Average nominal interest rates

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1. Calculating inflation using a simple price index

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student’s annual purchases. Suppose the following table

shows information on the market basket for the CSPI and the prices of each of the goods in 2010, 2011, and 2012.

The cost of each item in the basket and the total cost of the basket are shown for 2010.

Perform these same calculations for 2011 and 2012, and enter the results in the following table.

Keep the Highet: 2 / 2

2. Comparing salaries from different times

Consider golfers who led the Professional Golfers’ Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal

figures (unadjusted for inflation).

To convert the original earnings of Nicklaus, Miller, and Norman, use the formula for converting dollar figures from an earlier era into today’s (year 2010)

U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar.

Keep the Highet: 2 / 2

3. Inflation and interest rates

The following table shows the average nominal interest rates on sixmonth

Treasury bills between 1971 and 1975, which determined the nominal

interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1971 to 1975. (All

rates are rounded to the nearest tenth of a percent.)

Keep the Highet: 3 / 3

4. Interest, inflation, and purchasing power

Suppose Susan is an avid reader and buys only comic books. Susan deposits $2,000 in a bank account that pays an annual nominal interest rate of 5%.

Assume this interest rate is fixed—that is, it won’t change over time. At the time of her deposit, a comic book is priced at $20.00.

Initially, the purchasing power of Susan’s $2,000 deposit is comic books.