1. A loaf of bread costs $2.00. Based solely on this information, what is the value of the dollar (in terms of loaves of bread)?
If the price of a loaf of bread changes to $1.50, does the value of the dollar rise or fall?
2. Given the following information:
Consumers are very optimistic about the future. The price of oil has just doubled.
The money supply is growing at a 6% rate. The government has just cut spending by 8%. Firms are doubling their investment.
The trade deficit has doubled in the last 6 months.
Calculate the long-run rate of inflation.
3. Given the money supply is $1 trillion, the price level is 200, and real GDP is $5 trillion, calculate velocity.
(The price index should be divided by 100 when used for this calculation.)
4. The growth rate of the money supply is 7%, the inflation rate is 3%, and velocity is constant.
What is the growth rate of real GDP?
5. Suppose the real rate of interest is 3%, and the money supply is growing at 5%. If the growth rate of the money supply rises to 10%, then, according to the Fisher effect, what is the change in the real rate of interest? nominal rate of interest?
6. If the nominal interest rate is 8%, the expected inflation rate is 3%, and the tax rate is 25%, what is the after-tax real interest rate when taxes are paid on nominal interest income? the after-tax real interest rate when taxes are paid on real interest income?
7. I lend you a $1,000 today and you agree to pay me $1,100 one year from today. You are going to buy a computer with the $1,000 that your borrow from me. You anticipate that if you wait a year to buy the computer, its price will rise to $1,070.
What is the nominal interest rate on this loan?
What is the expected inflation rate? What real interest rate do the lender and borrower anticipate? Suppose that the computer actually costs $1,020 at the end of the year. What is the actual real interest rate on the loan?
Would you have been less likely or more likely to borrow the money if they had known the true inflation rate?
Who was hurt by the fact that the actual inflation was not equal to the expected inflation rate, the lender or the borrower?