Answer:
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
