1) Suppose that the value of the CPI in 2013 was 232.957 and its value in 2014 was 236.736. What was the rate of inflation in 2014 from 2013?
2) Suppose that your annual salary in 1997 was $50000 and rose to $62000 by the year 2000. If during that same time the CPI rose from 160 to 175, what was the % increase in your "real wage" over this three period?
3) Why do the CPI and the GDPD show different rates of inflation for the same time period?
4) Why has the tremendous growth in household consumption of computers since the CPI base year of 1983 imparted an upward bias to the rate of increase of the CPI?
5) If the rate of inflation in the U. S. expected by participants in Treasury bill markets rose from 2% to 4%, what would you expect to happen to the level of 1-year Treasury bill prices? Assume that investors required a 2% "real" return to willingly hold the entire existing supply of T-bills both before and after the change in inflation expectations. (If possible calculate the % Change in T-bill prices per $100 of face value... at least explain the direction of change in T-bill prices.)
6) Draw a supply demand diagram to illustrate your answer to #5.
7) The nominal yield on 10 year treasury bonds is currently ~4.9%. If an investor wishes to earn at least a 3.5% real before tax rate of return on her capital, what expectations about future inflation levels must she hold in order to willingly hold 10 year treasury bonds at existing prices?
8) Agree or disagree with the following statements and explain your reasoning:
A) The major problem with inflation is that it reduces everyone's real income.
B) If actual inflation exceeds market expectations of inflation, income is transferred from lenders to borrowers.
9) Explain why high inflation rates are likely to lower the growth rate of RGDP over time.