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Consider the following table: The economy in the base year 2019 produced: \b...
Mar 29, 2024
Consider the following table: The economy in the base year 2019 produced: \begin{tabular}{|l|l|l|} \hline Item & Quantity & Price \\ \hline Books & 3000 books & $50\$ 50 per book \\ \hline Boats & 20 boats & $7500\$ 7500 per boat \\ \hline Artwork & 50 paintings & $3000\$ 3000 per painting \\ \hline \end{tabular} In 2020 the same economy produced: \begin{tabular}{|l|l|l|} \hline Item & Quantity & Price \\ \hline Books & 2500 books & $75\$ 75 per book \\ \hline Boats & 25 boats & $5000\$ 5000 per boat \\ \hline Artwork & 55 paintings & $3500\$ 3500 per painting \\ \hline \end{tabular} Which of the following is the rate of consumer price inflation and real GDP growth between 2019 and 2020?2020 ? CPI inflation is 11.1%11.1 \% and real GDP growth is 12.2%12.2 \% CPI inflation is 11.1%11.1 \% and real GDP growth is 6.1%6.1 \% CPI inflation is 5.8%5.8 \% and real GDP growth is 12.2%12.2 \% None of the other answers
Solution by Steps
step 2
For 2019: Nominal GDP = (3000 books × 50perbook)+(20boats×50 per book) + (20 boats × 7500 per boat) + (50 paintings × $3000 per painting)
step 3
Calculate the nominal GDP for 2020 using the same formula
step 4
For 2020: Nominal GDP = (2500 books × 75perbook)+(25boats×75 per book) + (25 boats × 5000 per boat) + (55 paintings × $3500 per painting)
step 5
Calculate the Real GDP for 2020 using the prices from 2019 (base year)
step 6
For 2020 using 2019 prices: Real GDP = (2500 books × 50perbook)+(25boats×50 per book) + (25 boats × 7500 per boat) + (55 paintings × $3000 per painting)
step 7
Calculate the Consumer Price Index (CPI) for 2019 (base year) and 2020. CPI = (Nominal GDP / Real GDP) × 100
step 8
Calculate the CPI for 2019, which is 100 since it is the base year
step 9
Calculate the CPI for 2020 using the nominal GDP from 2020 and the Real GDP from 2020 calculated with 2019 prices
step 10
Calculate the inflation rate as: Inflation Rate = ((CPI in 2020 - CPI in 2019) / CPI in 2019) × 100%
step 11
Calculate the Real GDP growth rate as: Real GDP Growth Rate = ((Real GDP in 2020 - Real GDP in 2019) / Real GDP in 2019) × 100%
step 12
Use the asksia-ll calculator results to find the correct inflation rate and Real GDP growth rate
B
Key Concept
Inflation Rate and Real GDP Growth Rate Calculation
Explanation
The inflation rate is calculated using the Consumer Price Index (CPI), and the Real GDP growth rate is calculated by comparing the Real GDP of different years using constant prices.
Suppose Samsung introduces a new smartphone to replace their discontinued Galaxy 10 currently included in the CPI basket. The price of the new phone is 20%20 \% higher than the Galaxy 10 , but the new phone is much faster due to a better technology. In this situation the CPI will tend to inflation as a result of bias. overstate; substitution overstate; quality adjustment understate; substitution accurately measure; substitution understate; quality adjustment
Solution by Steps
step 2
For 2019, the total cost is calculated as follows: Total Cost 2019=(3000 books×$50 per book)+(20 boats×$7500 per boat)+(50 paintings×$3000 per painting) \text{Total Cost 2019} = (3000 \text{ books} \times \$50 \text{ per book}) + (20 \text{ boats} \times \$7500 \text{ per boat}) + (50 \text{ paintings} \times \$3000 \text{ per painting})
step 3
For 2020, the total cost using 2019 prices is calculated as follows: Total Cost 2020 at 2019 prices=(2500 books×$50 per book)+(25 boats×$7500 per boat)+(55 paintings×$3000 per painting) \text{Total Cost 2020 at 2019 prices} = (2500 \text{ books} \times \$50 \text{ per book}) + (25 \text{ boats} \times \$7500 \text{ per boat}) + (55 \text{ paintings} \times \$3000 \text{ per painting})
step 4
For 2020, the total cost using 2020 prices is calculated as follows: Total Cost 2020 at 2020 prices=(2500 books×$75 per book)+(25 boats×$5000 per boat)+(55 paintings×$3500 per painting) \text{Total Cost 2020 at 2020 prices} = (2500 \text{ books} \times \$75 \text{ per book}) + (25 \text{ boats} \times \$5000 \text{ per boat}) + (55 \text{ paintings} \times \$3500 \text{ per painting})
step 5
The CPI for each year is the total cost of the basket divided by the total cost of the basket in the base year (2019), multiplied by 100
step 6
The real GDP growth is the total cost of the basket in the current year (2020) at base year prices, divided by the total cost of the basket in the base year (2019), minus 1, then multiplied by 100 to get the percentage
step 7
Using the provided answer choices and the asksia-ll calculator result, we select the correct answer
B
Key Concept
CPI Inflation and Real GDP Growth
Explanation
CPI inflation measures the overall change in consumer prices based on a fixed basket of goods and services from one period to another, while real GDP growth measures the change in the value of goods and services produced in an economy, adjusted for inflation, from one period to another.
Regarding the question about the CPI and the introduction of a new smartphone, the correct answer is:
Solution by Steps
step 2
Recognize that when a new product is introduced at a higher price, it can cause the CPI to overstate inflation if the increase in quality is not properly accounted for
step 3
Identify that the substitution bias occurs when consumers switch to a different product that has become relatively cheaper, but the CPI basket does not reflect this change
step 4
Determine that quality adjustment is necessary when a product improves in quality; otherwise, the CPI may overstate inflation by not accounting for the increased value of the improved product
B
Key Concept
CPI Bias
Explanation
The CPI can overstate inflation if it does not properly account for quality improvements in new products that replace older ones, and if it does not adjust for consumer substitution towards relatively cheaper products.
If there is a recessionary gap in the economy, the Reserve Bank is likely to the money supply by government securities in the open market to make the interest rate. decrease; buying; lower increase; selling; lower increase; buying; lower decrease; selling; higher increase; buying; higher
If there is a recessionary gap in the economy, the Reserve Bank is likely to \textbf{decrease} the money supply by \textbf{buying} government securities in the open market to make the interest rate \textbf{lower}.
Suppose in an economy PAE =5000+.75Y−10000r=5000+.75 Y-10000 r and the central bank is aiming for the economy to produce at the potential output which is 18000 . The real interest rate equal to? 2%2 \% 3%3 \% 4%4 \% 6%6 \% 5%5 \%
Solution by Steps
step 1
To find the real interest rate r r , we start with the given equation for PAE: PAE=5000+0.75Y−10000r PAE = 5000 + 0.75Y - 10000r
step 2
We know that the central bank aims for the economy to produce at the potential output, which is Y=18000 Y = 18000
step 3
Substitute Y=18000 Y = 18000 into the PAE equation: PAE=5000+0.75×18000−10000r PAE = 5000 + 0.75 \times 18000 - 10000r
step 4
Solve the equation for r r to find the real interest rate
step 5
The calculation yields r=120 r = \frac{1}{20} , which is equivalent to 0.05 or 5%
Answer
r=5% r = 5\%
Key Concept
Solving for a variable in an equation
Explanation
The real interest rate is found by substituting the potential output into the PAE equation and solving for r r . The calculation shows that the real interest rate is 5%.
Starting from long-run equilibrium, if there is an increase in government purchases, this will result in a(n) gap in the short run and inflation. recessionary; higher; expansionary; lower; expansionary; higher; recessionary; lower;
Solution by Steps
step 1
Understand the question: We need to determine the type of gap and the direction of inflation resulting from an increase in government purchases starting from long-run equilibrium
step 2
Recall the economic principle: An increase in government purchases increases aggregate demand in the short run
step 3
Analyze the effect on the gap: Increased aggregate demand from long-run equilibrium creates an expansionary gap
step 4
Analyze the effect on inflation: An expansionary gap, where demand exceeds potential output, leads to higher inflation
Answer
expansionary; higher;
Key Concept
Expansionary Gap and Inflation
Explanation
An increase in government purchases raises aggregate demand, leading to an expansionary gap and higher inflation in the short run.
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