Question

3. Refer to the following data on the U.S. consumer price index and answer the questions below.

Year CPI Year CPI Year CPI Year CPI

1988 118.3 1993 144.5 1998 163.0 2003 184.0

1989 124.0 1994 148.2 1999 166.6 2004 188.9

1990 130.7 1995 152.4 2000 172.2 2005 195.3

1991 136.2 1996 156.9 2001 177.1 2006 201.8

1992 140.3 1997 160.5 2002 179.9

a. Compute the inflation rate for each year 1989-2006.

b. Which years were years of inflation? What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

c. In which years did deflation occur? What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

d. In which years did disinflation occur?