Question

15. From the Federal Reserve Bank of St Louis you collect the following data:

Period Price of oil ($ per barrel) Consumer Price Index

1965 2.920 31.7

1979 21.750 73.1

2002 29.420 180.9

2006 70.940 202.5

In real terms, in what year was crude oil was more expensive?

(a) 2006

(b) 2002

(c) 1979

(d) 1965

16. You save and invest $1,000 now and expect to earn a nominal annual rate of return of 12% over the next 20 years. Assume that the current price level is 1 and the expected inflation rate 5.5% annually over the next 20 years. What do you expect the real value of your investment to be 20 years later? Assume annual compounding.

A. 5,098.56.
B. 4,980.61
C. 10,894.812

D. 2,672.957
E. 3,306.064

17. The nominal interest rate is 5%, the expected inflation rate is 5%, and the actual inflation rate turned out to be -3% (that is, deflation of 3%). What is the ex-post real interest rate using the exact formula?

A. 8 %
B. 0%
C. -2%
D. 8.478 %
E. 8.247%

Answer 1

15)	Real prices for each year would be:
	2006 = 70.940*100/202.5	$              35.03
	2002 = 29.420*100/180.9 =	$              16.26
	1979 = 21.750*100/73.1 =	$              29.75
	1965 = 2.920*100/31.7 =	$                9.21
	Answer: [a]
16)	Real value of the investment =1000*1.12^20/1.055^20 =	$     3,306.064
	Answer: [e]
17)	Ex-post real interest rate =1.05/0.97-1 =	8.247%
	Answer: [e]