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NSWMaths Standard 2Quick questions

Year 12: Financial Mathematics

Quick questions on Inflation, CPI and real value for HSC Maths Standard 2

13short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.

What is what CPI measures?
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The Consumer Price Index measures the change in the price of a typical basket of goods and services bought by Australian households. The ABS publishes it quarterly. The base year is set so the index = 100100 at that base.
What is inflation rate over a period?
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For CPI values CPI1CPI_1 and CPI2CPI_2 at times 11 and 22:
What is annual inflation rate (compound)?
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If the time span is nn years and you want the equivalent annual compound rate (geometric mean):
What is real vs nominal?
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A nominal amount is the cash value at the time. A real amount is its value expressed in dollars of another year, after adjusting for inflation.
What is why inflation matters?
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A \50000salarytodaydoesnothavethesamepurchasingpoweras salary today does not have the same purchasing power as \5000050000 ten years ago. Inflation erodes the value of money. An investment that earns 4%4\% when inflation is 3%3\% has a real return of only about 1%1\%.
What is real return on investment?
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If a nominal return is rr and inflation is ii:
What is inflation 2014 to 2024?
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Total: 138.8−105.9105.9×100%=32.9105.9×100%≈31.1%\frac{138.8 - 105.9}{105.9} \times 100\% = \frac{32.9}{105.9} \times 100\% \approx 31.1\%.
What is salary in real terms?
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A worker earned \70000$ in 2014. To convert to 2024 dollars:
What is real return?
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An investment earned 7%7\% nominal in a year when CPI grew 4%4\%.
What is confusing total percentage change with annual rate?
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A 31%31\% change over 1010 years is about 2.74%2.74\% per year compounded, not 3.1%3.1\%.
What is treating inflation as additive over years?
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Inflation compounds: 3%3\% for 1010 years is (1.03)10≈1.344(1.03)^{10} \approx 1.344, a 34%34\% increase, not 30%30\%.
What is using a wrong reference year?
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Always note which year is the base for the CPI value being used. ABS reweights the basket periodically and rebases the series.
What is subtracting real from nominal naively?
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The real return is approximately nominal minus inflation; the exact form is (1+r)/(1+i)−1(1 + r)/(1 + i) - 1. :::

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