Suppose the consumer price index in 2015 is 100 and a shirt costs $50. In 2017,...
Suppose the consumer price index in 2015 is 100 and a shirt costs $50. In 2017, the consumer price index is 110. Which of the following is true?
(a) The shirt is cheaper in real terms in 2015 if it costs
$45
(b) The shirt is more expensive in real terms in 2017 if it costs
$60 (c) The shirt is cheaper in real terms in 2017 if it costed
$55
(d) The shirt is the same price in real terms in 2017 if it costs
$50
Homework Answers
Solution: The shirt is more expensive in real terms in 2017 if it costs $60
Working:
|
Year |
Price index |
Cost |
|
2015 |
100 |
50 |
|
2017 |
110 |
Real prices are adjusted for inflation. In year 2017 the real price should be 50 * 110/100 = $55
Thus we can conclude that the shirt in 2017 is more expensive in real terms if it costs $60
Add Answer to:
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