As you may recall from the readings, money demand rises when the price level ris

Question

As you may recall from the readings, money demand rises when the price level rises because people will need more money to make their everyday purchases. For example, if the price index rose from 100 to 140. Use this increase to calculate how many extra dollars an individual will need to buy the following:

a.   Fifteen gallons of gas that initially sold for $1.24 per gallon.

b.   An apartment that originally rented for $900 per month.

c.   A movie ticket that initially cost $7.

Remember, when the overall price level rises, consumers cannot substitute to cheaper products since all prices essentially are rising..

Explanation / Answer

Current item price ($) = (base year price) * (Current CPI) / (Base year CPI)

a. current price = 1.24*140/100 = $1.736

extra dollars an individual will need = 1.736-1.24=0.496

b.current price = 900*140/100 = $1260

extra dollars an individual will need = $1260-900 =$360

c. current price = 7*140/100 = $9.8

extra dollars an individual will need = $9.8-7= 2.8

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