Suppose that the salary for 2021 = 200,000 . The CPI for 2021 = 175. The CPI for 2022…

Suppose that the salary for 2021 = 200,000 . The CPI for 2021 = 175. The CPI for 2022…

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Suppose that the salary for 2021 = 200,000 . The CPI for 2021 = 175. The CPI for 2022…
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Suppose that the salary for 2021 = 200,000 £.
The CPI for 2021 = 175.
The CPI for 2022 = 250.
a) Explain the meaning of the CPI 2021.
b) Explain the meaning of the CPI 2022.
c) Calculate the % change in the cost of living from 2021-2022.
d) Calculate the % change from 2021-2022 in the average price level of the g/s in
the CPI reference basket.
e)
Explain the relation between your answers to questions c and d.
f) Calculate by how much does the 2022 salary need to increase over the 2021
salary, so that there is no loss in purchasing power.
g) Explain your answer to question f.
Question 2)
One criticism of the CPI is that it overestimates the cost-of-living in a given year; and thus
leads to an overestimation of the % change in the cost-of-living, from one year to the next.
One reason for the overestimation is referred to as substitution bias.
a) Explain the meaning of substitution bias.
b) Using the below information, construct an example to help explain the meaning of
substitution bias.
In 2021, the price of apples = 5 & per kilo. The estimated quantity of apples purchased in
2021 is 100 kilos, which is an estimated, fixed amount in regard to the reference basket
used to help construct the CPI for 2021.
In 2022, the price of apples rises to 8 & per kilo. The estimated quantity of apples
purchased in 2022 is 100 kilos, which is an estimated, fixed amount in regard to the
reference basket used to help construct the CPI for 2022.

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Answer rating: 100% (QA)

SOLUTION Answer to Question 1 a CPI2021 is the Consumer Price Index for the year 2021 It measures the average change in prices of a basket of goods and services consumed by households in that year com
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