HAMMAD SHAHZAD

28294
MACROECONOMICS
ASSIGNMENT NO.2
SIR ATEEB AKHTAR SYED
26 FEBRUARY 2024

QUESTION # 1
PART A

Chart Title
25.0

20.0

15.0

10.0

5.0

0.0
1968-06-11 1982-02-18 1995-10-28 2009-07-06 2023-03-15 2036-11-21
-5.0

INFLATION FEDERAL FUNDS RATE

Chart Title
25.0

20.0

15.0

10.0

5.0

0.0
01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01
1- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07- 01- 07-
-5.0
0
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
80 81 83 84 86 87 89 90 92 93 95 96 98 99 01 02 04 05 07 08 10 11 13 14 16 17 19 20 22 23
19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

INFLATION FEDERAL FUNDS RATE

PART B

Chart Title
25.0

20.0

15.0

10.0

5.0

0.0
01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01 01
08- 12- 04- 08- 12- 04- 08- 12- 04- 08- 12- 04- 08- 12- 04- 08- 12- 04- 08- 12- 04- 08- 12- 04- 08-
- - - - - - - - - - - - - - - - - - - - - - - - -
79 79 80 80 80 81 81 81 82 82 82 83 83 83 84 84 84 85 85 85 86 86 86 87 87
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19

INFLATION FEDERAL FUNDS RATE

PART C

1960s
8
6
4
2
0
3/25/1960 8/7/1961 12/20/1962 5/3/1964 9/15/1965 1/28/1967 6/11/1968 10/24/1969

INFLATION UNEMPLOYEMENT

1970s
12
10
8
6
4
2
0
6/11/1968 10/24/1969 3/8/1971 7/20/1972 12/2/1973 4/16/1975 8/28/1976 1/10/1978 5/25/1979 10/6/1980

INFLATION UNEMPLOYEMENT
 1980s
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1979-05-25 1980-10-06 1982-02-18 1983-07-03 1984-11-14 1986-03-29 1987-08-11 1988-12-23 1990-05-07

INFLATION UNEMPLOYEMENT

1990s
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1988-12-23 1990-05-07 1991-09-19 1993-01-31 1994-06-15 1995-10-28 1997-03-11 1998-07-24 1999-12-06

INFLATION UNEMPLOYEMENT

2000s
10.0
8.0
6.0
4.0
2.0
0.0
1998-07-24 1999-12-06 2001-04-19 2002-09-01 2004-01-14 2005-05-28 2006-10-10 2008-02-22 2009-07-06 2010-11-18
-2.0

INFLATION UNEMPLOYEMENT
QUESTION # 2
Part A
I.
CPI in base year :
20 pizza x $10 = 200
Rent = $600
Gasoline and car maintainence = $100
Phone service = $50
Total = 200 + 600 + 100 + 50 = $950

CPI in subsequent year :

20 pizza x $11 = 220
Rent = $640
Gasoline and maintainence = $120
Phone service = $40
Total = $1020

CPI in base year – 100

CPI in subsequent year – 107.4
INFLATION RATE = 7.4%

II.
They are worse off as their income rose only 5% whereas average increase in price levels is 7.4%
which means their income can buy 2.4% less goods and services, it used to buy before.
PART B
YEARS CPI INFLATION
1990 130.7
1991 136.2 4.2%
1992 140.3 3%
1993 144.5 3%
1994 148.2 2.6%
1995 152.4 2.8%
1996 156.9 3%
1997 160.5 2.3%
1998 163.0 1.6%
1999 166.6 2.2%
2000 172.2 3.4%
PART C
I.
$13.65 / 160.5 * 100 = $8.5 (REAL WAGE IN 1997)
II.
$8.5 / 0.92 = $9.24 (REAL WAGE IN 1990)
III.
$9.24 * 130.7/100 = $12.1 (Nominal wage in 1990)

PART D
Inflation rate (2014 to 2016) = (185-175/175)*100 = 5.7%
Income bracket
$20000 x 105.7% = $20140
$30000 x 105.7% = $ 31710
$50000 x 105.7% = $52850
$80000 x 105.7% = $84560
Adjusted Family Income Taxes Due (percent of Income)
<=$ 21,140 10
$21,141 - $31,710 12
$31,711- $52,850 15
$52,851- $84,560 20
>$84,560 25
PART E
I
Cost of basket in 2015 = (30x$3) + (10x$6) + (10x$8) = $230
Cost of basket in 2016 = (30x$5) + (10x$7) + (10x$8) = $300

Change in cost of eating index = (300-230)/230 *100 = 30.4%

II
Cost of 2 chicken in 2016 = 5 x 2 = 10$
Cost of 1 ham in 2016 = 7 x 1 = $7

Cost of 30 chickens before = 30 x 3 = $90

Cost of 30 chickens after = 30 x 5 = $150

Cost of 15 hams before = 15 x 6 = $90

Cost of 15 hams after = 15 x 7 = $105

Cost of basket before subsitution = 150 + 70 +80 = $300

Cost of basket after subsitution = 105 + 70 + 80 = $255

Inflation after subsitution = 255/230 *100 = 10.9 %

10.9% lower than 30.4% hence the overestimate of inflation in the cost of eating reflects the
substitution bias.
PART F
CPI PRICE LEVELS REAL INTEREST RATE ( NOMINAL –
INFLATION )
2012 100 (105-100)/100 *100= 5% 6-5 = 1
2013 105 (110-105)/105 *100 = 6-4.76 = 1.24
4.76%
2014 110 (118-110)/110 *100 = 6-7.27 = -1.27
7.27%
2015 118

In first year, albert invested $1000 which earned him 6% interest at end of 2012, but the price
levels rised by 5% , so in real terms he earned 1%. In second year he invested the principal +
interest earned in 2012 ($1060), which earned him 6% interest at end of 2013, but price levels
rasied by 4.76%, so in real terms he earned 1.24%. In third year he invested the prinicpal +
interest earned in 2012 and 2013 ($1123.6) and earned him 6% interest at end of 2014, but price
levels rised by 7.27%. So in real terms he earned 6-7.27 = -1.27%. ($1191)

Interest earned in three years = $191 or 19.1%

Price levels increased = 18%
Income in real terms = 1.1%

PART G
I.
Inflation rate in first year = 110-100/100 * 100 = 10%
Inflation rate in second year = 121-110/110 *100 = 10%

Inflation in 2 years = 10%

Real interest rate = Nominal Interest rate – Inflation
2 = Nominal Interest rate – 10
Nominal interest rate = 12%
II.
Indexing means to fluctuate the values according the inflation.
So if frank wants to earn 2% real interest, Sarah and Frank can agree on an interest rate of
(inflation rate + 2%).