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

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?

Explanation / Answer

a. Inflation rate for each year:

Year

CPI

Inflation

Disinflation

1988

118.3

1989

124

5%

1990

130.7

5%

FALSE

1991

136.2

4%

TRUE

1992

140.3

3%

TRUE

1993

144.5

3%

TRUE

1994

148.2

3%

TRUE

1995

152.4

3%

FALSE

1996

156.9

3%

FALSE

1997

160.5

2%

TRUE

1998

163

2%

TRUE

1999

166.6

2%

FALSE

2000

172.2

3%

FALSE

2001

177.1

3%

TRUE

2002

179.9

2%

TRUE

2003

184

2%

FALSE

2004

188.9

3%

FALSE

2005

195.3

3%

FALSE

2006

201.8

3%

TRUE

Formulae:

b. Years of inflation:

Inflation occured in all of the years.

Real interest rate = Nominal rate - inflation rate

If nominal rates remain unchanged during inflation, the real interest rate would reduce

c. Years of deflation: None (deflation is opposite of inflation)

If nominal rates remain unchanged during deflation, the real interest rate would increase

d. Disinflation occured in following years:

1991, 92, 93, 94, 97, 98, 2001, 02 & 06

Disinflation is marginal reduction of inflation over a period.

Year

CPI

Inflation

Disinflation

1988

118.3

1989

124

5%

1990

130.7

5%

FALSE

1991

136.2

4%

TRUE

1992

140.3

3%

TRUE

1993

144.5

3%

TRUE

1994

148.2

3%

TRUE

1995

152.4

3%

FALSE

1996

156.9

3%

FALSE

1997

160.5

2%

TRUE

1998

163

2%

TRUE

1999

166.6

2%

FALSE

2000

172.2

3%

FALSE

2001

177.1

3%

TRUE

2002

179.9

2%

TRUE

2003

184

2%

FALSE

2004

188.9

3%

FALSE

2005

195.3

3%

FALSE

2006

201.8

3%

TRUE

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.