The inflation rate in 2018 is 45.30% Now assume an investor is negotiating with the bank to pay either a 1.5% interest rate or a 2.0% interest rate on loans advanced. Will she/he be better off with the first or second option? Explain carefully.
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Consider a simple economy that produces only three products: hot dogs, torches and golf balls. Use the information in the following table to calculate the inflation rate for 2018, as measured by the
|
Product |
Quantity |
Base Year Price (2009) |
Price (2017) |
Price (2018) |
|
Hot dogs |
10 |
$1.00 |
$1.50 |
$1.75 |
|
Torches |
15 |
$5.00 |
$7.00 |
$6.75 |
|
Golf balls |
8 |
$2.00 |
$3.00 |
$3.50 |
(2009) = 10 x $1.00 + 15 x $5.00 + 8 x $2.00 = $101
(2018) = 10 x $1.75 + 15 x $6.75 + 8 x $3.50 = $146.75
CPI (2009) = $101/$101 x 100 = 100
CPI (2018) = $146.75/$101 x 100 = 145.30
Inflation rate= (145.30 - 100) / 100 = 45.30%
The inflation rate in 2018 is 45.30%
Now assume an investor is negotiating with the bank to pay either a 1.5% interest rate or a 2.0% interest rate on loans advanced. Will she/he be better off with the first or second option? Explain carefully.
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