[Anonymous]

A hospital is comparing last year’s emergency rescue services expenditures to those from 10 years ago. Last year’s expenditures were $100,500. Ten years ago, the expenditures were $72,800. The CPI for last year is 168.5 as compared to 121.3 10 years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services?

A. 38.0% increase

B. 13.8% increase

C. 0.6% decrease

D. 18.1% decrease

This is the explanation. I feel dumb because I can’t get why the 72,800 is multiplied by the fraction of 168.5/121.3:

To convert a dollar amount from one price level to another, multiply it by the ratio of the price level you are converting to divided by the price level you are going from. So, the 10-year-old expenses of $72,800 are multiplied by the fraction 168.5/121.3, which gives expenses converted to current dollars of $101,128.

Subtracting last year’s expenditures of $100,500 from the previous period price-level adjusted prior expenditures of $101,128 gives a reduction in expenditures of $628. Dividing this $628 reduction by the previous period price-level expenditures of $101,128 gives a decrease of 0.6%

Is there a simplier way to calculate this? Changes in % I thought were calculated as: current price-prior price/ prior price

[Jdn9201]

You have to think about it like this – before you can compare the 2 amounts, you have to bring up the 2005 dollars to equal what it would be in 2015 dollars. Otherwise, you are comparing apples to oranges because a 2005 dollar is going to be worth more in 2015 dollars (as indicated by the increase in CPI over that time). By applying the change in CPI to the 2005 dollars, you get the equivalent of what would have been spent in 2015. Then, you can compare that to the 2015 amount to get the % increase/decrease.

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[Anonymous]

jdn9201 thanks for the reply! 🙂 . I knew that we had to convert the 72,800 to current price levels in order to know the change. My confussion came with the 168.5 divided by 121.3 to convert to current prices. Conceptually I am not seeing it.

[monikernc]

i just answered this in the bec group.

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[kikefuentez]

Hi,

I got to the answer doing the process Becker’s provided but in the order it appears in the book (B5-18). They always locate the “current period” above the equation and the “prior period” below the equation. (not how they explained this example in their response). This is how I got to the response;

CPI = (Current / Base Year) x 100
CPI = (168.5 / 121.3) X 100 = 138.91%

This response is how the price level increased compared to 10 years ago ($72,800). Becker’s is using the $100,500 and bringing that amount to the previous value (10 years ago) but in order to use the numerators and denominators as they explained in the book, I compared the amount to get this numbers to the present value.

$72,800 X 138.91% = $101,126.48 present value

I compared; (100,500 current expenditures – $101,126.48 expenditures 10 years ago = $626 rounded difference). The difference is calculated with the inflation rate computation of the pag B5-18 (below)

Inflation Rate = $626 Difference / $100,500 = .6%

That’s how I resolved this problem, I hope that maybe this helps you!

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