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9 June, 02:33

During a certain year, the nominal interest rate was 7 percent, the real interest rate was 4 percent, and the CPI was 198.3 at the end of the year. The CPI at the beginning of the year was a. 192.5 b. 220.1 c. 204.2 d. 178.6

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  1. 9 June, 02:55
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    a) 192.5

    Step-by-step explanation:

    Since we are given:

    Real interest rate = 4%

    Nominal interest rate = 7%

    CPI for year end = 198.30

    nominal interest rate 7%

    real interest rate 4%

    end of the year CPI is 198.30

    beginning of the year CPI = ?

    To find beginning of the year CPI, let's first find the difference between nominal rate and real interest rate, which is:

    Nominal rate - real interest rate, we have:

    7 - 4 = 3%

    Formula for end of year CPI =

    beginning of year CPI*[1 + (nominal rate - real interest rate) ]

    To find beginning of year CPI, let's make it the subject of the formula:

    Beginning of year CPI = end of year CPI / (1 + 3%)

    =198.30 / (1 + 0.03)

    = 198.30/1.03

    =192.52

    Therefore, beginning of year CPI is 192.5
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