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# interest rate and present value problems

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1. Click on the following web link and determine the change in the CPI between 1971 to 1981 and the period 1991 to 2001.

http://www.minneapolisfed.org/index.cfm

By what percentage did the CPI increase over each of these two 10-year periods? If you were earning \$5.50 per hour in 1971 and your wages were \$11.00 in 1981, by what percentage did your wages actually increase or decrease in their purchase power?

2. Calculate the GDP for the year if actual government expenditures in that year were \$100B; consumption was \$400B; investment was \$75B; exports were \$125B; and imports were \$150B. If real GDP in the previous year was \$523B, and the CPI for that year was 132.5, and the CPI for the current year was 136.3, determine the real GDP for the current year, and the actual real growth (or contraction) that occurred between the two years.

3. Why is the consumer price index (CPI) biased and how does this bias affect estimates of the increase in real wages in the United States since 1970?

4. In a market economy, what function do changing interest rates serve? Do investors pay attention to nominal interest rates or real interest rates? Explain your reasoning.

5. Calculate the solutions to the following interest rate and present value problems.

a. You borrow \$25,000 at an annual interest rate of 5 percent, what will be your first monthâ??s interest payment?
b. In year 1, the nominal interest rate is 4.5 percent and the inflation rate is 3.1 percent. In year 2, nominal interest rate is 6.4 percent and the inflation rate is 5.2 percent. In which year is the real interest rate the highest? Why?
c. Are you better off investing \$4,000 at an average annual interest rate of 4 percent for 5 years or receiving \$4,500 five years from now? Explain your answer.

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#### Solution Summary

The consumer price index (CPI) is examined.

\$2.19