ECO 202 HW 3
Consider the following table: Year, Nominal Average Hourly Earnings 2008, $16.00 2009, $17.00 2010, $18.00 What is the real average hourly wage in 2009?
$8.21
Suppose you were borrowing money to buy a car. Consider the following situations. Situation 1: Suppose the interest rate on your car loan is 18.00 percent and the inflation rate is 17.00 percent. Calculate the real interest rate.___% Situation 2: Suppose the interest rate on your car loan is 8.00 percent and the inflation rate is 5.00 percent. Calculate the real interest rate.___% Situation 1 will be BETTER THAN Situation 2 because the REAL INTEREST RATE is lower. Now suppose you are JPMorgan Chase, and you are making car loans. Which situation above would you now prefer? JPMorgan Chase would prefer _________
1% ; 3% ; Situation 2
Suppose the economy's consumer price index (CPI) in 2008 was 185 and the CPI in 2009 was 199. The inflation rate over the period from 2008-2009 was equal to
7.6%
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation? (Mark all that apply.)
Borrowers gain from a lower real interest rate. Lenders lose from a lower real interest rate.
What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and 2010?
Both real and nominal average hourly earnings increased
During the late nineteenth century in the United States, many farmers borrowed heavily to buy land. During most of the period between 1870 and the mid-1890s, the United States experienced mild deflation. Many farmers engaged in political protests during these years, and deflation LOADING... was often a subject of their protests. Why would farmers have felt burdened by deflation during this period?
During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.
In 2020, the government of Venezuela raised the monthly minimum wage from 150,000 bolivars to 450,000 bolivars, but an article on bloomberg.com noted that whereas a worker receiving the minimum wage in 2019 could buy 4 kilograms of beef with it, a worker receiving the new higher minimum wage in 2020 couldn't buy even 1 kilogram of beef. Source: Nicolle Yapur, "Venezuela's Maduro Starts Year With a 67% Minimum Wage Hike," bloomberg.com, January 10, 2020. Why would the minimum wage in Venezuela buy so little despite having been raised by so much?
Even though their wages were increasing by so much, prices were increasing by more.
The substitution bias in the consumer price index refers to the idea that consumers ______ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket.
change; over−estimates
The price index which is used to measure changes in the cost of living is the
consumer price index (CPI).
What index is used to measure the average prices paid by a typical family? An average of the prices of the goods and services purchased by a typical family is the:
consumer price index (CPI).
Lower prices usually cause consumers to buy more, not less. However, in this case, consumers may
delay buying until prices fall further, so current lower prices would not have the ususal effect
The difference between a nominal variable and a real variable is that
nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.
During the spring of 2015, the United Kingdom experienced a brief period of deflation. According to an article in the Wall Street Journal, "The U.K.'s history of sticky and hard-to-control inflation suggests that a short period of falling prices will be taken as a reprieve for consumers, not as a signal to defer purchases." Source: Richard Barley, "U.K. Deflation More Curiosity Than Concern," Wall Street Journal, May 19, 2015. Consumers could see deflation as a "signal to defer purchases" because if deflation is expected to continue,
prices would be lower in the future.
A consumer price index of 234.6 in December 2013 with a base period of 1982-84 means that the cost of the market basket in December 2013
rose 134.6 percent from the cost of the market basket in the base period.
The difference between the nominal interest rate and the real interest rate is
the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.
The real interest rate equals
the nominal interest rate minus the inflation rate.
If the economy is experiencing deflation,
the nominal interest rate will be lower than the real interest rate.
If inflation is expected to increase,
the nominal interest rate will increase.
If the inflation rate is 6 percent and the nominal interest rate is 4 percent, then the real interest rate is
-2 percent, which is the nominal interest rate minus the inflation rate.
