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On April 1, the price of gas at Bob’s Corner Station was $3.40 per gallon. On May 1, the price was $3.90 per gallon. On June 1, it was back down to $3.40 per gallon.

Between April 1 and May 1, Bob's price increased by____________ or __________
Between May 1 and June 1, Bob's price decreased by ___________ or ___________

Suppose that at a gas station across the street, prices are always 20% higher than Bob’s. In absolute dollar terms, the difference between Bob’s prices and the prices across the street is___________ when gas costs $3.90 than when gas costs $3.40.

Some economists blame high commodity prices (including the price of gas) on interest rates being too low.
Suppose the Fed raises the target for the federal funds rate from 2% to 2.5%. This change of _________ percentage points means that the Fed raised its target by approximately __________

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Answer:

1. Bob's Corner Station:

Prices of Gas per gallon:

Between April 1 and May 1, Bob's price increased by___$0.50_________ or ____14.7%______

Between May 1 and June 1, Bob's price decreased by ___$0.50________ or ____12.82%_______.

2. In absolute dollar terms, the difference between Bob’s prices and the prices across the street is___$0.02________ when gas costs $3.90 than when gas costs $3.40.

3. Suppose the Fed raises the target for the federal funds rate from 2% to 2.5%. This change of ___25______ percentage points means that the Fed raised its target by approximately ____25%______

Explanation:

a) Computation of Price Increases:

i) Gas at Bob's

Between April 1 and May 1, price increased by $0.50 ($3.90 - $3.40)

This is an increase of 14.7% ($0.50/$3.40 x 100).

Between May 1 and June 1, price decreased by $0.50 ($3,90 - $3.40)

This is a decrease of 12.82% ($0.50/$3.90 x 100)

ii) When gas costs $3.40 at Bob's, the price at the other gas station will be $4.08 ($3.40 x 1.2), a difference of $0.68 ($4.08 - $3.40).

iii) When gas costs $3.90 at Bob's, the price at the other gas station will be $4.68 ($3.90 x 1.2), a difference of $0.78 ($4.68 - $3.90).

iv) So in absolute terms, the dollar difference is $0.02 ($0.78 - $0.68) when gas costs $3.90 than when gas costs $3.40.

v) Percentage and percentage points describe the relationship between two sets of data.  Percent refers to the rate of change, whereas percentage point measures the actual amount of change.

vi) The percent change in our case is calculated as follows:

Change in Rate divided by Former Rate = (2.5 - 2)/ 2 = 0.25 = 25%.

The percentage point of 25% = 25.

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