Question

1. Name a US government agency that publishes data of CPI and unemployment and provide a URL link for each of the two variables that leads you to the data.

2. Calculate the inflation rate between year a) 1999 and 2000, b) 2000 and 2001 given the following CPI:

CPI (1999)= 89, CPI (2000)=100, CPI (2001)=107

3. Suppose the nominal output of year 1999 was $3200 and the real output of year 1999 was $3600, calculate the GDP deflator of year 1999.

4. Suppose the CPI in Maryland is 110 and the CPI in Texas 1999 is 100 and you are given that the nominal income in Texas is $5000 while the nominal income in Maryland is $5100. Suppose you are given a job offer in each state. Which offer should you take if you are indifferent about the different environment in each state? Explain your answer thoroughly and include necessarily calculations or numbers.

5. Suppose the CPI of the US in 1990 was 120 and the CPI in 2003 was 200. For how much could a car that cost $20,000 in 2003 have been bought in 1990? Explain your answer thoroughly and include necessarily calculations or numbers.

6. If the real interest rate is 5% and inflation rate is 3 %, what is the nominal interest rate?

Answer 1

(1)

Inflation rate between 1999 and 2000 = [(CPI in 2000 - CPI in 1999) / CPI in 1999]*100

=> Inflation rate between 1999 and 2000 = [(100 - 89) / 89)*100

=> Inflation rate between 1999 and 2000 = 12.359 %

=> Inflation rate between 1999 and 2000 = 12.36%

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Inflation rate between 2000 and 2001 = [(CPI in 2001 - CPI in 2000) / CPI in 2000]*100

=> Inflation rate between 2000 and 2001 = [(107- 100) / 100)*100

=> Inflation rate between 2000 and 2001 = 7%

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(2)

GDP deflator = (nominal GDP / real GDP)*100

GDP defltaor of 1999 = (Nominal GDP of 1999 / Real GDP of 1999)*100

=> GDP deflator of 1999 = ($3200 / $3600)*100

=> GDP deflator of 1999 = 88.89

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(3)

Nominal Income in Maryland = $5100

CPI in Maryland = 110

=> Real income in Maryland = (Nominal income in Maryland / CPI in Maryland)

=> Real income in Maryland = ($5100 / 110)

=> Real Income in Maryland = $46.36

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Nominal Income in Texas = $5000

CPI in Texas = 100

=> Real income in Texas = (Nominal income in Texas / CPI in Texas)

=> Real income in Texas = ($5000 / 100)

=> Real Income in Texas = $50

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The real income is larger in Texas (i.e., the purchasing power of income in Texas will be higher than Maryland). It means you should take Texas offer.

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(4)

CPI in 1990 = 120

CPI in 2003 = 200

Cost of car in 2003 = $20,000

Cost of same car in 1990 = Cost of car in 2003 * (CPI in 1990 / CPI in 2003)

=> Cost of same car in 1990 = $20,000 (120 / 200)

=> Cost of same car in 1990 = $12000

In 1990 the cost of same car would be $12000

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(5) According to Fisher effect:

Real interest rate = Nominal interest rate - Inflation rate

=> 5% = Nominal interest rate - 3%

=> Nominal interest rate = 5% + 3%

=> Nominal interest rate = 8%