# answerstopracticequestions5fall2004 - beginning of the loan...

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Economics 102 Fall 2004 Answers to Practice Questions 5 Multiple choices: 1) a. The CPI tracks the cost of a basket of goods and services. 2) b. 3) c. The CPI (base 2001) and the CPI (base 2000) are just a rescale one of the other and the inflation rate is the same if computed using any of the two. 4) c. 5) b. 6) d. 7) a. 8) b. Problems: 1) a. Using 2002 as base year, the CPI is 100 in 2002 and 105.5 in 2003. b. Using 2003 as base year, the CPI is 100 in 2003 and 94.79 in 2002. c. The inflation rate in 2003 was 5.5%. 2) a. The CPI is 100 in 2002 (the base year) and 112 in 2003. b. The Real Wage is \$ 10 in 2002 and \$ 10.5 in 2003. c. The Real Wage increased by 5%. 3) Using the inflation rates we can get the CPI for each year, which we use to compute the Real Wage. Nominal Wage CPI (base 1999) Real Wage 1999 \$ 15.00 100 \$ 15.00 2000 \$ 17.60 110 \$ 16.00 2001 \$ 19.80 132 \$ 15.00 2002 \$ 20.10 151.8 \$ 13.24 2003 \$ 22.21 166.98 \$ 13.30 4) a. Tom will pay \$ 1,092; \$ 1,000 for the repayment of the loan and \$ 92 as compensation for the lost in purchasing power due to the inflation. Indeed, if the CPI was 100 at the

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Unformatted text preview: beginning of the loan, it becomes 109.2 at its expiration. Therefore, in order for Bob to receive an amount of money with the same purchasing power that the \$ 1,000 lent two years before, Tom has to pay \$ 1,092. b. In this case, Bob receives \$ 1,000 at the end of the loan, but the value of this money expressed in 2002 dollars is only \$ 1,000/109.2 = \$ 915.75. c. In terms of purchasing power, Tom benefits from the unexpectedly higher inflation rate, while Bob looses because of it. d. Bob receives \$ 1,092 at the end of the loan; the CPI at the expiration of the loan is 111.3. Therefore, the value of the money he receives expressed in 2002 dollars is \$1,092/111.3 = \$ 981.13. e. Since the CPI at the expiration of the loan is 111.3, the amount that Tom should pay to Bob in order to compensate him for the actual inflation rate during the two years of the loan is \$ 1,113....
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## This note was uploaded on 08/08/2008 for the course ECON 102 taught by Professor Drozd during the Spring '08 term at University of Wisconsin.

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answerstopracticequestions5fall2004 - beginning of the loan...

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