show work. Thank you

Answer 1

Ans:

37)

Mavis should increase the hourly wages of its workers by about 0.625 per hour

Explanation

Indexed wages = current wages * (CPI current / CPI year ago)

= $7.50 * (130 / 120)

= $8.125 per hour

Increase in wages = $8.125 per hour - $7.50 per hour

= 0.625 per hour

38)

Thomas’s 2001 salary in 2006 dollars = $75,000

Explanation

Thomas’s 2001 salary in 2006 dollars = 2001 salary * (CPI in 2006 / CPI in 2001)

= $50,000 * (265.5 / 177)

= $75,000

39)

$100 today purchases the same amount of goods and services = $20

Explanation

Amount of goods and services purchased in 1995 = $100 * (CPI in 1955 / current CPI)

= $100 * (95 / 475)

= $20

40)

The Real GDP per person has remained the same at $5.

Explanation  

GDP deflator = (Nominal GDP / Real GDP) * 100

Real GDP 25 years ago = (Nominal GDP * 100 / GDP deflator)  

= ($1000 * 100) / 200

= $100000 / 200

= $500

Real GDP per person 25 years ago = Real GDP / Population

= $500 / 100

= $5

Current Real GDP = ($3000 * 100) / 400

= $300000 / 400

= $750

Current Real GDP per person = $ 750 / 150

= $5

The Real GDP per person has remained the same.

41)

Real interest rate = 2.5%

Explanation

Inflation rate = (CPI in 2007 - CPI in 2006) / CPI in 2006

= (234 - 225) / 225

= 9 / 225

= 0.04 or 4%

Real interest rate = Nominal interest rate - Inflation rate

= 6.5% - 4%

= 2.5%