Assignment 1
1) Based on Surveys conducted by the BLS, the CPI basket assigns a weight of approximately 15%
to transportation spending. Suppose you walk to your workplace everyday and you do not use
any other means of transportation.
a) With everything else the same, if the price of transportation services increases by 10%, by
approximately how much does the CPI increase?
b) Is the CPI measuring true change in your cost of living?
2) Suppose that Apple Inc. manufactures a new generation of iPhone that can ascertain your
interlocuter is lying. Assuming that the price of this good will be higher than that of currently
marketed iPhone, comment on the CPI capability of correctly measure the corresponding change
in the cost of living.
3) Go to the St. Louis Federal Reserve (FRED) database, find the most recent values for Gross
Domestic Product (GDP) and Gross National Product (GNP).
a) Calculate Net Factor Income using the most recent values.
b) Explain whether foreign production by U.S. firms is larger than U.S. production by foreign first
or vice versa.
4) The US treasury issues some bonds as Treasury Inflation Index Securities, or TIIS, which are
bonds adjusted for inflation: hence the yields can be roughly interpreted as real interest rates. Go
to the St. Louis Federal Reserve FRED database and find the data on the following TIIS bonds to
compare these yields with their nominal counterparts for the most recent available data and
answer the questions below.
• 5-year US treasury (DGS5) and 5-year TIIS (DFII5)
• 7-year US treasury (DGS7) and 7-year TIIS (DFII7)
• 10-year US treasury (DGS10) and 10-year TIIS (DFII10)
• 20-year US treasury (DGS20) and 20-year TIIS (DFII20)
• 30-year US treasury (DGS30) and 30-year TIIS (DFII30)
a) Following the pandemic of 2020 5, 7, 10 and even 20-year TIIS yields became negative for a
period of time. How is this possible?
b) For each of the bond pairs above, calculate the difference between the bonds (DFS5- DFII5 ,
etc. ). What does this difference represent?
c) Based on your answer to part (b) above, are there significant variations in the differences in
the bond pairs? Interpret the magnitude of variation in differences among the pairs.
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