ECON10003 Lecture Notes - Lecture 2: Real Interest Rate, Nominal Interest Rate, Fisher Equation
Document Summary
Get access
Related Documents
Related Questions
1. Provide the formula for the expenditure approach to GDP accounting and include an example of each category of spending.
2. Suppose a consumer buys 10 units of good X and 20 units of good Y every year. The following table lists the prices of goods X and Y in the years 2005-2007. Assume that these two goods constitute the typical market basket. Calculate the price indices for these years with 2005 as the base year. Comment on the inflation picture for these years.
Year |
Good X |
Good Y |
2005 |
$3 |
$6 |
2006 |
4 |
7 |
2007 |
4.5 |
7.5 |
3. Using the expenditure approach, calculate GDP using the following data.
Item |
Amount in dollars (billions) |
Consumption |
7,600 |
Consumption of Durable Goods |
1,600 |
Consumption of Non Durable Goods |
2,800 |
Consumption of Services |
3,200 |
Investment |
2,750 |
Fixed Investment |
1,000 |
Government purchases of Goods & Services |
1,675 |
Government Transfer Payments |
450 |
Exports |
750 |
Imports |
1,600 |
GDP Equals |
4. a. What is the importance of measuring per capita GDP?
b. Why nominal GDP can be misleading?
The US Bureau of Labor Statistics calculates inflation by taking samples of prices for a 'basket of goods and services' a 'typical consumer' would purchase. Each good and service is assigned a 'weight' or the percentage of income spent on that product. For example, 'cakes, cupcakes, and cookies' are given a weight of 0.197. This means that about 0.2% of the 'average' household spending is made on these items. Of course, an individual's spending may vary significantly from the hypothetical basket of goods and services. In this assignment, you will review the BLS's Relative importance of components in the Consumer Price Indexes and compare how your household spending measures up to the typical consumers.
Part I
Considering your household budget, divide up your spending into these eight broad categories:
Category | CPI Weight | Your Budget |
---|---|---|
Food and beverages | 14.8 | |
Housing | 41.5 | |
Apparel | 3.6 | |
Transportation | 17.3 | |
Medical Care | 6.6 | |
Recreation | 6.3 | |
Education & Communication | 6.4 | |
Other | 3.5 | |
Total | 100 | 100 |
How closely does your household spending correlate to the typical consumer? How might your household be disproportionately affected by a change in one of these broad categories? Do you believe that the government's weightings are an accurate approximation for the whole economy?
The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year.
Year | Consumer Price Index | Inflation Rate |
2005 | 100 | |
2006 | 115 | B |
2007 | 125 | C |
2008 | 140 | D |
2009 | A | 10% |
2010 | 160 | E |
| |||
120 | |||
| |||
|
The price index was 170 in the first year, 180 in the second year, and 195 in the third year. The inflation rate was about
| |||
| |||
| |||
|
0.1 points
QUESTION 17
The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced
5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years. | ||
7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years. | ||
5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years. | ||
7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years |
0.1 points
QUESTION 18
Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?
| |||
| |||
| |||
|
0.1 points
QUESTION 19
If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is
| |||
| |||
| |||
|
0.1 points
QUESTION 20
If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is
9.5 percent. | |||
| |||
| |||
|
. From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010?
0.9% | |||
| |||
| |||
|
If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?
| |||
| |||
| |||
9.1% |
. Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basketâs cost was $80; in 2014, the basketâs cost was $86; and in 2015, the basketâs cost was $90. The value of the CPI in 2015 was
104.6 and the inflation rate was 4.6%. | |||
| |||
| |||
|
Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basketâs cost was $80; in 2008, the basketâs cost was $92; and in 2010, the basketâs cost was $108. The base year must be
| |||
2002 | |||
2008 | |||
|
Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basketâs cost was $80.00; in 2013, the basketâs cost was $84; and in 2014, the basketâs cost was $87.60. The value of the CPI was
| ||||
| ||||
| ||||
|
Which of the following is correct?
| |||
| |||
| |||
|
The inflation rate is defined as the
| |||
| |||
| |||
|
Economists use the term inflation to describe a situation in which
| |||
| |||
| |||
|