Questions;
Q1) CPI / Inflation calculation:
Suppose the US economy makes only apples and pears. Data from 2009, 2010 and 2011 are shown below.
Apples Pears CPI Inflation
Price Quantity Price Quantity
2010 $0.50 100 $1.00 200
2011 $1.00 150 $1.25 350
2012 $4.00 150 $1.50 500
• Calculate the CPI with 2010 as the base year. Use a basket of 1 apple and 2 pears (the average basket in 2010 if there are 100 people)
• What is the inflation rate from 2010 to 2011 using the CPI with 2010 as the base year? From 2011 to 2012
• Using the data feom 2011 and 2012, explain why inflation as measured by CPI overestimates the increase in the cost of living.
• How much money would you need in 2010 to have the same purchasing power as $100 has in 2012?
Q2) Mortgages and interest rate:
Suppose that you borrowed money at a fixed rate 5% over 30 years to purchase a house.
• If the rate of inflation is 1% what is the real interest rate of the loan?
• If the rate of inflation is 4% what is the real interest rate of the loan? What if the rate was 10%?
• Which one of the inflation rates is best for you in terms of the loan repayments? Why?
• Which one of the inflation rates is best for the bank? Why?
Q3) Briefly describe a police that a developing (poor) country can implement for itself (without the help from another county) that would help future growth. Which components of the model we discussed in chapter 7 would be affected? Explain how they would be affected.
Describe something that a developed (already "rich") country can do to help a developing country improve their future growth. Which components of the model we discussed in chapter 7 would be affected? Explain how they would be affected.
Q4) Consider Oceania and Eurasia, two countries identical in every sense except for the amount of physical capital. (that is, Eurasia' population, level of human capital, level of technology and amount of each natural resource is equal to that of Oceania). At this particular time, the amount of physical capital that Eurasia has is double that of Oceania. According to the model in the "Productivity and Growth" chapter of your text:
• Which country's productivity is higher? Why?
• Which country's GDP is higher? Why?
• Suppose a foreign (to both countries) builds one factory in Eurasia and one in Oceania. The factories are identical to each other. Will the change in Oceania's GDP be larger, smaller or the same as the change in Eurasia's GDP? Why?