Finance 462

Problem Set #2

1) Go to the Federal Reserve of St. Louis Economic Data (FRED).  The web address is

Look up data for the Consumer Price index and GDP deflator from 1970 – 1980.

a)      For each series, calculate the inflation rate and annualize it (remember, the CPI is monthly while the GDP deflator is quarterly.

b)      Average the inflation rates over the 10 year period.

c)      What do you notice about these two inflation rates?  Can you explain the difference? (Hint: Oil Prices increased dramatically in the 1970s).

2) Consider the following data: Assume that capital's contribution to output is equal to 1/3 while labors contribution is equal to 2/3.

 Year Real GDP (Y) Total Capital Stock (K) Total Labor Hours (L) 2000 \$8.162T \$13.034T 254,044 2001 \$8.183T \$13.571T 253,752

a) Calculate the growth of Real GDP, Total Capital, and Total Labor Hours

b) Calculate the growth in Labor Productivity (= output growth - labor growth)

c) Calculate the growth in Multifactor Productivity. ( = output growth - 1/3*capital growth - 2/3*labor growth)

3) How is it possible for both total employment in the AND the unemployment rate to rise at the same time?

4) Consider the following two assets:

·         A 90 day TBill with a face value of \$100 and a current market price of  \$98.50

·         A 10 year STRIP (a bond that makes one payment in 10 years) with a face value of \$100 and a current market price of \$63.75.

Which of these assets has the larger annual return?

5) Suppose that the current interest rate is 5.75% (annualized).  The CPI increased by .3% over the previous month and the public is expecting that trend to continue.  What is the (expected) real rate of return?