Say that the price of a representative basket of consumer goods and services in a hypo- thetical economy is as follows in each of four years: 2013: $70 2014: $74 2015: $80 2016: $83 (For this question please round your answers to two decimal places.) a) Create a price index for this basket with 2014 as the base year. What is the value of the index in each year? b) What is the inflation rate between each subsequent period (i.e. from 2013-14, 2014-15, and 2015-16)? c) If the real interest rate was negative during this whole time period, what must be true about the nominal interest rate (numerical answer, please)? Explain.
Say that the price of a representative basket of consumer goods and services in a hypo- thetical economy is as follows in each of four years: 2013: $70 2014: $74 2015: $80 2016: $83 (For this question please round your answers to two decimal places.) a) Create a price index for this basket with 2014 as the base year. What is the value of the index in each year? b) What is the inflation rate between each subsequent period (i.e. from 2013-14, 2014-15, and 2015-16)? c) If the real interest rate was negative during this whole time period, what must be true about the nominal interest rate (numerical answer, please)? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![**Price Index and Inflation Rate Exercise**
**2. Exercise**
Say that the price of a representative basket of consumer goods and services in a hypothetical economy is as follows in each of four years:
- 2013: $70
- 2014: $74
- 2015: $80
- 2016: $83
(For this question, please round your answers to two decimal places.)
**a) Create a price index for this basket with 2014 as the base year. What is the value of the index in each year?**
**b) What is the inflation rate between each subsequent period (i.e., from 2013-14, 2014-15, and 2015-16)?**
**c) If the real interest rate was negative during this whole time period, what must be true about the nominal interest rate (numerical answer, please)? Explain.**
**Explanation of Concepts:**
1. **Price Index:**
- A price index measures the average price level of a basket of goods and services in one period relative to a base year.
- Formula: \[ \text{Price Index} = \left( \frac{\text{Cost of Basket in Given Year}}{\text{Cost of Basket in Base Year}} \right) \times 100 \]
2. **Inflation Rate:**
- The inflation rate measures the percentage change in the price level from one period to another.
- Formula: \[ \text{Inflation Rate} = \left( \frac{\text{Price Index in Current Year} - \text{Price Index in Previous Year}}{\text{Price Index in Previous Year}} \right) \times 100 \]
3. **Real vs Nominal Interest Rate:**
- Real Interest Rate = Nominal Interest Rate - Inflation Rate
- For the real interest rate to be negative, the nominal interest rate must be less than the inflation rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2ea625e9-7ba0-48f3-afcb-684cf7ba723a%2F74ce51a4-29d8-49db-a384-a9a4644cf8c7%2Fx2ev257_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Price Index and Inflation Rate Exercise**
**2. Exercise**
Say that the price of a representative basket of consumer goods and services in a hypothetical economy is as follows in each of four years:
- 2013: $70
- 2014: $74
- 2015: $80
- 2016: $83
(For this question, please round your answers to two decimal places.)
**a) Create a price index for this basket with 2014 as the base year. What is the value of the index in each year?**
**b) What is the inflation rate between each subsequent period (i.e., from 2013-14, 2014-15, and 2015-16)?**
**c) If the real interest rate was negative during this whole time period, what must be true about the nominal interest rate (numerical answer, please)? Explain.**
**Explanation of Concepts:**
1. **Price Index:**
- A price index measures the average price level of a basket of goods and services in one period relative to a base year.
- Formula: \[ \text{Price Index} = \left( \frac{\text{Cost of Basket in Given Year}}{\text{Cost of Basket in Base Year}} \right) \times 100 \]
2. **Inflation Rate:**
- The inflation rate measures the percentage change in the price level from one period to another.
- Formula: \[ \text{Inflation Rate} = \left( \frac{\text{Price Index in Current Year} - \text{Price Index in Previous Year}}{\text{Price Index in Previous Year}} \right) \times 100 \]
3. **Real vs Nominal Interest Rate:**
- Real Interest Rate = Nominal Interest Rate - Inflation Rate
- For the real interest rate to be negative, the nominal interest rate must be less than the inflation rate.
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