Question

Score: 0 of 1 pt + 8 of 26 (7 complete) HW Score: 22 31%, 58 of 26 pts Concept: Price Indexes 2 Question Help O Price indexes can be used to compare prices across different periods Suppose that a year of tuition for college at public institutions averaged a cost of 1 0 and that the index was 111 in 1989 If the CPI index was 214 in 2000, then the cost of tuition in 2000, as the result of inflation would quals Enter your response rounded to the o uter)

Answer 1

1) Cost of tuition in 1989 = 1,943

CPI in 1989 = 111

If CPI in 2009 is 214

Inflation rate = [(214 - 111) / 111} * 100 = 92.79%

Thus cost of tuition in 2009 would be 1,943 + 1,943 * 0.9279 = 3,745.96

2) Nominal interest rate = Real Interest rate + Inflation rate

Nominal interest rate = 16%

Inflation rate = 15%

Thus, real interest rate = 16% - 15% = 1%

3) Price of bottled water = $2

Lent = 1,000 at 12.3% (Nominal rate of interest = 12.3%)

At the end of year, price of bottled water = $2.07

Rate of inflation = [(2.07 - 2) / 2] * 100 = 3.5%

Real rate of interest = Nominal interest rate - Inflation rate

Thus, real interest rate = 12.3% - 3.5% = 8.8%