Question

For questions 87 to 98, refer to the following (Inflation, Interest Rates and Money Market):

I. Inflation and Interest Rates
Consider the year-to-year inflation rates in Atlantis for the following years. All the data have been measured at the end of each year.

87. What is the CPI for the year 2001? A) 103.

    B) 104.

    C) 105.

    D) 106. E) 107.

88. What is the CPI for the year 2002? A) 105.

    B) 107.5.
    C) 115.
    D) 115.5.
    E) None of the answers is correct.

89. What is the real wage for the year 2001? A) 13.64.

    B) 13.91.

    C) 15.24.

    D) 16.80. E) 18.40.

90. What is the real wage for the year 2002?

    A) 14.72.

    B) 14.78. C) 16.19. D) 17.85. E) 19.64.

91. Consider the years 2000 and 2001: Given the nominal wages in 2000 and 2001, what must be the value of the CPI in 2001 so that the real wage in 2001 remains at $15?
    A) 102.25.
    B) 106.67.

    C) 157.50. D) 168. E) 184.

Y ear	Inflation Rate	CPI	Nominal Wage	Real Wage
2000	---	100	$ 15.00	$15.00
2001	5%		$ 16.00
2002	10%		$ 17.00

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92. Suppose you borrowed $100 from a commercial bank in the beginning of 2002 and have to pay back $108 in the end of 2002. What is the real interest rate on your loan?
A) 2%.
B) 5%.

C) -7.5%.

D) -2%.

E) None of the answers is correct.

Part II: Money Market
Assume the desired reserve ratio is 10% for a specific Canadian bank, and the cash drain ratio = 0.

Assets Reserves Loans

93. What is the amount of excess reserves? A) $5,000.

B) $10,000.

C) -$5,000.

D) -$10,000. E) $90,000.

$ 5,000 $95,000

Liabilities Deposits

$100,000

94. By what amount should this bank change its loans? A) Expand by $50,000.

B) Expand by $100,000.

C) Contract by $5,000.

D) Contract by $10,000. E) Expand by $900,000.

Answer 1

87. C) 105.
(Inflation rate is measured by percentage change in CPI.
In 2001, inflation rate = 5 = [(CPI in 2001-CPI in 2000)/CPI in 2000]*100 = [(CPI in 2001-100)/100]*100 = CPI in 2001 - 100
So, CPI in 2001 = 5 + 100 = 105)

88. D) 115.5.
In 2002, inflation rate = 10 = [(CPI in 2002-CPI in 2001)/CPI in 2001]*100 = [(CPI in 2002-105)/105]*100
So,(CPI in 2002-105)/105 = 10/100 = 0.1
So, CPI in 2002 - 105 = (105)*(0.1) = 10.5
So, CPI in 2002 = 10.5 + 105 = 115.5)

89. C) 15.24
(Real wage in 2001 = (Nominal wage in 2001/CPI in 2001)*100 = (16/105)*100 = 15.24)

90. A) 14.72
(Real wage in 2002 = (Nominal wage in 2002/CPI in 2002)*100 = (17/115.5)*100 = 14.72)

(Note: Post 4 MCQs at a time.)