In 1940 you could buy a “nickel Pepsi” for (oddly enough) a nickel. If the price
ID: 1118989 • Letter: I
Question
In 1940 you could buy a “nickel Pepsi” for (oddly enough) a nickel. If the price index in 1940 was 14 and the 2011 price index was 221, then the inflation-adjusted price of a Pepsi would be (Show your calculations) :
Assume tuition at a Community College cost $588 (per semester) in 2004 and $813 in 2012. If the price index was 184 in 2004 and 226 in 2012, then we could say (show your calculations:
Tuition has increased at a rate of ______________. Which shows that tuition has increased more rapidly than inflation.
You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5; in San Diego it is 132.3. If real wages are the only consideration, then you would (show your calculations):
Definitely take the job in ________________because the real wage is (higher/lower?) __________ there.
You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5 percent fixed rate for exactly one year. The lender (correctly) assumes that inflation will be 2 percent this year. Based on the above information and assuming you adhere to the terms of the loan, you will pay back the lender exactly $ __________, which will represent $ ____________of purchasing power (show your calculations).
Explanation / Answer
Increase in tuition per year = Increase in absolute tuition fee/ no. of years = 2(813 - 588)/ 8 = 450/8 = 56.25 per year.
Real wage in Virginia = 67000/ 104.5 = 641.14
Real wage in San Diego = 79000/ 132.3 = 591.12
Thus, the job should be accepted in Virgina since the real wage there is higher.
Amount paid to lender after 1 year = 20,000 * 1.05 = 21000
Inflationary effect = 20,000 * 1.02 = 20,400
Thus, real increase in amount paid = 21,000 - 20,400 = 600
The interest rate thus is = 600/20,000 * 100 = 3