1)A) In 1970 a gallon of gas cost $0.36, and the CPI was 38.8. Today the...
1)A) In 1970 a gallon of gas cost
$0.36, and the CPI was 38.8.
Today the CPI is 258.7. If a
gallon of gas sells for $1.95, what is its real price in 1970
dollars?
1)B)If, under current conditions, the equilibrium quantity of oil has fallen, then which side of the market has had a stronger influence, supply or demand?
Homework Answers
Solution:
1)
Gas cost CPI Real
price
1970 0.36 38.8
2020 1.95 258.7 ?
Real Price - 2020 in 1970 dollar = (Nominal Price 2020 ) x (CPI
- 1970 / CPI - 2020).
Real Price - 2020 in 1970 dollar = 1.95 * 38.8 / 258.7 = 0.29
2) Demand will have more influence when the real prices have fallen
as there will be more aggregate demand
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