Question

3. Below are some income and Consumer Price Index data for Bill living in the U.S.

Year	Bill’s Nominal Income	CPI
2010	$60,000	90
2011	$70,000	120
2012	$80,000	180

a) Using the base year as the comparison year, calculate the Real Value of Bill’s Income for 2010 measured in base year dollars. Please show the work done to get your answer. Please calculate your answer to the nearest dollar.

b) Using the base year as the comparison year, calculate the Real Value of Bill’s Income for 2011 measured in base year dollars. Please show the work done to get your answer. Please calculate your answer to the nearest dollar.

c) Using the base year as the comparison year, calculate the Real Value of Bill’s Income for 2012 measured in base year dollars. Please show the work done to get your answer. Please calculate your answer to the nearest dollar.

d) In what year was Bill’s Real Income the highest?

e) Using the information above calculate the inflation rate from 2011 to 2012. Please show the work done to get your answer. Please calculate your answer to the second decimal place (hundredths place)

f) In one factual sentence please state what information your answer in (e) above tells us. (I did not want any opinion of whether you think your answer is high or low.)

In other words, the inflation rate you calculated in (f) above tells us what information?

Make sure to use your answer in (e) in your sentence here.

g) If Sue lent Bill $20,000 at the start of 2011 for 1 year and charged Bill a nominal interest rate of 7.00%, then please calculate the real interest rate that Sue earned for this1-year loan. Please show how you got your answer. Please calculate your answer to the second decimal place (hundredths place)

h) If Sue wanted to earn a real interest rate (return) of 7.00% for the loan mentioned above, then what nominal interest rate should she have charged Bill? Please show how you got your answer. Please calculate your answer to the second decimal place (hundredths place)

Answer 1

Parts a, b, c: Real Income (in terms of base year prices) is calculated as follows: (Nominal income (in the given year)/CPI)*100.

Year	Nominal Income	CPI	Real income
2010	60000	90	66667
2011	70000	120	58334
2012	80000	180	44445

d. Bill's real income was the highest in 2010, as seen in the table.

e.