The Global Economy – Macro; FINA 4621;
1.- Calculate average annual inflation from 2005 to 2008 if these are the baskets of goods consumed and their prices:
(Note that there are two ways to calculate inflation given this data.)
| |Tomatoes |Bread |Mayo |
|Year 1 Prices |$1 |$2 |$5 |
|Year 1 Quantities |10,000 |20,000 |1,000 |
|Year 2 Prices |$1.50 |$2.50 |$3.50 |
|Year 2 Quantities |8,000 |22,000 |1,300 |
1) Using Y1’s quantity:
Y1 = 1*10000+2*20000+5*1000 = 55000
Y2 = 1.5*10000+2.5*20000+3.5*1000 = 68500
g=(68500/55000)^(1/3)-1 = 7.59%
2) Using Y2’s quantity:
Y1: 1*8000+2*22000+5*1300 = 58500
Y2: 1.5*8000+2.5*22000+3.5*1300 = 71550
g= (71550/58500)^(1/3)-1 = 6.94%
2.- a) Show which investors would rather buy treasury bonds than that buy claims to corporate bonds or equities in the following table. If investors can get buy T-Bills (which pay the fed rate) , and still get their desired rate, they put all their money in treasuries. If they want a higher rate than what the fed rate offers, they buy corporate bonds or equities.
| |Investors Desired Rate and amount of assets to |
| |invest |
| |3 tn |2 tn |2 tn |
|Fed | |1% |2% |3% |
|Rate | | | | |
| |1% |T-Bills |C Bonds |C Bonds |
| |2% |T-Bills |T-Bills |C Bonds |
| |3% |T-Bills |T-Bills |T-Bills |
| |4% |T-Bills |T-Bills |T-Bills |
b) Suppose the fed wants to set the Treasury...