1. Ch 23 Practice 1 Key Step 1 – compute Basket Prices Step 2 – compute CPI 2010QuantityPrice Hot Dogs10$1 Hamburgers12$2 Buns16$2.05 2011QuantityPrice Hot Dogs11$1.05 Hamburgers13$2.10 Buns16$2.05 2012QuantityPrice Hot Dogs10$1 Hamburgers12$2 Buns16$2.05 Base year is like NGDP – it is just P x Q $10 $24 $32.80 Base Yr Basket P = $66.80 CPI = Current Basket / Base Yr. Basket x 100 = 100 Base YR Q x Current Price 10 x $1.05 = $10.50 12 x $2.10 = $25.20 16 x $2.05 = $32.80 2011 Basket P = $68.50 CPI = Current Basket / Base Basket x 100 $68.50/ $66.80 x 100 = 102.54 Base YR Q x Current Price 10 x $1.10 = $11 12 x $2.10 = $25.20 16 x $2.10 = $33.60 2012 Basket P = $69.80 CPI = $69.80 / $66.80 = 104.49

2. What is the inflation rate in 2012? This question means you are comparing to the previous year. Get % Change in CPI’s 104.49 – 102.54 / 102.54 = 1.9% Meaning? Many ways to say it…….. From 2011 to 2012 …. Price Levels went up 1.9% Inflation Rate was 1.9% Inflation went up 1.9% Purchasing Power went down 1.9% You can afford to buy 1.9% less than before

3. Inflate a Salary (Correct for Inflation) (Adjusted for Inflation) If Mr. G. made $50,000 in 1999, what would that be equal to in 2012 Dollars? Need to know the CPI’s of each year. 1999 = 173 : 2012 = 230 $ amt. X CPI of Yr going to / CPI of Yr starting $50,000 x 230/173 = $66,473.98

4. So what does this mean? $50,000 x 230/173 = $66,473.98 If Mr. G.’s salary keept pace with inflation, he SHOULD BE making $66,473.98. What if he was actually making $60,000 in 2012? His salary did not keep pace with inflation. His standard of living ….. DECREASED  What if he was actually making $80,000 in 2012? His salary “out-paced” inflation. His standard of living…. Increased

5. We can do the same in reverse : Deflating a salary $ amt. X CPI of Yr going to / CPI of Yr starting If Mr. G. made $80,000 in 2015 (CPI 240), what would that be equal to in 1999 (CPI 173) dollars? $80,000 x 173 / 240 = $57,666