Document Sample
1. Measuring the Rate of Inflation

Here is some price data for selected consumer products from the 1970s:

         The cost of a first-class stamp was $0.06.
         The cost of a gallon of regular gas was $0.36.
         The cost of a dozen eggs was $0.62.
         The cost of a gallon of milk was $1.15.

(Source: 1970s Flashback Economy, on the Web at

Construct a market basket from these goods using a Grapher.

Now, calculate the price index based on the basket. Decide a quantity and estimate current prices for each product.

2. Inflation

Explain how an increase in nominal income and a decrease in real income might occur at the same time. Think carefully
and answer the following questions:

         Who does inflation hurt?
         Who does unemployment hurt? Explain the two answers.
         If you had to choose between full employment with 7 percent inflation annually or 9 percent unemployment with
          no or a very low and stable inflation rate, which would you choose? Why?

3. Calculating GDP

Part I
Consider the following hypothetical data for the US economy in 2010 (all amounts are in trillions of dollars).

Consumption                                            11.0
Indirect business taxes                                .8
Depreciation                                           1.3
Government spending                                    1.8
Imports                                                1.7
Gross private domestic investment                      2.0
Exports                                                1.5

     a)   Based on the data, what are the GDP, NDP, and NI?
     b)   Suppose that in 2011, exports fall to $1.3 trillion, imports rise to $1.85 trillion, and gross private domestic
          investment falls to $1.25 trillion. What will the GDP be in 2011, assuming that other values do not change
          between 2010 and 2011?
     c)   Note that according to the fictitious data in (b), depreciation (capital consumption allowance) exceeds gross
          private domestic investment in 2011. How would this affect future US productivity, particularly if it were to
          continue beyond 2011?

Part II
Now, consider the following table for the economy of a nation whose residents produce four final goods.

                   2007                                    2008
Goods             Price        Quantity        Price          Quantity
                  ($)                          ($)
Computers         1,000        10              800            15
Apples            6            3,000           11             1,000
Televisions       100          500             150            300
Chocolates        1            10,000          2              10,000

Assuming a 2008 base year:
    d) What is the nominal GDP for 2007 and 2008?
    e) What is the real GDP for 2007 and 2008?