1. Real – Vs. – Nominal GDP (65 points) The economy of country X produces 2 goods, bread, and butter. In 2019, 740,000 units of bread was sold at $0.55 each and 650,000 units of butter at $0.64 each. From 2019 to 2020, price of bread increased to $0.70, and the amount sold fell to 710,000; the price of butter fell to $0.60, and amount sold rose to 688,900. Base year is 2020

a. Calculate Nominal GDP in 2019, and in 2020, then calculate Real GDP in 2019, and 2020.

2019 Nominal value for Bread: $________________________

2019 Nominal value for Butter: $________________________

2019 Nominal GDP: $ ____________________________________

2020 Nominal value for Bread: $________________________

2020 Nominal value for Butter: $________________________

2020 Nominal GDP: $ ____________________________________

2019 Real value for Bread: $________________________

2019 Real value for Butter: $________________________

2019 Real GDP: $ ____________________________________

2020 Real value for Bread: $________________________

2020 Real value for Butter: $________________________

2020 Real GDP: $ ____________________________________

b. Calculate both the nominal GDP growth rate, and real GDP growth rates between 2019 and 2020. Which of the two values should be used to measure economic growth rate? Explain your answer.

2. CPI and Inflation In country X a typical family of four buys an average of 177 loaves of bread and 63 sticks of butter each year. Concerned about increase in price of these essential goods the head of the family decides to create an index of these goods. The prices of these items are given in the accompanying table.

2018 Base year 2019 2020

182 Loaves of bread $1.65 $1.99 $2.15

52 sticks of butter $4.00 $4.65 $5.10

a. Using 2018 as a base year, create a CPI for these items for each year.

2018: CPI ______________

2019: CPI ______________

2020: CPI ______________

b. Calculate the inflation rate between years 2019 and 2020?

3. Converting dollar value from one year to another Suppose you earned $68,000 in 2017 when CPI was 245.12, to keep up with inflation what should your nominal income be in 2022 when CPI is 296.31?

4. Converting nominal income to real income.

a. Suppose in year 1 your nominal income was $68,000 and CPI is 100. In year 2 you were given a $1,000 raise and CPI increases to 102.5. Calculate your real income in year 2.

b. Are you better off or worse off in year 2? Explain

5. Unemployment rates Civilian, non-institutional, population over 16 years of age in country X is 200 million. Of the 200 million 140,000,000 are employed, and 24,000,000 are unemployed of whom 3,000,000 are frictionally and 5,000,000 are structurally unemployed. You must round numbers up to the nearest hundredth decimal: For example, 34.1277 = 34.13.

a. Calculate the actual (or total) unemployment rate. ___________________

b. Calculate the Natural Rate of Unemployment (NRU). _______________

c. Calculate the cyclical unemployment rate. ______________________

d. Is this country in a recession or a boom? _____________________________

e. Explain your answer to part d. ________________________________________

6. Define Fiscal Policy and explain how an expansionary fiscal policy can help an economy get out of a recession.

7. Monetary policy: An economy is facing an inflationary gap, see graph below. How should the Central Bank react using each of the 3 monetary policy tools to eliminate the inflationary gap?

a) Open Market operations:

b) Discount rate:

c) Required Reserve Ratio:

8. Open-Economy Macroeconomics: Suppose the U.S. and Japan are the only two countries in the world. What will happen to the value of the U.S. dollar (appreciates or depreciates), and the U.S. exports, as a result of the following events (other things equal)?

a. The United States imposes import tariffs on many Japanese goods.

b. Interest rates on savings bonds in the United States rise relative to interest rate on Japanese savings bonds.