2210 hw06

ASSIGNMENT 6 (20 points)

Note: Please write legibly so that it is easy to read the answers while grading

Last Name _______________________ First Name _________________________

1. Refer to the table above. Consumers in a country buy only two goods, sneakers and manicures. The prices and quantities purchased by urban households are in the table above. The reference base year is 2007. Calculate the CPI for 2008. Show your calculations. (5 points)

2. In 1973, the price of a Big Mac was $0.50. The CPI in 1973 was 44.4 while the CPI in 2006 was 201.6. Calculate the equivalent price of a Big Mac in 2006 dollars. (4 points)

3. Congratulations! Your boss has given you a raise.

However, you want to know whether your purchasing power has actually increased, since price level as indicated by the CPI has risen as well. The table below gives you data for wages and the Consumer Price Index (CPI) for this year and last year.

A.) Based on what you learnt in ECON 2210, calculate your real wages for last year and this year respectively. (4 points)

B.) Based on your calculations above, is your purchasing power this year higher or lower than last year? (1 point)

4. Your bank paid 3% interest on $1,000 deposited in your savings account. The inflation rate during the year was 4%.

A.) Calculate the real interest rate that you earned on the deposit. (2 points)

B.) Based on your calculations above, did you gain or lose? (1 point)

5. How does a decrease in income affect saving by households? (1.5 points)

6. How does an increase in corporate taxes affect investment by firms? (1.5 points)

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