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19 February, 09:53

Suppose that the consumer price index in Eastlandia rises from 150 to 159 over the past year, and that the city sets its car registration prices so that real prices stay the same. If the cost to register a car was $50 last year, how much would it cost this year, in nominal terms?

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  1. 19 February, 10:23
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    The Nominal Cost to register the car should be $53.

    Explanation:

    For the first year the data is given as

    CPI=150

    Nominal Price=$50

    Real Income = Nominal Cost / Consumer Price Index

    =50/150 = 0.33

    Now for the second year as the real income is same as previous year thus

    RI=0.33

    CPI has increase to 159. Now the nominal cost is given as

    Nominal Cost=Real Income * Consumer Price Index

    Nominal Cost=0.33 * 159

    Nominal Cost=$53

    So the Nominal Cost to register the car should be $53.
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