Ron Larson
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4.2 Inflation & the Consumer Price Index

4.2 Inflation & the Consumer Price Index
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  • 19. Creating a Price Index

    To create a price index, first choose a base year. The index in that year is 100. The price index reflects the ratio of the price from a given year to the price in the base year. Use the formula

    to find the index for a given year A. Complete the table.

    • Worked-Out Solution

      Begin by entering the data into a spreadsheet. Then use the given formula to complete the table.

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      _  _     _____     ______   __   __   ______   
 | \| ||  |  ___||  /_   _//  \ \\/ // |      \\ 
 |  ' ||  | ||__      | ||     \ ` //  |  --  // 
 | .  ||  | ||__     _| ||      | ||   |  --  \\ 
 |_|\_||  |_____||  /__//       |_||   |______// 
 `-` -`   `-----`   `--`        `-`'   `------`
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  • 20. Create a Line Graph

    Make a double line graph of the gasoline index and the diesel index. Compare the rate of inflation for gasoline to the rate of inflation for diesel fuel.

    A spreadsheet is available to help you complete this exercise.

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                ______    ______     ___              
  ____     /_   _//  /_____//   / _ \\    ____    
 |    \\    -| ||-   `____ `   / //\ \\  |    \\  
 | [] ||    _| ||_   /___//   |  ___  || | [] ||  
 |  __//   /_____//  `__ `    |_||  |_|| |  __//  
 |_|`-`    `-----`   /_//     `-`   `-`  |_|`-`   
 `-`                 `-`                 `-`
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  • 21. Gasoline and Diesel Prices

    For the years shown, use a spreadsheet to compare the rates of inflation for gasoline and diesel fuel to the rate of inflation indicated by the CPI.

    • Worked-Out Solution

      Begin by entering the data into a spreadsheet. Then calculate the percent increase from 1995 to 2009 for each of the three quantities.

      From the results of the spreadsheet, you can see that both gasoline and diesel prices increased at a higher rate than the consumer price index.

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       _____   _    _              __   __    _  _   
  / ___// | || | ||     ___    \ \\/ //  | \| || 
  \___ \\ | || | ||    /   ||   \ ` //   |  ' || 
  /    // | \\_/ ||   | [] ||    | ||    | .  || 
 /____//   \____//     \__ ||    |_||    |_|\_|| 
`-----`     `---`       -|_||    `-`'    `-` -`  
                         `-`
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  • 22. Annual Fuel Cost

    Diesel engines are 30% more fuel efficient than similar-sized gasoline engines. From 2005 through 2009, would the annual fuel cost be more for a diesel engine or a similar-sized gasoline engine? Explain your reasoning.

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     _    _    _    _              _    _   __    __  
| || | || | || | ||     ___   | || | || \ \\ / // 
| || | || | || | ||    /   || | || | ||  \ \/ //  
| \\_/ || | \\_/ ||   | [] || | \\_/ ||   \  //   
 \____//   \____//     \__ ||  \____//     \//    
  `---`     `---`       -|_||   `---`       `     
                         `-`
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  • 23. Individual Inflation Experience

    Why might the inflation rate published by the Bureau of Labor Statistics not match an individual's inflation experience?

    • Worked-Out Solution

      There are many reasons why an individual's experience with inflation might not match the figures published by the Bureau of Labor and Statistics. The Bureau states that "the CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included."

      From this, you can see that there are many reasons why the CPI might not match your inflation experience.

      • You live in a rural, not an urban area.
      • You have substantial investments in stocks and bonds.
      • You own your home and are not affected by changing house prices.
      • You have a high income and pay high income tax rates.
      • You live in a state that has high income tax rates.
      • You have a costly medical condition.
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      _____     _____   __    __     ___      _____   
 |__  //   |  ___|| \ \\ / //   / _ \\   / ____|| 
   / //    | ||__    \ \/ //   / //\ \\ / //---`' 
  / //__   | ||__     \  //   |  ___  ||\ \\___   
 /_____||  |_____||    \//    |_||  |_|| \_____|| 
 `-----`   `-----`      `     `-`   `-`   `----`
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  • 24. Effects of Inflation

    Discuss the effects of inflation on an economy. Explain your reasoning.

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     __   __    _____     ______   _    _     ______  
 \ \\/ //  |  ___||  /_   _// | || | ||  /_____// 
  \   //   | ||__      | ||   | || | ||  `____ `  
  / . \\   | ||__     _| ||   | \\_/ ||  /___//   
 /_//\_\\  |_____||  /__//     \____//   `__ `    
 `-`  --`  `-----`   `--`       `---`    /_//     
                                         `-`
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