FV= (1+.05) ^25 * 1400
FV = 3.386 *1400
FV= $4740.89
2. Sam bought a saving bond that will pay $500 in 10 years. If the current interest rate is 4%, what is the present value of the bond?
PV = 1/(1+.04)^10 * $500
PV = 1/1.4802 * 500
PV = 0.675564 * 500
PV = $337.82
3. A market basket of goods and services cost $5,300,755 in 1995 (base year). The same goods and services cost $6,793,850 in 2000. Calculate the CPI for 1995 and the CPI for 2000.
1995 CPI = $5,300,755/ $5,300, 755 * 100
1995 CPI = 1.0 * 100
1995 CPI = 100 (which is what you expect for the base year)
2000 CPI = 6,793,850/ 5,300,755 * 100
2000 CPI = 1.28 * 100
2000 CPI = 128
4. What would increasing aggregate demand do to the price level and to National Income?
This is a shift to the right. The new equilibrium income would
be higher and the new price level would be higher.
5. A house cost $65,000 in 1970 and $150,000 in 1990. If the CPI was 38.8 in 1970 and the CPI for 1990 was 130.7, what can you say about the real price of this house?
1970 real price = $65,000/38.8 * 100
1970 real price = 1675.257 * 100
1970 real price = $167,525
1990 real price = 150,000/130.7 * 100
1990 real price = 1147.666 *100
1990 real price = $114,766
In real terms the value of this house declined over time. While the nominal price increased, it did not keep up with inflation.
6. If your student loan has an interest rate of 3% and the inflation rate is 7%, what is the real interest rate on this loan?
real int rate = 3% - 7%
real interest rate = -4%
If inflation is higher than the nominal interest rate, the real cost of borrowing is negative. This means the borrower earns money, in real terms. (Good if you are a borrower, bad if you are a lender.)
7. The BLS surveyed 1000 people and found 650 had jobs, 40 were jobless and looking for work, and 310 were not working and were not looking for work. Calculate the unemployment rate.
unemployment rate = unemployed/ labor force
unemployment rate = unemployed/ (employed + unemployed)
unemployment rate = 40 / (650+40)
unemployment rate = .0579 (or 5.79%)
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