Real Interest Rate

1.     What exactly does the CPI measure?  2.     The GDP price index (also called the GDP deflator) is another type of price index. How does it differ from the CPI?  3.     If the CPI increased form 107.8 in 1985 to 183.9 in 2003, by what percent did the average of all prices increase over this time period?  4.     Which year or years are the baser years currently used for the CPI? What is always the index value of the base year?  5.     Assume you’d like to invest $1000 in an account that will pay you 8% interest. The current inflation rate is actually 5%. What is the nominal interest rate? What is the Real interest rate?  6.     Who would benefit the most from unanticipated inflation – borrowers or creditors? Explain why.  7.     If GDP, inflation, and interest rates increased, and the unemployment rate decreased, what phase of the business cycle would you assume the economy is in? Briefly explain.  8.     Calculate the CPI in 2013 using a CPI basket of goods from 2012: 2013 prices = $90; 2012 prices = $60.  9.     Read “Eye on Your Life” pg. 439 and answer the following. How does the inflation rate for a college student compare with the CPI index? Why?  10.  Read “Eye on Box Office Hits” and answer the following and EXPLAIN why the following statement is either true or false: “Gone With the Wind earned a total of $200 million but doesn’t even come close to the popularity of the movie The Avengers which has earned a total of $623 million.” Explain in detail.

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