Question

The table below gives information on the CPI and the monthly take-home pay of Bill Jones, an employee at the Ford Canada.

(a) What is the purchasing power of the dollar for 2007 based on the period 2002? (Round the final answer to 5 decimal places.)

(b) Determine Mr. Jones’ "real" monthly income for 2007. (Round the final answer to 2 decimal places.) .

(c) What is the purchasing power of the dollar for 2010 based on the period 2002? (Round the final answer to 5 decimal places.)

(d) Determine Mr. Jone's "real" monthly income for 2010. (Round the final answer to 2 decimal places.)

Year (2002 = 100) Consumer Price Index (CPI) Mr. Martins Monthly Take-Home Pay ($) 2002 100.0 2300 2007 111.5 2700 2010 116.5 2900 2013 122.8 3100

Answer 1

(a) Here the base year is 2002 and the target year is 2007.

CPI of 2002 w.r.t 2007 = 100/111.5 x 100

                                    = 89.68610%

CPI change during this period = 100 - 89.68610

                                            = 10.31390%

Thus, the purchasing power of the dollar in 2007 is 89.68610% of what it was in 2002

The dollar has a 10.31390% less purchasing power for 2007 as compared to 2002.

(b) Mr. Jones' 'real' monthly income = 2700 x 89.68610%

                                                   = $2421.52

(c) Here the base year is 2002 and the target year is 2010.

CPI of 2002 w.r.t 2010 = 100/116.5 x 100

                                    = 85.83691%

CPI change during this period = 100 - 85.83691

                                            = 14.16309

Thus, the purchasing power of the dollar in 2010 is 85.83691% of what it was in 2002

The dollar has a 14.16309% less purchasing power for 2010 as compared to 2002.

(d) Mr. Jones' 'real' monthly income = 2900 x 85.83691%

                                                   = $2489.27