DSE 14-05

Study the following information about an economy.

(a) Calculate the inflation rate in 2013. (1 mark)

(b) Explain ONE difference between using CPI and Gross Domestic Product (GDP) deflator to measure the change in the price level. (2 marks)

(c) Suppose people did not expect any change in the price level from 2012 to 2013. Explain whether each of the following persons would gain or lose when the change in the price level in the above table occurred.

(i) In 2012, Kitman borrowed a housing mortgage loan from a bank at a fixed nominal interest rate. (2 marks)

(ii) In 2012, Marlene invested in a project with an expected nominal rate of return of 12% per year. In 2013, she discovered that the actual nominal rate of return was 15% per year. (5 marks)