Exam 19: Returns, Index Numbers and Inflation

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.What was the price index for this book in 2010?

Boris Arshavin invested $1million in buying a house in 2002,and sold it at $2.5 million in 2005.The consumer price index for 2002 and 2005 were 180 and 210,respectively.Compute the real return Boris earned from selling the house.

When Dana Roberts started her job as a librarian two years ago,her annual salary was $40,000.Although she is very good at her job and is now earning 10% more than what she started with,she notices that new hires in the same field are being offered $43,000 as an annual salary this year.Which of the following statements is most likely to be true?

Exhibit 19-7.The following table shows the value of CPI for three years in a country. Refer to Exhibit 19-7.What is the annual inflation rate for 2005?

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.If the price index in 2011 was 95,calculate the percent change in the price of the book between 2010 and 2011.

An unweighted price index for different types of properties will unfairly treat all property prices equally.

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.Identify the correct statement from the following.

Which of the following statements is true about the Laspeyres and Paasche indices?

Exhibit 19-6.Three firms X,Y,and Z operate in the same industry,although their products have different features and are priced differently.The following table provides the prices and the quantities sold (in units)during the period 2000-2002. Refer to Exhibit 19-6.Compute the Laspeyres price index for 2001,using 2000 as the base year.

The Laspeyres and Paasche indices tend to differ when the length of time between the periods increases since the relative quantities of items adjust to the changes in consumer demand over time.

Consider the following table providing the prices for three different brands of chocolate-chip cookies during 2008-2009 in a particular country.(Prices are in the country's local currency. ) a.Compute the unweighted aggregate price index for 2009,using 2008 as the base year. B)Interpret the result.

Jack Simmons is expecting to earn a 0.34% return on his investment in a government bond that matures next year.If the inflation rate during the time of maturity is expected to be 7% what will be the real rate of return from his investment?

Rhea Anderson purchased a corporate bond at $500 a year ago,on which she received a coupon payment of $35.The price of the bond has now gone up to $525. A)Compute Rhea's capital gains yield. B)Compute Rhea's income yield. C)Compute Rhea's investment return.

As long as an investor does not sell an asset,there is no capital gain or loss involved.

Suppose the simple price index for a good was 112 in 2008,using 2007 as the base year.In 2009 however,the simple price index for the same good was 98. A)What does this information imply? B)If the price of the good was $20 in 2008,what was the price in 2009?

Jake Morris invested $150 in buying a share of ABC Corp. ,a year back,on which he received a dividend of $20.Now when the share is trading at a different price,Jake computes his investment return to be 10%. A)Compute Jake's income yield from this investment. B)What is the current price of the share? C)Interpret the result.

Exhibit 19-4.Consider the following data on the prices (in dollars)of three items,A,B,and C,from 2000 through 2002. Refer to Exhibit 19-4.If the price of item C in 2002 was 210 instead of 207,calculate the unweighted price index for 2002 for the three items,using 2000 as the base year.

Almas Mohammed paid $50 for a stock of Jones Inc. ,and expects to earn an annual dividend of $5.If the price of the stock increases to $55 in a year's time,compute the real rates of return from this investment if: A)the expected inflation rate a year from now is 1.25%. B)the expected inflation rate a year from now is 3%.

Exhibit 19-2.Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period. Refer to Exhibit 19-2.What nominal rate of return will Hugh earn if he invested in option 1?

Exhibit 19-4.Consider the following data on the prices (in dollars)of three items,A,B,and C,from 2000 through 2002. Refer to Exhibit 19-4.Compute the unweighted price index for the three items for 2002,using 2000 as the base year.