MGMT673 problem set 2

1. Locate the Real Gross Domestic Product (RGDP) graph from the Federal Reserve Bank of St. Louis FRED databases (search within FRED).

a. What is the base year for computing the RGDP?

b. What was US RGDP at the peak before the Great Recession of 2008? (Hint: Move your cursor along the graph line).

c. When did the economy peak before the recession? When was the trough?

d. When did GDP surpass the peak before the Great Recession?

e. What is the current RGDP (last data point on the graph)?

2. Although some economists expected inflation to soar as a result of the Federal Reserve Bank’s “easy money” policies in the wake of the Great Recession, inflation was actually very low. Suppose an unexpected increase in inflation does occur. Place an X in the table indicating whether each entity is helped or hurt.

Entity	Helped	Hurt
Homeowners with fixed rate mortgages
US Federal Government
Unionized labor
Businesses
Lenders

3. Define deflation. Briefly explain why economists believe deflation is harmful to economic growth.

4. Use the Bureau of Labor Statistics “Consumer Price Index History Table” (http://www.bls.gov/cpi/tables.htm) to answer the following questions. Note: There are many tables that the BLS occasionally rearranges. You need the annual percent changes from 1913. This was table 24, but might change.

a. Ford Motor Company produced the first Mustang in 1964 which cost $2,368. What is the equivalent price in current dollars? Show the computation.

b. What was the longest sustained period of price deflation since 1913 (7 years including 1 year of zero inflation)? What marcoeconomic event occurred in this period? What was the greatest rate of deflation during that time period?

c. During what 3 year period did the US experience the highest level of inflation? What was the highest yearly inflation rate during that period?

5. Obtain historical mortgage rates from the Average 30 Year Fixed Mortgage Rates chart at Mortgage News Daily (http://www.mortgagenewsdaily.com/data/30-year-mortgage-rates.aspx).

a. What was the highest mortgage rate since 1971? In what year?

b. Compare the inflation rate from the BLS tables to the mortgage rates. What is the apparent relationship between inflation and nominal interest rates?

c. From Marthinsen, write the formula for the nominal interest rate?