Question

15. Using the following data on the Consumer Price Index for a fictitious economy, tell whether there has been inflation, deflation (or neither) from each year to the next: Year 1978 1979 inflation?/deflation?/neither? XXX CPI 130 120 100 110 120 1980 1981 1982 16. Given that the base rate of interest a bank would charge with NO inflation = 7% in year A, actual inflation in year A was 3% but expected inflation that year was predicted to be a. What nominal interest rate would the bank have charged for a loan in year A? b. What real interest rate would the banks actually have cared in year A?

help

Answer 1

15

Inflation = (CPI in current year - CPI in previous year) / CPI in previous year * 100

inflation in 1979 = (120 - 130) / 130 * 100 = - 10 / 130 * 100 = -7.69%

As it is negative, therefore deflation occured in 1979

inflation in 1980 = (100 - 120) / 120 * 100 = - 20 / 120 * 100 = -16.67%

As it is negative, therefore deflation occured in 1980

inflation in 1981 = (110-100) / 100 * 100 = 10 / 100 * 100 = 10%

As it is positive, therefore inflation occured in 1981

inflation in 1982 = (120-110) / 110 * 100 = 10 / 110 * 100 = 9.09%

As it is positive, therefore inflation occured in 1982

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