1. The consumer price index is 125 in year 1 and 160 in year 2. All inflation is anticipated. If the Commerce Bank of Beverly Hills charges an interest rate of 35 percent in year 2, what is the bank's real interest rate?
2. [Related to the Economics in Practice on p. 138] Evaluate the following statement: Because the CPI is a fixed-weight price index, it has a tendency to overestimate the rate of inflation. Therefore, if the CPI decreases, it must also have a tendency to underestimate the rate of deflation.