PS2 - Econ 3140 Fall 2009 Problem Set 2 Due Wednesday...

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Econ 3140 Fall 2009 Problem Set 2 Due Wednesday September 16 (on lecture time) Reading assignment: Chapter 2.4, 2.5,3.1, 3.2 & 3.3 1. How does chain weighting lead to a di/erent measurement of real GDP than the meth- ods used by the BEA prior to 1996? What are the advantages of chain weighting? What are the disadvantages? 2. The consumer price index (CPI) was 180 for 2002 when using 1983 as the base year (1983 = 100). Now suppose we switch and use 2002 as the base year (2002 = 100). What is the CPI for 1983 with the new base year? 3. Question Four from Abel et.al., Chapter 2, analytical problems 4. Loretta agrees to lend Ted \$500 ; 000 to buy computers for his consulting °rm. They agree to a nominal interest rate of 8% . Both expect the in±ation rate to be 2% . (a) Calculate the expected real interest rate. (b) If in±ation turns out to be 3% over the life of the loan, what is the real interest rate? Who gains from unexpectedly high in±ation, Loretta or Ted? (c) If in±ation turns out to be 1% over the life of the loan, what is the real interest rate? Who gains from
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