Question

2. The Burau (1 Labor St ?List ics provides indices or cons" mer prices Or the USA. The following table provides the monthly evolution of the CPI in the Eighties: (a) What was the monthly inflation rate in November 1982 In December 1982? (b) What was the a inflation rate in November 1982? In December 1982? Real GDP and CPI YearJan Oct Dec 1980 77 1981 87.0 1982 94.3 983 97.8 1984 1019 1985 1055 1986 1096 987 111.2 1988 115.7 1989 1211 78.9 80.1 810 83.3 84.8 85.5 86.3 94.0 97.6 81.B 84.0 93.2 97.9 87.9 88.5 89.8 91.6 92.3 93.4 94.9 97.0 97.5 97.7 99.2 103.4 107.3 101.0 105.3 108.7 110.3 115.3 120.2 125.6 97.9 100.2 100.7 101.2 101.3 102.4 105.0 104.1 107.8 109.5 13.8 118.5 124.4 1026 103.1 105.3 105.3 1064 106.9 107.6 10B.0 109.0 109.3 1088 1121 1165 108.9 113.1 1175 123.8 109.5 1135 118.0 124.1 110.2 115.0 119.8 125.0 109.3 108.6 109.7 110.4 110.5 115.4 120.3 125.9 1154 120.5 126.1 112.7 116.0 119.0 121.6 1223 123.1 Figure 1: Monthly CPI in the US, 1980-1989 Povdde epayments are fixed borrower? For a lendr explain erease in inlation go

Answer 1

(a) Monthly Inflation rate = % Change in CPI between two months

(i) Monthly inflation rate, Nov 1982 = (98.0 / 98.2) - 1 = 0.9998 - 1 = - 0.0002 = - 0.02%

(ii) Monthly inflation rate, Dec 1982 = (97.6 / 98.0) - 1 = 0.9959 - 1 = - 0.0041 = - 0.41%

(b) Annual Inflation rate = % Change in CPI in month N of current year and month N of previous year

(i) Annual inflation rate, Nov 1982 = (98.0 / 93.7) - 1 = 1.0459 - 1 = 0.0459 = 4.59%

(ii) Annual inflation rate, Dec 1982 = (97.6 / 94.0) - 1 = 1.0383 - 1 = 0.0383 = 3.83%

(c) Increase in inflation is a good news for the borrower, but bad news for lender. The reason is, an increase in inflation erodes purchasing power of money and real value of a loan falls. So, the borrower gains by repaying an amount that has less real worth and the lender loses by accepting an amount that has less real worth.