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24 Nov 2018

YEAR PRICE LEVEL INTEREST RATES PERCENT 1977 60.6 5.6 1978 65.2 7.6 1979 72.6 10 1980 82.4 11.4 1981 90.9 13.8 1982 96.5 11.1 1983 99.6 8.8 1984 103.9 9.8 1985 107.6 7.7 1986 109.6 6.1 1987 113.6 6.1 1988 118.3 7 1989 124 8 1990 130.7 7.5 1991 136.2 5.5 1992 140.3 3.6 1993 144.5 3.1 1994 148.2 4.7 1995 152.4 5.6 1996 156.9 5.1 1997 160.5 5.2 1998 163 4.9 1999 166.6 4.8 2000 172.2 5.9 2001 177.1 3.4 2002 179.9 1.7 1a) Calculate the rate of inflation for the years of 1978- 2002 1b) Calculate the expected rate of inflation for the years 1979-2002 assuming people expect the rate of inflation to be the average rate of inflation in the two previous years and people have perfect foresight and expected inflation just equals actual inflation 1c) For each of the assumptions in part b, calculate the real interest rate for the years 1977-2002 In light of this example, explain why economists have such a difficult time measuring the real interest rate 1d) How do you think people forecast inflation? What information do they use? Do you think they systematically underestimate changes in the price level?

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Irving Heathcote
Irving HeathcoteLv2
25 Nov 2018
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