Question 1:Suppose that people consume only three goods, as shown in this table:

Year	Tennis Balls	Tennis Racquets	Gatorade
	Price	Quantity	Price	Quantity	Price	Quantity
2014	$2	100	$40	10	$1	200
2015	$2	100	$60	10	$2	200

a)What is the percentage change in the price of each of the three goods?

b)What is the percentage change in the overall price level? Hint: Calculate the inflation rate using CPI. (Use 5 steps in reaching the inflation rate calculation).

Question 2:A single copy of Toronto Star costs $0.10 to purchase in 1970 and $0.50 in 1990. The average wage in manufacturing was $3.01 per hour in 1970 and $14.19 in 1990.

a) By what percentage did the price of a newspaper rise?

b) By what percentage did the wage rise?

c) Did workers' purchasing power in terms of newspapers rise or fall?

Question 3: Henry Ford paid his workers $5 a day in 1914. If the US CPI was 10 in 1914 and 195 in 2005, how much is the Ford daily paycheque worth in 2005 dollars?

Question 4: Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.

a) Is the real interest rate on this loan higher or lower than expected?

b) Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?

c) Inflation during 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed rate mortgages during the 1960s? How did this affect the banks that lent the money?