Inflation FRQ Practice

Assume that 1984 is the base year.

l 1984 quantity l 1984 price l 1985 quantity l 1985 price

wheat l 60 l $25 l 80 l $25

Cars l 50 l $60 l 100 l $100

Computers l 20 l $40 l 50 l $50

calculate each of the following

i. The nominal gross domestic product (GDP) in 1984

ii. The nominal GDP in 1985

iii. The real GDP in 1985

b. If in one year the price index is 40 and in the next year the price index is 45, what is the rate of inflation from one year to the next?

c. Assume that next year's wage rate will be 4 percent higher than this year's because of inflationary expectations. The actual inflation rate is 5 percent. At the beginning of next year, will the real wage be higher, lower, or the same as today?

d. Assume that Marcos gets a fixed- rate loan from a bank when the expected inflation rate is 4 percent. If the actual inflation rate turns out to be 5 percent, who benefits from the unexpected inflation: Marcos, the bank, neither, or both? Explain.