Section II Inflation and Cost of Living 1. Mount Saint Mary College students con

Question

Section II Inflation and Cost of Living 1. Mount Saint Mary College students consume the following items in the following quantities listed in the table below. Good Gatorade Pizza Quantity 2013 2014 S1.50 S12 S93 S80 S75 2015 $2.00 S14 S105 S95 $90 200 Running Shoes Textbooks Jeans S1 S10 $84 S55 S50 2 25 Calculate the price of the consumption bundle. Calculate a CPI using 2013 as the base year. Calculate the annual inflation rates 2. Given the following historical data in the table below, calculate the real interest rate for each year. 2002 2003 2004 2005 2006 Interest Rate on T bills | 1.6 0 | 1.4 13.2 14.7 Percentage change in cPI 2.4 19 3.3 34 2.5 Real Interest rate

Explanation / Answer

Question 1

Find the cost of basket as the product of price and quantity. CPI is computed as the difference between the two baskets and inflation is the rate of increase of CPI year by year.

Cost of basket in 2013 is = 200 x 1 + 100 x 10 + 2 x 84 + 25 x 55 + 2 x 60 = 2863

Question 2

Real interest rate = Nominal interest rate - inflation rate

RII 2002 = 1.6 - 2.4 = -0.8

RII 2003 = 1 - 1.9 = -0.9

RII 2004 = 1.4 - 3.3 = -1.9

RII 2005 = 3.2 - 3.4 = -0.2

RII 2006 = 4.7 - 2.5 = 2.2

GOOD Q 2013 P 2014 P 2015 P G 200 1 1.5 2 P 100 10 12 14 R 2 84 93 105 T 25 55 80 95 J 2 60 75 90 Cost of basket 2863 3836 4565 CPI 100 134.0 159.4 Inflation rate 34.0 19.0

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