Week 6 Discussion Questions (09/27 - 10/03) Question 1 Imagine that you are given $1,000 to spend and told that you must spend it all buying items from a Sears catalog. But you do have a choice of catalog. You may select from the 1930 catalog or from Sears.com today. You will pay the prices quoted in the catalog that you choose. a) Which catalog will you choose and why? b) Refer to any biases in the CPI that might be relevant to your choice. Question 2 Go to the website of the Bureau of Labor Statistics (http://www.bls.gov) and find data on the CPI. By how much has the index including all items risen over the past year? For which categories of spending have prices risen the most? The least? Have any categories experienced price declines? Can you explain any of these facts? Question 3 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. Is the real interest rate on this loan higher or lower than expected? Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose? Inflation during the 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 it affect the banks that lent the money? Question 4 a) If the price of imported French wine rises, there is little effect on the CPI, because alcoholic beverages account for only 1 percent of the CPI's basket. But the GDP price index is not affected at all, because imported French wine is not produced domestically so it is not included in GDP. b) Mr. Oluwalanbe deposits $1,000 into a bank account that pays an annual interest rate of 10%. A year later, she withdraws $1,100. What will happen to the purchasing power of his money if within the year price rises by 10%, 6%, 0% and a 2% deflation