Question

12. The CPI was 121 in 2007 and 175 in 2017. The nominal interest rate during this time was 67 percent. What was the real interest rate during this period?

13. Suppose a country only buys two items, overalls and straw hats. The fixed basket includes 7 pair of overalls and 15 straw hats. In 1996, a pair of overalls cost $23.75 and in 2000 they cost $35.99. In 1996 a straw hat cost $3.50 and in 2000 it cost $5.75. What is the inflation rate between the two years? Suppose that the nominal interest rate during this period was 78 percent, what is the real interest rate?

14. Go online and in Google search for “Planet Money the price of lettuce in Brooklyn” and listen to the podcast at the link. Write a one page double spaced summary of it and staple it to the back of this packet. Only use 12 point Times New Roman font, and one inch margins. If you don’t follow these directions you not get credit for this part.

Answer 1

(12)

Inflation rate = % Change in CPI = (175 / 121) - 1 = 1.4463 - 1 = 0.4463 = 44.63%

Real interest rate = Nominal interest rate = Inflation rate = 67% - 44.63% = 22.37%

(13)

Cost of basket, 1996 ($) = 23.75 x 7 + 3.5 x 15 = 166.25 + 52.5 = 218.75

Cost of basket, 2000 ($) = 35.99 x 7 + 5.75 x 15 = 251.93 + 86.25 = 338.18

CPI, 1996 = 100 (Since base year CPI = 100)

CPI, 2000 = (Cost of basket, 2000 / Cost of basket, 1996) x 100 = (338.18 / 218.75) x 100 = 154.60

Inflation rate = % Change in CPI = (154.6 / 100) - 1 = 1.546 - 1 = 0.546 = 54.6%

Real interest rate = Nominal interest rate = Inflation rate = 78% - 54.6% = 23.4%

NOTE: As per Answering Policy, 1st 2 questions are answered.