T. Gallaway

ECO 155

Fall 1999

Homework: Unit #2

 

Instructions:  Answer all of the following questions.  Be sure to complete each part of every question.  When you turn in your homework, this handout must be used as a cover sheet.  Place this sheet behind your answers, staple them all together, fold them all lengthwise and write your name and row number on the back of this sheet.

Note: Links used for the internet questions can be found on your course webpage.

 

 

1.      Use the table below to answer the following questions.

 

Income

Marginal

Tax Rate

$0 - $10,000

10%

$10,000 - $ 30,000

20%

$30,000 and above

50%

 

¨      If you earned $50,000 per year, how much tax would you owe on the first dollar you earned?

¨      $0.10

¨      How much tax would you owe on the last dollar you earned?

¨      $0.50

¨      What would your average tax rate be?

¨      $1000 +  $4000 + $10,000 = $15,000

¨      ($15,000/$50,000) * 100 =  30%

 

2.      Which type of unemployment is most relevant to macroeconomics? Cyclical  Which type is not necessarily bad? Frictional—small amounts are useful

 

3.      Abe Lincoln earned $25,000 per year as president.  Bill Clinton earns $200,000.  The CPI (base year: 1982-4) was 9 in 1863 and was 159.1 in 1997.

¨      Calculate the real income (in 1982-4 dollars) of each president. 

¨      Nominal Incomeyear T * CPIbase/CPIyear T  =  Real Income

¨      Lincoln: $25,000 * 100/9   =   $25,000 * 11.11 = $277,777.78 (Inflation made the cost of living increase more than eleven fold between 1863 and 1982; To maintain the purchasing power of Lincoln’s salary, it would have to increase more than eleven fold too.)

¨      Clinton: $200,000 * 100/159.1 =  $200,000 * .63 = $125,707.10 ($200,000 in 1997 is only worth 63% of what it was in 1982)

¨      Which president enjoyed the highest salary?

¨      In real terms, Lincoln had the higher salary.

¨      Can you covert Lincoln’s income to 1997 dollars?

¨      Between 1982 & 1997, there was inflation of 59.1%.  We need to increase the answer we got above (Lincolns salary in 1982 terms) by this same proportion. $277,777.78 * 159.1/100 = $441,944.45

 

4.      If the CPI was 148 a year ago and is 160 today, what was the inflation rate over the past year?

¨      Percentage Increase =  [(New CPI – Old CPI)/Old CPI] *100

¨      [(160-148)/148] * 100 = 12/48 *100 = 8.1%

 

5.      Go to: http://stats.bls.gov/cps_htgm.htm

¨      How many households are part of the sample that the BLS surveys each month to estimate unemployment? 60,000

¨      If the BLS, as part of their survey interviews you, and you answer “yes” to the first question but  “no” to the second and third questions, what will their next question be?   “LAST WEEK, (in addition to the business,) did you have a job either full or part time? Include any job from which you were temporarily absent.”

6.      Go to: http://stats.bls.gov/eag.table.html

¨      What was the unemployment rate for September? 4.2  What was it in September the year before? 4.5

¨      What was the percentage change in the PPI  in August 1998? –0.3

¨      What was the percentage change in the CPI for May and June of this year? 0.0, 0.0

 

7.      Go to: http://stats.bls.gov/cpifact8.htm

¨      The CPI is reported monthly.  However, it takes a while for the data to be collected and the index to be constructed.  How long does this process take?   About two weeks.

¨      How many different indexes does the BLS publish every month as part of their CPI information?  Thousands

¨      How many regions does the BLS publish statistics for?  4 How many population classes? 3

¨      List the eight major groups of goods & services that make up the market basket for the CPI.

¨      Food and beverages, Housing (rent of primary residence, fuel oil, bedroom furniture);

¨      Apparel (men’s shirts and sweaters, women’s dresses, jewelry);

¨      Transportation (new vehicles, gasoline, tires, airline fares);

¨      Medical care (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services);

¨      Recreation (television sets, cable TV, pets and pet products, sports equipment, admissions);

¨      Education and communication (college tuition, postage, telephone services, computer software and accessories);

¨      Other goods and services (tobacco and smoking products, haircuts and other personal care services, funeral expenses).

 

¨      What is the difference between the CPI-U & the CPI-W?

“For each published CPI data series, two separate indexes are available: All Urban Consumers (CPI-U) and Urban Wage Earners and Clerical Workers (CPI-W). Both the CPI-U and the CPI-W reflect only the buying habits of urban consumers. The CPI-U is the most comprehensive of the two and represents the expenditures by all urban consumers, about 87 percent of the total U.S. population.”

 

 

8.      Go to:   http://stats.bls.gov/news.release/cpi.t01.htm 

¨      What was the Relative importance of food & beverages in the CPI-U in December 1998? 16.408%

¨      What was the relative importance of apparel? 4.831

¨      If both men’s and women’s apparel increased in price by 10%, which would have the greater impact on the CPI?  Why?  Women’s.  It is weighed more heavily in the CPI goods basket.