Question

1. What are the three effects that bias the measurement of CPI?

1. _____________________
2. _____________________
3. _____________________

2. Which of the three effects listed in part c does each of the following illustrate?
   1. US households in 2010 spent a larger fraction of their income on televisions than they did in 1950. __________________________
   2. All televisions available in 2010 had higher resolution than any televisions available in 1950. __________________________
   3. In 1950, no US household had a plasma screen television, but in 2010 they are widely available. __________________________
3. Suppose the average television purchased in 1950 cost $200, and the average television purchased today costs $700.
   1. What is the percentage change in the average television price? _______
   2. Taking into account the effects in part c, is this percentage increase likely an underestimate or overestimate of the true change in the cost of televisions? ____________

3. Why?____________________________________________________

____________________________________________________________________________________________________________________

4. Suppose CPI is as follows in each year:

Year:	2007	2008	2009	2010
CPI:	100	99	125	140

Suppose in the year 2007 you are considering a job offer that pays $50,000 in 2007, plus a 10% (compounding) raise in each of the next three years.

1. What nominalsalary will you make in each year?

Year:	2007	2008	2009	2010
Nominal Salary

2. What will your real salary be in each year, using a 2007 base year?

Year:	2007	2008	2009	2010
Salary in 2007$

Answer 1

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2001 | 200 20o2oIo Nomenatl salary CS L 2/2

200202o 1o Salay CAoundid gin /Vote worth oniy roo dluu to a 2S 3/3