Download problem set 3 - Shepherd Webpages

PROBLEM SET 3
PROBLEMS FOR CHAPTER 4
1. Suppose the Bureau of Labor Statistics calculates that the total expenditure on a given
market basket of consumer goods and services for various years is as follows:
Year
1
2
3
4
5
Value of Market
Basket
$1,020
1,053
1,069
1,080
1,100
CPI
Base = Year 1
CPI
Base = Year 4
a. Calculate the consumer price index for each year with:
i. Year 1 as the base year (fill in the third column of the table above).
ii. Year 4 as the base year (fill in the fourth column of the table above).
b. Calculate the rate of inflation between years 4 and 5 using both indices that you
constructed in part a. Do you get approximately the same rate of inflation for each
index?
2. Calculate a price index for the hypothetical market basket of goods in the table below,
using 1989 as the base year.
Year
1987
1988
1989
1990
1991
1992
Value (or Price) of Market Basket
$175
180
200
240
260
270
Price Index
3. Calculate the rate of inflation from the consumer price index (CPI) for each of the
years below:
Year
1977
1978
1979
1980
1981
1982
CPI
(1982-84 = 100)
60.6
65.2
72.6
82.4
90.9
96.5
Rate of
Inflation
2
4. Use the data in the table below to answer the following questions:
Period
Quarter 4, 1989
Quarter 1, 1990
Quarter 2, 1990
Quarter 3, 1990
Quarter 4, 1990
Quarter 1, 1991
Nominal GDP
(billions of dollars)
$ 5,289.3
5,375.4
5,443.3
5,514.6
5,527.3
5,557.7
GDP Price Index
(GDP Deflator)
(Base Year = 1982)
128.0
129.5
131.0
132.2
133.1
134.8
Real GDP
a. Calculate real GDP for each quarter (fill in the fourth column of the table above).
b. What phases of the business cycle was the economy in over the period?
5. a. Calculate real GDP for each year in the table below:
Nominal GDP
GDP Price Index
Year
(billions of dollars)
(GDP Deflator)
Real GDP
1
$729
90.0
2
800
100.0
3
840
105.0
4
990
120.0
5
1066
130.0
b. Which year’s prices are used to evaluate each year’s output in the real GDP series
that you calculated above?
6. a. Suppose that a simple economy only produces one type of good, gadgets. The table
below includes the quantity (Q) of gadgets produced and the price (P) of a gadget for five
consecutive years. Using this information, complete the table.
GDP GDP
Quantity of
Price of a
Price Index
gadgets produced
gadget
Nominal
(GDP
Year
(Q)
(P)
GDP
Deflator)
Real GDP
1
1,800
$135
2
2,000
150
100.0
3
2,000
180
4
2,400
180
5
2,300
195
b. Which year’s price is used to evaluate each year’s output in the real GDP series
that you calculated above?
Welch and Welch:
`
(a) Welch and Welch, pp. 135-136: #2, 5, 9
(b) p. 130: “Test Your Understanding”
3
ANSWERS
1. a.
Year
1
2
3
4
5
Base = Year 1
100.00
103.24
104.80
105.88
107.84
Base = Year 4
94.44
97.50
98.98
100.00
101.85
b. Approximately the same for both indices: 1.85%.
2.
Year
1987
1988
1989
1990
1991
1992
Index
87.5
90.0
100.0
120.0
130.0
135.0
3.
Year
1978
1979
1980
1981
1982
Rate of
Inflation
7.59%
11.35%
13.50%
10.32%
6.16%
4. a.
Period
Quarter 4, 1989
Quarter 1, 1990
Quarter 2, 1990
Quarter 3, 1990
Quarter 4, 1990
Quarter 1, 1991
Real GDP
$4132.3
$4150.9
$4155.2
$4171.4
$4152.7
$4122.9
b. Use real GDP: Recovery (expansionary) phase through quarter 3, 1990; peak in
quarter 3, 1990; recession (contractionary) phase after quarter 3, 1990.
4
5. a.
Year
Real GDP
1
$810
2
$800
3
$800
4
$825
5
$820
b. Prices of year 2 (you know because year 2 is the base year of the GDP price index.
6. a.
Year
1
2
3
4
5
b. Price of year 2.
Nominal GDP
243,000
300,000
360,000
432,000
448,500
Welch and Welch, p. 135: #2
a. Not unemployed (not in labor force)
b. Unemployed – structural
c. Unemployed – frictional
d. Not unemployed – (employed – see p. 139)
e. Unemployed – cyclical
f. Not unemployed (employed)
Welch and Welch, p. 135: #5
Year
1
2
3
4
5
6
7
Index
85.0
90.0
100.0
100.0
112.0
125.0
140.0
GDP Price Index
(GDP Deflator)
90.0
100.0
120.0
120.0
130.0
Real GDP
270,000
300,000
300,000
360,000
345,000
5
Welch and Welch, p. 136: #9
Year
1
2
3
4
5
6
Nominal GDP
$400
$528
$550
$572
$702
$784
GDP Price Index
(GDP Deflator)
100
110
125
130
130
140
Real GDP
$400
$480
$440
$440
$540
$560