Explain the relationship between the CPI and the business cycle.

News Assignment 2: Inflation

Look at recent Consumer Price Index (CPI) data:


1) Create or find a graph of the CPI from 1913 to the present.

2) Find a graph of GDP from 1913 to the present, & look at the Business Cycles.

Explain the relationship between the CPI and the business cycle.

Cite specific time periods that support your explanation.

3) “Workers” average hourly earnings in September 2013 rose a meager 0.1 percent. For the typical employee, that amounts to 24 cents per day.”

a. Find an article about recent U.S. wage increases. (As always, include the URL or a copy of the article)

b. Explain how stagnant wages affect future GDP growth (hint: which GDP component is affected? Percentage-wise, is it an important component of GDP?)

c. What happens when the rate of inflation is higher than the growth in wages?

4) Read Paul Krugman”s 2010 article on Deflation: http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/?_r=0

a. Who does he think wins if there”s deflation? Why?

b. Krugman is a Liberal (see article”s title!). Find a similar article on deflation written from the Conservative perspective.

(As always, include the URL or a copy of the article)

Do you think Conservatives view deflation the same way as Liberals do? Cite passages from your article to support your answer.

5) Your rich great-grandpa brags about buying a roadster during the Depression for $3000.

a. Use the inflation calculator at http://www.westegg.com/inflation/

to find out what $3000 in 1933 would be worth in 2012 dollars. If you spent this equivalent amount for a roadster in 2012, would you get more or less car for your money? Why?

b. Write out the formula for converting 1933 dollars to 2012 dollars. Fill in the numbers from our example above to see if your calculation matches the web sites”s calculation.

6) Create a table of real gas prices from the year 1980 to the present. You can find historic nominal gas prices at


Using the CPI data from question 1, calculate the price of gas each year after adjusting for inflation. (Show your calculations!)

In which year was the real gas price cheapest?

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