Y ou may work in groups of up to four students. Make sure all names are on your submitted work. I recommend doing as much as possible of the calculations in Excel or Google Sheets (or something similar). You can copy tables from your spreadsheet into your answers. 1. (Ch.2,Q.4) An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2009 and 2010 are as follows: 2009 2010 Quantity Price Quantity Price Cars 10 $2000 12 $3000 Computers 4 $1000 6 $500 Oranges 1000 $1 1000 $1 a. What is the nominal GDP in 2009 and 2010? By what percentage does nominal GDP change from 2009 to 2010? b. Using the prices for 2009 as the set of common prices, what is real GDP in 2009 and in 2010? By what percentage does real GDP change from 2009 to 2010? . Using the prices for 2010 as the set of common prices, what is real GDP in 2009 and in 2010? By what percentage does real GDP change from 2009 to 2010? d. Why are the two output growth rates constructed in (b) and (c) different? Which one is correct? Explain your answer. 2. (Ch.2, Q. 7) The Consumer Price Index The Consumer Price Index represents the average price of goods that households consume. Many thousands of goods are included in such an index. Here consumers are represented as buying only food (pizza) and gas as their basket of goods. Here is a representation of the kind of data the Bureau of Economic Analysis collects to construct a consumer price index. In the base year, 2008, both the prices of goods purchased and the quantity of goods purchased are collected. In subsequent years only prices are collected. Each year, the agency collects the price of that good and constructs an index of prices that represents two exactly equivalent concepts. How much more money does it take to buy the same basket of goods in the current year than in the base year? How much the purchasing power of money has declined, measured in baskets of goods, in the current year, from the base year? The data: In an average week in 2008, the BEA surveys many consumers and determines that the average consumer purchases two pizzas and 6 gallons of gas in a week. The price per pizza and per gallon in subsequent years are found below. Prices change over time. o Year Price of Pizza Price of Gas 2008 $10 $3 2009 $11 $3.30 2010 $11.55 $3.47 2011 $11.55 $3.50 2012 $11.55 $2.50 2013 $11.55 $3.47 What is the cost of the consumer price basket in 2008? What is the cost of the consumer price basket in 2009 and subsequent years? Represent the cost of the consumer price basket as an index number in the years 2008 to 2013. Set the value of the index number equal to 100 in 2008. Calculate the annual rate of inflation using the percent change in the value of the index number between each year from 2009 to 2013. You would find it helpful to fill in the table below: Year Consumer Price Index Inflation rate 2008 =100 2008 100 2009 2010 2011 2012 2013 Is there a year where inflation is negative? Why does this happen? What is the source of inflation in the year 2011? How is that different than inflation in the years 2009 and 2010? I have 100 dollars in 2008. How many baskets of goods can I buy with $100 in 2008? If I have $100 in 2013, how many baskets of goods can I buy with that money in 2013? What is the percentage decline in the purchasing power of my money? How does the percentage decline in the purchasing power of money relate to the change in the value of the price index between 2008 and 2013? From 2010 to 2011, the price of pizza remains the same while the price of gas rises. How might consumers respond to such a change? In 2012, the price of gas falls. What are the implications of such changes in relative prices for the construction of the Consumer Price Index? Suppose the BEA determines that in 2013, the average consumer buys 2 pizzas and 7 gallons of gas in a week. Use a spreadsheet to calculate the CPI set equal to 100 in 2013 and moving back in time, using the 2013 basket in the years from 2008 to 2013. Fill in the table below: Year Consumer Price Index Inflation rate 2013 =100 2008 2009 2010 2011 2012 2013 100 Why are the inflation rates (slightly) different in part d and part i? 3. (Ch.3, Qs 2&3) Suppose the economy is characterized by the following behavioral equations: o a0 op C =160 + 0.6Y, =150 G =150 T =150 Solve for the following variables: Equilibrium GDP (Y) Disposable income (YD) Consumption spending Compute total demand and make sure it is equal to your answer in part (a). Assume that G is now equal to 110. Solve for the equilibrium output. Compute your new total demand. It is equal to production? Explain. Assume that G is equal to 110, so output is equal to your answer in part (). Compute private plus public saving. Is the sum of private and public saving equal to investment? Explain. 4. (Ch. 4, Q8) Money and the banking system The book described a monetary system that included simple banks in Section 4.3. Assume the following: i. The public holds no currency ii. The ratio of reserves to deposits is 0.1. iii. The demand for money is given by: M4 = $Y (0.8 4i) Initially, the monetary base is $100 billion, and nominal income is $5 trillion. a. b. What is the demand for central bank money? Find the equilibrium interest rate by setting the demand for central bank money equal to the supply of central bank money (monetary base). What is the overall supply of money? Is it equal to the overall demand for money at the interest rate you found in part (b)? What is the effect on the interest rate if central bank money increased to $300 billon? If the overall money supply increases to $3,000 billion, what will be the effect on 1?7 [Hint: Use what you discovered in part (c).]