7-20. The cost of a nation\'s market basket in the base year is $1, 200, and the

Question

7-20. The cost of a nation's market basket in the base year is $1, 200, and the current year's price index equals 125. What is the cost of the market basket in the current year? 7-21. This year's value of the economy's price index is 100, and people anticipate that next year's value will be 103. The current nominal interest rate is 5 percent. What is the real interest rate? 7-22. This year is the base year for computing the nations price index. The current nominal interest rate is 6 percent, and the real interest rate is 3.5 percent. What is the anticipated value of next year's price index?

Explanation / Answer

7-20

cost of market basket=1200*125/100
=1500

7-21

inflation rate=103/100-1=3%

real interest rate is=((1+5%)/(1+3%))-1=1.94% or 2%

7-22

inflation rate=(1+6%)/(1+3.5%)-1

=2.42%

value of price index next year=100*(1+2.42%)

=102.42

the above is answer..

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