Econ Chapter 11 questions

If the price of a Navy submarine rises, there is no effect on the consumer price index, because Navy submarines are not consumer goods. But the GDP price index is affected, because Navy submarines are included in GDP as a part of government purchases

If the price of a Navy submarine rises, is the consumer price index or the GDP deflator affected More? Why?

a. When inflation is higher than was expected, the real interest rate is lower than expected. For example, suppose the nominal interest rate is 7% and people expect inflation to be 4%, then the market has an expected real interest rate of 3%. If inflation turns out to be 5%, the real interest rate is 7% minus 5% equals 2%, which is less than the 3% that was expected. b. Because the real interest rate is lower than was expected, the lender loses and the borrower gains. The borrower is repaying the loan with dollars that are worth less than was expected. In other words, the purchasing power of the loan the lender gets back is lower than was expected. c. Homeowners (borrowers) in the 1970s who had fixed-rate mortgages (nominal interest rate maintains constant) from the 1960s benefited from the unexpected inflation, while the banks (lenders) that made the mortgage loans were harmed.

Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected. A. is the real interest rate on this loan higher or lower than expected? B. Does the lender gain or lose from this unexpectedly high inflation? does the borrower gian or lose? C. Inflation during the 1970's was much higher than most people had expected when the decade bagan. How did this affect Homeowners who obtained fixed-rate mortgages during the 1960's ? How did it affect the banks that lent the money?

$100 spent in 1990 has the same buying power of $180.79 in 2014.Multiply $100 by the CPI for the current year, then divide by the CPI for the year in which you were born.

Suppose that the year you were born someone bought $100 of goods and services for your baby shower. How much would you guess it would cost today to buy a similar amount of goods and services? Now find data on the Consumer price Index and compute the answer based on it. (BLS Calculator found here: http://www.bls.gov/data/inflation_calculator.htm)