The following graph shows the inflation rate in the US between 1965 and 2015

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The following graph shows the inflation rate in the US between 1965 and 2015.

(a) From 1965 to 1995, does CPI in the US always increase over time? Explain.

(b) Suppose 2009 is the base year, and the inflation rate between 2009 and 2010 is -2%. (i) What is the CPI in 2009? (ii) Calculate the CPI in 2010. (iii) Between 2009 and 2010, the nominal interest rate is 3%, calculate the real interest rate.

(c) Between 1970 and 1985, inflation rate fluctuated severely. Firms might be unwilling to buy raw materials to produce at that time. Explain (This is related to the cost of inflation.)

(d) Suppose that CPI in 1985 is 80 and the CPI in 2015 is 188. You earned $60,000 in 1985, and you earned $119,000 in 2015. Do you have a higher real income in 1985 or in 2015? Explain with calculations.

(e) Is it possible that CPI increases but GDP deflator decreases? Explain.