During a certain year, the consumer price index increased from 150 to 162 and th

Question

During a certain year, the consumer price index increased from 150 to 162 and the purchasing power of a person’s bank account increased by 2.5 percent. For that year,

The nominal interest rate was 10.5 percent

The inflation rate was 10.5 percent

The nominal interest rate was 8 percent

The inflation rate was 2.5 percent

A factory worker earned $12 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.40. From 1980 to 1990, the factory worker's hourly real wage:

A) decreased from $14.63 to $10.71

B) remained constant

C) increased from $8.57 to $18.29

D) increased from $12 to $15

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7% and inflation turns out to be 5% over the life of the loan, then the borrower _____ and the lender _____.

A) Gains; gains

Gains; loses

C) Loses; gains

Is not affected; gains

Gummyland and Candyland are the same except Gummyland has a larger capital stock. Both countries undertake policies that raise their saving rates to the same higher level. We would expect that

A) both countries would have temporary increases in their growth rates, but the increase would be larger in Gummyland.

B) both countries would have permanent increases in their growth rates, but the increase would initially be smaller in Candyland.

C) both countries would have temporary increases in their growth rates, but the increase would be smaller in Gummyland.

both countries would have permanent increases in their growth rates, but the increase would initially be larger in Gummyland.

The nominal interest rate was 10.5 percent

The inflation rate was 10.5 percent

The nominal interest rate was 8 percent

The inflation rate was 2.5 percent

Explanation / Answer

1) The inflation was 8%; ((162 - 150)/150*100) = 8%

A) The nominal interest rate was 10.5%

2) CPI increased from .82 to 1.4. The inflation rate was ((1.4-.82)/.82*100). The inflation rate was 71%.

Real wage = Nominal wage/(1+r) where r is the rate of inflation

$15/(1.71) = 8.786, so the real wage decreased from $12 to $8.786

A) the real wage decreased

3) (1+R) = (1+n)*(1+i) where R is the real interest rate, n is the nominal interest rate, and i is the rate of inflation.

Inflation is lower than expected. When i changes from 7% to 5%, R decreases.

The borrower gains and the lender loses

B) gains; loses

4) A higher savings rate has a temporary increase in growth rate as per the solow growth model. Since Gummyland has a higher capital stock, the increase would be higher in gummyland.

A) Both countries have a temporary increase in growth rates, but the increase would be larger in Gummyland.

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