ECON 101 AP MacroeconomicsAssignment: Apply Knowledge of InflationGood Quantity PriceA. If the price of coffee doubles, what is the resulting percentage change in the price level? (2 points) B. If the price of bread doubles, what is the resulting percentage change in the price level? (2 points) C. Why is the effect of a 100% increase in the price of coffee so much greater than the effect of
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ECON 101 AP Macroeconomics
Assignment: Apply Knowledge of Inflation
Good Quantity Price
A.
If the price of coffee doubles, what is the resulting percentage change in
the price level? (2 points)
B.
If the price of bread doubles, what is the resulting percentage change in
the price level? (2 points)
C.
Why is the effect of a 100% increase in the price of coffee so much
greater than the effect of a similar change in the price of bread? (4 points)
D.
Assume that the mix of goods in a basket is kept constant for long periods. If
the price of one good rises very rapidly over several years, what will happen
to the relative importance of the other goods in the basket? Is this a
problem? (6 points)
E.
If the price of coffee increases, we get a positive rate of inflation, even if
no other price rises. Is this really inflation? Explain. (6 points)
A.
Calculate price index for 1996, 1997, and 1998. (3 points)
B.
Calculate inflation rates for 1996-97 and 1997-98. Is inflation increasing
or decreasing (2 points)
A.
If the inflation rate is 6% and interest on this CD is not taxable, what is the
real interest rate on the CD? Hint: What is the relationship between the real rate of
interest and the nominal rate of interest? (2 points)
B.
If the inflation rate is 6% and the interest on this CD is taxable, what is
the real interest rate on the CD? (2 points)
AP Macroeconomics
Assignment: Apply Knowledge of Inflation
Page 2 of 2
C.
How does taxation of interest affect the real return on the CD when
the nominal rate is 12% and inflation is 6%? (2 points)
D. Now, if the inflation rate is 18%, the nominal rate of interest on the CD is
24%, and the interest is not taxable, what is the real interest rate on the CD?
(2 points)
E.
If the inflation rate is 18%, the nominal rate of interest on the CD is 24%, and
the interest is taxable (at a rate of 25%), what is the after-tax real interest
rate on the CD? (2 points) Hint: first calculate the after-tax nominal rate.
4. Costs and benefits of inflation
A.
Explain why unexpectedly high inflation rates benefit borrowers. (4 points)
B.
Explain why unexpectedly low inflation rates benefit lenders. (4 points)
C.
Define hyperinflation and list at least two costs it imposes on individuals or
the society. (5 points)
5. Sources of inflation
A.
List the two main sources of inflation. (4 points)
B.
Briefly state the cause of each type of inflation. (4 points)
C.
Which group in the economy is responsible for each type of inflation? (4 points)
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