Keep the Highest no score out of 2/ 2

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Keep the Highest no score out of 2/ 2

2. Inflation and interest rates

The following table shows the average nominal interest rates on six-month Treasury bills between 1997 and 2001, 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 1997 to 2001. (All rates are rounded to the nearest tenth of a percent.)

Year

Nominal Interest Rate

Inflation Rate

(Percent)

(Percent)

1997 5.2 2.3 1998 4.8 1.5 1999 4.8 2.2 2000 5.9 3.4 2001 3.4 2.8

Source: FRED Economic Data, Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org.

On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1997 to 2001. Next, use the green points (triangle symbol) to plot the real interest rates for those years.

Nominal Interest RateReal Interest Rate19961997199819992000200120026.05.04.03.02.01.00INTEREST RATE (Percent)YEAR

According to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment?

1997

1998

1999

2000

2001

1. Alternative price indexes

Because there isn’t one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator.

The GDP deflator for this year is calculated by dividing the using by the using and multiplying by 100. However, the CPI reflects only the prices of all goods and services .

Indicate whether each scenario will affect the GDP deflator or the CPI for the United States. Check all that apply.

Scenario

Shows up in the…

GDP Deflator

CPI

An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing, made in the U.S., but not bought by U.S. consumers A decrease in the price of a Chinese-made car that is popular among U.S. consumers

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