CAS EC 102 Lecture Notes - Lecture 4: Opportunity Cost, Business Cycle, Trade Adjustment Assistance

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12 Oct 2017

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Inflation rate = : i = r + , so if i = 4%, = 3% then r = 1% Bank wants r = 5: changes in price level and interest rates. As p goes up, goes up. As goes up, ^e goes up. Since i = r + ^e , if ^e goes up, i goes up. Therefore p goes up, i goes up: calculating what a past amount would be worth in a later year. Value in later year dollars = (value in earlier year dollars) (cpi later/ cpi earlier) 1) in 1969 the salary of the president of the usa was raised to ,000. What would that salary be in july 2017 dollars: cpi in 1969 = 36. 7, cpi in july 2017 = 245. 519, value of ,000 now = ,000 ( cpi 2017 / cpi 1969, = (245. 519 / 36. 7) 2) in 1980 bu raised tuition, room and board to a total of / year.

Related Questions

Suppose I borrow $200,000 for one year at a fixed nominal interest rate of 7 percent.

(a) What is my nominal repayment next year?

(b) Suppose that at the time the loan was made, both the lender and I believed that the (ex-ante) rel interest rate on the loan would be two percent. Suppose the actual inflation rate over the life of the loan turns out to be 4 percent. What is the ex-post real interest rate? Does the inflation rate help me at the expense of the lender, or help the lender at my expense?

(d) Given that the lender and I agreed that the ex-ante real interest rate should be 2 percent, what nominal interest rate would I have been charged if the lender and I had expected inflation over the life of the loan to be 10 percent? 3 percent? 0 percent?

(e) Inflation increased enexpectedly during the 1970s. Explain why this helped someone who bought a house using a 30-year mortgage with fixed nominal interest rates in 1965, but not someone who bought a house using a 30-year mortgage with a fixed nominal interest rate in 1980.

yellowprairie-dog173

Short Answer/ProblemsâAnswer all numbered questions @ 10 points each. Provide your answers in the space provided or the back of the page. Make sure to scan all work pages. Any quantitative questions require showing your work for full credit. Round all $ problems to the nearest cent. All other calculations must be to at least the fifth decimal place. 1. Answer BOTH parts a & b below. a) Explain the impacts of low level unanticipated inflation for a country like the United States. b) In the United States, our confidence in our fiat money is derived from (3 things) 2. Given the following 4 scenarios: â¢ The contract interest rate was 6.5% and the expected inflation rate was 2.5%. â¢ The contract interest rate was 12% and the expected inflation rate was 10%. â¢ The contract interest rate was 7.5% and the expected inflation rate was 4%. â¢ The contract interest rate was 4% and the expected inflation rate was 1%. a) Indicate which scenario would have been best for the lender and explain why it is best for the lender. b) With an ex post actual inflation rate of 2.25%, indicate which scenario would have been best for society and explain why it is best for society of the four options. 3. Define, compare, and contrast two of the following sets of terms as they. a. organized exchange markets vs. OTC (over the counter) markets b. fiat money vs. representative full-bodied money c. adverse selection vs. moral hazard 4. Indicate what would happen to both M1 and M2 (increase, decrease, no change) due to each of the following events. Consider each lettered event to be independent of the others. a) you write a check for cash at the casino b) an individual redeems a personal CD and deposits the funds into a savings deposit account c) U.S. commercial banks use some of their excess reserves to purchase $250 billion worth of U.S. Treasury securities from the Federal Reserve. d) as the economy improves, banks ease their credit standards and approve a higher percentage of loan applications. e) you spend $4,000 in U.S. currency while on your spring break trip to Acapulco (if you spent less than that you could not have had much fun) Part III: Longer ProblemsâAnswer all numbered questions @ 15 points each. Provide your answers in the space provided or the back of the page. Make sure to scan all work pages. Any quantitative questions require showing your work for full credit. Round all $ problems to the nearest cent. All other calculations must be to at least the fifth decimal place. 5. The following is a historical list of median home prices in two states. Year State 1 ($) State 2 ($) GDP deflator (2009 base year) 1950 9,564 5,396 14.09 1960 15,100 9,800 17.56 1970 23,100 13,000 23.18 1980 84,500 43,900 46.05 1990 195,500 50,800 67.62 2000 211,500 74,400 82.59 2017 (estimate) 400,000 201,991 113.61 a. Convert each price into current year dollars. b. Determine how much a person would have had to pay in 1950 (for both states) to equal the 2017 real home value. c. For both states, determine the percentage increase in home values from 1950-2017 (one calculation for each). 6. Using the following information for a U.S. state: Nominal GDP Real GDP Population Year (millions) (millions 2009 $âs) 1,151,119 1,421,713 32,987,911 1998 1,879,520 1,975,457 36,020,878 2006 2,350,807 2,143,167 38,792,459 2014 a. What is the average annual growth rate for this state during the time periods listed? (Note: time periods of interest are 1998-2006 & 2006-2014) b. What is the average annual inflation rate for this state during the time periods listed? c. To what extent are living standards likely changing in this economy? Explain and support your claim using evidence from the above table. d. For 1 bonus point, indicate the U.S. state associated

CAS EC 102 Lecture Notes - Lecture 4: Opportunity Cost, Business Cycle, Trade Adjustment Assistance

CAS EC 102 Full Course Notes

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