110 Miller • Economics Today, Nineteenth Edition
©2018 Pearson Education, Inc.
7-21. This year’s value of the economy’s price index is 100, and people anticipate that next year’s
value will be 103. The current nominal interest rate is 5 percent. What is the real interest rate?
The anticipated future price index, 103, is 3 percent larger than the current price index of 100, so
the expected inflation rate is 3 percent. The real interest rate, therefore, equals the nominal interest
rate of 5 percent less the 3 percent anticipated inflation rate, which is 2 percent.
7-22. This year is the base year for computing the nation’s price index. The current nominal
interest rate is 6 percent, and the real interest rate is 3.5 percent. What is the anticipated
value of next year’s price index?
The anticipated inflation rate equals the nominal interest rate minus the real interest rate, or 6 percent
– 3.5 percent = 2.5 percent. Because this year is the base year for the price index, this year’s price
index has a value of 100. Thus, the anticipated value of next year’s price index is 102.5.
◼ Selected References
Alchian, Arman A., “Information Costs, Pricing, and Resource Unemployment,” Western Economic
Journal, Vol. 7, June 1969, pp. 109–128.
Alchian, Arman A. and Reuben A. Kessel, “Redistribution of Wealth through Inflation,” Science, Vol.
130, No. 3375, September 4, 1959, pp. 535–539.
Brimmer, Andrew F., “Inflation and Income Distribution in the United States,” Review of Economics and
Statistics, Vol. 53, No. 1, February 1971, pp. 37–48.
Bronfenbrenner, Martin and Franklyn D. Holzman, “Survey of Inflation,” The American Economic
Review, Vol. 53, 1963.
Brozen, Yale, Automation—The Impact of Technological Change, Washington, D.C.: American
Enterprise Institute, 1963.
Cagan, Philip et al., A New Look at Inflation: Economic Policy in the Early 1970s, Washington, D.C.:
American Enterprise Institute, 1973.
Campbell, Colin D., ed., Wage-Price Controls in World War II: United States and Germany, Washington,
D.C.: American Enterprise Institute, 1971.
Economic Indicators, January 2017, Washington, D.C.: Government Printing Office.
Feldstein, Martin, “The Economics of the New Unemployment,” The Public Interest, Fall 1973.
Kessel, Reuben A. and Arman A. Alchian, “Effects of Inflation,” Journal of Political Economy, Vol. 70,
December 1962, pp. 521–537.
Miller, Roger L. and Robert W. Pulsinelli, Macroeconomics, New York: Harper and Row, 1986.
Phelps, Edmund S. et al., Microeconomic Foundations of Employment and Inflation Theory, New York:
W.W. Norton, 1970.
Schuettinger, Robert and Eamonn Butler, Forty Centuries of Wage and Price Controls, Washington,
DC: The Heritage Foundation, 1979.
Solow, Robert M., “The Intelligent Citizen’s Guide to Inflation,” The Public Interest, Vol. 38,
Winter 1974, pp. 30–66.