Question

Use the information for Economy X in the table to answer the question below.

Year	CPI
2014	280.2
2015	290.4
2016	296.5
2017	292.4
2018	298.3

In which year did Economy X have disinflation?  

a. 2018

b. 2017

c. 2015

d. 2016

e. None of the choices shown is correct.

Did Economy X experience stagflation in 2017?

a. Economy X may have experienced stagflation in 2017, but more information is needed to know for sure.

b. Economy X did experience stagflation in 2017.

c. Economy X did not experience stagflation In 2017.

An employee in Economy X received a pay increase of 2% in 2015. Which of the following statements is correct?

a. The employee’s nominal pay increased and the real pay stayed the same.

b. The employee’s nominal pay increased and the real pay increased.

c. The employee’s nominal pay increased but the real pay decreased.

d. The employee’s nominal pay increased but more information is needed to know if there was any change in the real pay.

In which year did Economy X have deflation?

a. 2018

b. 2019

c. 2015

d. 2016

e. 2017

What was the rate of inflation in Economy X in 2016?

a. 2.10%

b. 6.1%

c. 2.01%

d. 1.02%

e. 3.12%

A person in Economy X earned $20 per hour in 2014. How much would the person have to earn in 2018 to adjust for inflation?

a. $22.46

b. $25.31

c. $38.20

d. $21.29

e. $18.78

Which year is the base year for this information?

a. 2014

b. 2015

c. 2018

d. 2016

e. None of the choices shown is correct.

Answer 1

(1) Increase in CPI shows inflation and decrease in CPI shows deflation.

We can see that in year 2017, the CPI decreases from 296.5 to 292.4. It means Economy X have deflation in year 2017.

Answer: Option (b)

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(2) Stagflation implies inflation and increase in unemployment at the same time. In 2017, economy experiences deflation. Hence, Economy X did not experience stagflation in 2017.

Answer: Option (C)

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(3) Inflation rate in 2015 = [(CPI in 2015 - CPI in 2014)/ CPI in 2014]*100

Inflation rate in 2015 = [(290.4 - 280.2) / 280.2]*100

=> Inflation rate in 2015 = 3.64%

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Real wage (real pay) = Nominal wage / Price level

=> % change in real pay = % change in nominal wage - inflation rate

=> % change in real pay = 2% - 3.46%

=> % change in real pay = -1.46%

Hence, the nominal wage increased by 2% and real pay decrease by 1.46%

Answer: Option (c)

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(4)

In year 2017, there was defltaion because CPI decreases in year 2017.

Answer: Option (e)

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(5)

Inflation rate in 2016 = [(CPI in 2016 - CPI in 2015)/ CPI in 2015]*100

Inflation rate in 2016 = [(296.5 - 290.4) / 290.4]*100

=> Inflation rate in 2016 = 2.10%

Answer: Option (a)

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(6) Income in 2014 = $20 per hour.

CPI in 2014 = 280.2

CPI in 2018 = 298.3

Year 2014 income adjusted for inflation in 2018 = Income in 2014 * (CPI in 2018 / CPI in 2014)

=>.Year 2014 income adjusted for inflation in 2018 = $20*(298.3 / 280.2)

=> Year 2014 income adjusted for inflation in 2018 = $21.29

Person have to earn $21.29 per hour in 2018 to adust for inflation

Answer: Option (D)

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(7) In base year, the CPI value is 100.

So, in the given table, no one is base year.

Answer: Option (e)