I need any help that is available, i.e. web sites, samples, answers
with explanation for the following question.
Given the following data, calculate the real interest rate for years
2, 3, and 4.  (Assume that each CPI number tells us the price level at
the end of each  year.

Year 1, CPI = 100, Nominal Interest Rate = ____, Real Interest Rate =
______
Year 2, CPI = 110, Nominal Interest Rate = 15%, Real Interest Rate =
_____
Year 3, CPI = 120, Nominal Interest Rate = 13%, Real Interest Rate =
_____
Year 4, CPI = 115, Nominal Interest Rate = 8%, Real Interest Rate =
______

If you lent $200 to a friend at the beginning of year 2 at the
prevailing nominal interest rate of 15 percent andyour friend returned
the money--with interest--at the end of year 2, did you benefit from
the deal?

Hi boobee!!!

First of all some definitions for calculations.

IR(n+1) = Inflation rate for year (n+1) = ((CPI(n+1)/CPI(n))-1 ) *100

NIR = Nominal Interest Rate

RIR = Real Interest Rate = NIR - IR

 
Year 1, CPI = 100, NIR = ____, RIR =______

Year 2, CPI = 110, NIR2 = 15%, RIR2 = 15% - ((110/100)-1)*100 = 5%

Year 3, CPI = 120, NIR3 = 13%, RIR3 = 13% - ((120/110)-1)*100 = 3.91%

Year 4, CPI = 115, NIR4 = 8%, RIR4 = 8% - ((115/120)-1)*100 = 12.17%


-If you lent $200 to a friend at the beginning of year 2 at the
prevailing nominal interest rate of 15 percent and your friend
returned
the money--with interest--at the end of year 2, did you benefit from
the deal?

I think that the answer is yes.
To compare dollar amounts at different dates, we need to know the CPI
at those dates.
When you lent the $200 (at start of year 2) the CPI was 100, and when
your friend returned the money ($200*1.15 = $230) at the end of year 2
the CPI was 110.
The equivalent of this $200 at the end of the year 2 is:

$200 * CPI2/CPI1 = $200 * 110/100 = $200 * 1.10 = $220 ;

This means that you need, at the end of year 2, $220 to buy the same
amount of goods that you could buy with the $200 at the start of the
year 2.

In real terms, you give up $200/1.00 = $200 in goods and services
today
and receive $230/1.10 = $209.09 (approx) in goods and services
tomorrow.
You are receiving more than you lent, so you win with the deal.
The difference $10 correspond to the RIR such is 5%.

For references you can visit the following web pages:

"Today´s Lecture" from the Department of Economics of the Boston
university website:
http://econ.bu.edu/gilchrist/teaching/ec102/cpilecture.PDF

To view this page you need the Acrobat Reader, you get it here:
http://download.com.com/3000-2378-10000062.html

As you can see at the year 4 there was a deflation, you can read about
this in the following articles:
-"Deflation Demons", article written by John S. Irons for ArgMax.com:
(It has a nice example)
http://www.argmax.com/mt_blog/archive/000228.php


-"Turning Japanese?" by Bruce Bartlett for National Review Online
Financial:
http://www.nationalreview.com/nrof_bartlett/bartlett121001.shtml


You can also download the following MS Powerpoint files:
"The Price Level and Inflation"
http://www03.homepage.villanova.edu/eugene.kroch/ch23.ppt


"The CPI and the Cost of Living":
http://www.nvcc.edu/home/bkhana/Economics/Economics%20Class%20notes/Parkin/Chapter%207%20The%20CPI%20REVISED.ppt

Search Strategy:
CPI nominal real "interest rate"

Search Engine:
Google


I hope this helps, if you need a clarification feel free to post a
request for it.

Best Regards.
livioflores-ga

Thanks