Reading prices across years fairly

Civics & Economics · Economics · ages 15-16

Name ______________________ Date ____________

A fixed basket contains two tickets and one lunch. In the base year, tickets cost $5 each and lunch costs $10. Later, tickets cost $6 each and lunch still costs $10. With the base index set to 100, what is the later index?
Answer: ______________
Phone prices fall, but a broad price index rises over the year. What does this show?
- Inflation stops whenever one widely used product gets cheaper.
- Inflation means every individual price must rise at once.
- Inflation can occur while some individual prices fall.
Which description fits hyperinflation?
- An extreme, rapid rise in the general price level.
- A one-time price increase affecting only one shop's products.
- A long period when the general price level stays unchanged.
A loan's payments are fixed in money and do not adjust for inflation. Inflation is higher than expected when the loan was agreed. How does this change the real value of those payments?
- The borrower repays less buying power than expected.
- The lender receives more buying power than originally expected.
- Both sides receive exactly the buying power originally expected.
An hourly wage rises 3 percent while the relevant price index rises 5 percent. Before tax, how does the wage's buying power change?
- Buying power rose by exactly 3 percent.
- Buying power fell by about 1.9 percent.
- Buying power fell by exactly 5 percent.
A price index moves from 120 to 126 over one year. Enter the inflation rate as a percent.
Answer: ______________
A household spends much more of its budget on rent than the national index basket does. Rent rises rapidly, while most other prices change little. Why can its bills rise faster than the published index?
- The household's larger rent share causes rent prices to rise faster.
- Rent is a larger share of this household's spending.
- A low national rate means no household faces higher bills.
Twenty years ago, an hourly wage was $15 and the price index was 80. Today the wage is $30 and the same index is 240. Before tax, does today's wage buy more, less or the same?
- It buys more: doubling the money wage doubles its buying power.
- It buys the same: the two wage rises exactly match the price rise.
- It buys less: the old wage equals $45 in today's money.

Answer key

For grown-ups. Fold this page away before handing over the rest.

Reading prices across years fairly W1-mt_58FeRqSjYh-s1

110 · The basket costs $20 in the base year and $22 later. The later index is 22 / 20 x 100 = 110.
Inflation can occur while some individual prices fall. · The rising broad index indicates inflation even though phone prices fell.
An extreme, rapid rise in the general price level. · Hyperinflation is extreme and rapid inflation. Money's buying power falls very quickly.
The borrower repays less buying power than expected. · The money payments stay fixed, but higher-than-expected prices reduce their buying power. The borrower repays less real value than expected.
Buying power fell by about 1.9 percent. · The real-wage ratio is 1.03 / 1.05, about 0.98095. Buying power fell by about 1.9 percent.
5 · The increase is 6. Divide by the old index: 6 / 120 x 100 = 5 percent.
Rent is a larger share of this household's spending. · Rapid rent increases affect this household more because rent takes a larger share of its budget. The spending share changes the effect on its bills; it does not explain why rent prices rose.
It buys less: the old wage equals $45 in today's money. · Express the old wage in today's money: $15 x 240 / 80 = $45. Today's $30 wage has less buying power.