1. Your savings account pays 4 percent per year: Each $100 in the bank grows to $104...

Question:

1. Your savings account pays 4 percent per year: Each $100 in the bank grows to $104 over a one-year period. If prices increase by 3 percent per year, by keeping $100 in the bank for a year you actually gain $ _____.
2. You earn 5 percent interest on funds in your money market account. If consumer prices increase by 7 percent per year, your earnings on $1,000 in the money-market account is $ _____ per year.
3. Suppose that over a one-year period, the nominal wage increases by 2 percent and consumer prices increase by 5 percent. Fill in the blanks: The real wage ______ by ___________ percent.
4. Suppose you currently live and work in Cleveland, earning a salary of $60,000 per year and spending $10,000 for housing. You just heard that you will be transferred to a city in California where housing is 50 percent more expensive. In negotiating a new salary, your objective is to keep your real income constant. Your new target salary is $ ___________.
5. Between 1974 and 2005, the federal minimum wage increased from $2.00 to $5.15. Was the typical minimum-wage worker better off in 2005? ______ (Yes/No)
6. Suppose you graduate with $20,000 in student loans and repay the loans 10 years later. Which is better for you, inflation (rising prices) or deflation (falling prices) _________?
7. Changes in Welfare Payments. Between 1970 and 1988, the average monthly welfare payment to single mothers increased from $160 to $360. Over the same period, the cost of a standard basket of consumer goods (a standard bundle of food, housing, and other goods and services) increased from $39 to $118. Fill the blanks in the following table. Did the real value of welfare payments increase or decrease over this period?

8. Changes in Wages and Consumer Prices. The following table shows for 1980 and 2004 the cost of a standard basket of consumer goods (a standard bundle of food, housing, and other goods and services) and the nominal average wage (hourly earnings) for workers in several sectors of the economy.

a. Complete the table by computing the percentage changes of the cost of the basket of consumer goods and the nominal wages.
b. How do the percentage changes in nominal wages compare to the percentage change in the cost of consumer goods?
c. Which sectors experienced an increase in real wages, and which sectors experienced a decrease in real wages?
9. Repaying a Car Loan. Suppose you borrow money to buy a car and must repay $20,000 in interest and principal in five years. Your current monthly salary is $4,000.
a. Complete the following table.
b. Which environment has the lowest real cost of repaying the loan?

10. Inflation and Interest Rates. Len buys MP3 music at $1 per tune, and prefers music now to music later. He is willing to sacrifice 10 tunes today as long as he gets at least 11 tunes in a year. When Len loans $50 to Barb for a one-year period, he cuts back his music purchases by 50 tunes.
a. To make Len indifferent about making the loan, Barb must repay him_______ tunes or $ ____. The implied interest rate is ______ percent.
b. Suppose that over the one-year period of the loan, all prices (including the price of MP3 tunes) increase by 20 percent, and Len and Barb anticipate the price changes. To make Len indifferent about making the loan, Barb must repay him _________ tunes or $ ______. The implied interest rate is ______percent.