1. 2. 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
A decrease in the price of a German-made television that is popular among U.S. consumers
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

2.3. Comparing salaries from different times

Consider golfers who led the Professional Golfers' Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal figures (unadjusted for inflation).

To convert the original earnings of Casper, Nicklaus, and Kite, use the formula for converting dollar figures from an earlier era into year 2018 U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar.

Year	Golfer	Nominal Winnings	U.S. CPI	Winnings in 2018 Dollars
(Dollars)	(1983 = 100)
1968	Billy Casper	205,169	34.8
1973	Jack Nicklaus	308,362	44.4
1981	Tom Kite	375,699	90.9
2018	Tiger Woods	5,443,841	251.1	5,443,841

True or False: According to the previous table, the golfer with the highest PGA winnings in nominal dollars is the same as the golfer with the highest PGA winnings after adjusting for inflation.

True

False

3. 4. Inflation and interest rates

The following table shows the average nominal interest rates on six-month Treasury bills between 1971 and 1975, 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 1971 to 1975. (All rates are rounded to the nearest tenth of a percent.)

Year	Nominal Interest Rate	Inflation Rate
(Percent)	(Percent)
1971	4.5	4.2
1972	4.5	3.3
1973	7.2	6.3
1974	8.0	11.0
1975	6.1	9.1

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 nominalinterest rates for the years 1971 to 1975. Next, use the green points (triangle symbol) to plot the realinterest rates for those years.

Nominal Interest RateReal Interest Rate19701971197219731974197519768.07.06.05.04.03.02.01.00-1.0-2.0-3.0INTEREST 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?

1971

1972

1973

1974

1975

4.5. Interest, inflation, and purchasing power

Suppose Teresa is a cinephile and buys only movie tickets. Teresa deposits $1,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixedthat is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00.

Initially, the purchasing power of Teresa's $1,000 deposit is

movie tickets.

For each of the annual inflation rates given in the following table, first determine the new price of a movie ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Teresa's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates.

Hint: Round your answers in the first row downto the nearest movie ticket. For example, if you find that the deposit will cover 20.7 movie tickets, you would round the purchasing power down to 20 movie tickets under the assumption that Teresa will not buy seven-tenths of a movie ticket.

	Annual Inflation Rate
0%	5%	10%
Number of Tickets Teresa Can Purchase after One Year
Real Interest Rate			When the rate of inflation is greater than the interest rate on Teresa's deposit, the purchasing power of her deposit over the course of the year.