Macroeconomics: Principles for a Changing World
Macroeconomics: Principles for a Changing World
4th Edition
ISBN: 9781464186929
Author: Eric Chiang
Publisher: Worth Publishers
Question
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Chapter 6, Problem 15QP

(a)

To determine

The consumer price index in Snowland for each year.

(a)

Expert Solution
Check Mark

Explanation of Solution

The consumer price index is calculated by using the following formula:

CPI=Total cost in the Current yearTotal cost in the Base year×100 (1)

Substitute the respective values in Equation (1) to calculate the CPI for year 1.

Total cost in the year 1(base year) is $26,

              CPI=2626×100=100

Thus, CPI for year 1 is 100.

The cost increased to $29 in year 2. Then, substitute the respective values in Equation (1) to calculate the CPI for year 2.

CPI=2926×100=111.54

Thus, CPI for year 2 is 111.54.

The total cost in year 3 is $30.20. Then, substitute the respective values in Equation (1) to calculate the CPI for year 3.

               CPI=30.2026×100=116.15

Thus, CPI for year 3 is 116.15.

The total cost in year 4 is $30.5. Then, substitute the respective values in Equation (1) to calculate the CPI for year 4.

                 CPI=30.526×100=117.30

Thus, CPI for year 4 is 117.30.

Economics Concept Introduction

Consumer Price index (CPI): Consumer price index is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from base year.

(b)

To determine

The rate of inflation in year 2, year 3, and year 4.

(b)

Expert Solution
Check Mark

Explanation of Solution

The rate of inflation is calculated using Equation (2):

Rate of inflation=CPICurrent yearCPIPrevious yearCPIPrevious year×100 (2)

In case 1, the consumer price index for this year is 111.54 and the consumer price index for the previous year is . Thus, the rate of inflation in the economy can be calculated using these values and substituting them in Equation (2) is as follows:

Rate of inflation=111.54100100×100=11.54

Thus, the rate of inflation in year 2 is 11.54 percent.

In case 2, the consumer price index for year 3 is 116.15, and the consumer price index for the previous year is 111.54. Thus, the rate of inflation in the economy can be calculated by using these values and substituting them in Equation (2) as follows:

Rate of inflation=116.15111.54111.54×100=4.61111.54×100=4.1

Thus, the rate of inflation in year 3 is 4.1 percent.

In case 3, the consumer price index for year 4 is 117.30, and the consumer price index for the previous year is 116.54. Thus, the rate of inflation in the economy can be calculated using these values and substituting them in Equation (2) as follows:

Rate of inflation=117.30116.15116.15×100=1.15116.15×100=1

Thus, the rate of inflation in year 4 is 1 percent.

Economics Concept Introduction

 Inflation rate: Inflation rate refers to the percentage change in the price level from the preceding period.

(c)

To determine

The real GDP in each of the four years.

(c)

Expert Solution
Check Mark

Explanation of Solution

The consumer price index for year 1 is 100, and the corresponding nominal GDP is $5 billion. Thus, the real GDP can be calculated by using these values and substituting them in Equation (3) as follows:

Real GDP=Nominal GDPCPI×100.......(3)=5100×100=5

Thus, the real GDP in year 1 is $5 billion.

The consumer price index for year 2 is 111.54, and the corresponding nominal GDP is $5.6 billion. Thus, the real GDP can be calculated by using these values and substituting them in Equation (3) as follows:

Real GDP=5.6111.54×100=0.502×100=5.02

Thus, the real GDP in year 2 is $5.02 billion.

The consumer price index for year 3 is 116.15, and the corresponding nominal GDP is $6.1 billion. Thus, the real GDP can be calculated by using these values and substituting them in Equation (3) as follows:

Real GDP=6.1116.15×100=0.0525×100=5.25

Thus, the real GDP in year 3 is $5.25 billion.

The consumer price index for year 4 is 117.30, and the corresponding nominal GDP is $6.5 billion. Thus, the real GDP can be calculated by using these values and substituting them in Equation (3) as follows:

Real GDP=6.5117.30×100=0.0554×100=5.54

Thus, the real GDP in year 4 is $5.54 billion.

Economics Concept Introduction

Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured at constant prices.

Nominal GDP: Nominal GDP is the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.

(d)

To determine

The percentage increase in nominal GDP as a result of inflation from the year 1 to 4.

(d)

Expert Solution
Check Mark

Explanation of Solution

There is a 30 percentage increase in the nominal GDP from the year 1 to 4.

Percentage change in Nominal GDP=6.555×100=30

For 17.3 percentage change in the price level:

Percentage change in Price=117.30100100×100=17.3

Therefore, the inflation represented as follows: 17.330×100=57.67

Thus, the inflation represents a 57.67% of rise in nominal GDP.

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