1. Justus loves playing baseball and is always looking into purchasing anything baseball related. Last year, he purchased the following baseball related items, by what percentage does Justus' cost of entertainment increase in the last year?
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Price Last Year
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Price This Year
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Baseball Cards
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$5
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$5
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Baseball Bat
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$80
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$100
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Catching Equipment
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$150
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$140
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Baseball Cleats
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$50
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$45
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2.The index number representing the price level changes from 100 to 105 in one year, and then from 105 to 110 the next year. Since the index number increases by 5 each year, is 5 the inflation rate each year? Is the inflation rate the same each year? Briefly explain.
3. Describe a situation, either a government policy situation or an economic problem or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate than using the GDP deflator.
4.When is the most recent time that inflation was truly a major issue in the U.S. economy?
5. A mortgage loan is a loan that a person makes to purchase a house. Below is a list of the mortgage interest rate being charged for several different years, and the rate of inflation for each of those years. In which years would it have been better to be a person borrowing money from a bank to buy a home? In which years would it have been better to be a bank lending money?
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Mortgage Interest Rate
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Inflation Rate
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1986
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11.5%
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4.0%
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1992
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9.8%
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5.2%
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1998
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7%
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2.2%
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2001
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6.5%
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2.6%
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6.If inflation rises unexpectedly by 7%, indicate for each of the following whether the economic actor is helped, hurt or unaffected:
A) A union member with a COLA wage contract
B) Someone with a large amount of cash in a safe deposit box
C) A bank lending money at a fixed rate of interest
D) A person who isn't due to receive a pay raise for another 11 months.
E) A department store that often has large amounts of cash on hand
F) A person buying a home with an Adjustable Rate Mortgage
G) A retired person living on a fixed pension
H) A state government borrowing money at a fixed interest rate to fix roads
7. Give an example of indexing in the private sector. Say who is protected from the effects of inflation by this indexing. Give another example of indexing in the public sector. Say who is protected from the effects of inflation by this indexing.