Consumer Price Index (CPI)

---

1. Write down the average hourly wage (or if you worked for a salary, compute the hourly wage equivalent) you have received for each year that you have worked. Access the data series for the consumer price index. These data are monthly, so you will need to compute the average CPI value (under the "data" column) for each year you have worked. Compute your real hourly wage by dividing each year's average hourly wage by that year's CPI value. Has your real wage been rising or falling?

2. Inflation usually drops during times of very slow economic growth. The term "stagflation" has been used to describe the situation in which high rates of inflation occur during times of slow economic growth. Access the data series for the consumer price index and Real GDP and plot these data for the period 1975 through 1981. When was stagflation at its worst? How might the two oil price shocks of the mid- and late 1970's have contributed to stagflation?

The following question is more challenging:

3. Between 1979 and 1982 the Fed adopted a policy to sharply limit the rate of growth in the Consumer Price Index in order to slow the rate of inflation, which was running at close to 14 percent per year. Access the data series for the consumer price index, for the 10 Year Treasury Bond Yield, and for Real GDP, and plot these data for the period 1979 through 1982.
(i) What happened to interest rates when the Fed slowed the rate of growth in M2?
(ii) How did the change in interest rates (as measured by the bond yield data) affect the rate of growth in real GDP?
(iii) Was Fed policy successful in reducing the rate of inflation (when evaluating inflation in the data set, use the "% change from last year" column)? At what cost to the economy in terms of lost economic growth?

©2004  South-Western.  All Rights Reserved   webmaster  |   DISCLAIMER