1. Fill in the blanks.

Billions

2016 2017

Nominal GDP 18,626.90 19,390.60

Real GDP ———- 17,095.50

GDP deflator 111.42 ———-

(Price Index)

(2009=100)

(These are actual U.S. data)

What was the percent change in Real GDP between 2016 and 2017.

2. A. How does inflation tend to cause inefficient business decisions?

B. How does deflation affect business decisions?

C. In conditions of a lot of leverage, how can a decrease in financial asset prices cause further decreases?

3. Using the data given below, you are going to construct 2 different student price indexes.

Q 2005 P2005 Q2012 P2012

Cell Phones 100 100 100 200

iPads 0 – 100 500

Ski Jackets 50 300 40 400

Bicycles 60 400 50 600

Computers 10 1000 20 500

A. Compute the student price index for 2012, using the base of 2005=100 and using the 2005 market basket of goods. What type of index is this?

B. Compute a second student price index for 2012 using the base of 2005=100 and using the 2012 market basket of goods. What type of index is this? (Since price indexes need 2 sets of data you cannot include the iPad in your index).

C. Why is the Paasche Index lower than the Laspeyres?

D. This simple problem reveals some problems in constructing meaningful price indexes.

(i) What is the problem for price indexes represented by iPads?

(ii) Are cells phones, which went up in price, really the same product in 2012 as in 2005? What problem is that?

4. Because market baskets change over time, we have to decide which market basket to use. In 1995, the U.S. Bureau of Economic Analysis decided to change to chain-linked annual-weighted calculations of price indexes. In essence, this allows the BEA to change the market basket every year instead of once a decade. (The following is adapted from the July 1995 Survey of Current Business).

Year 1

Quantity Price

Oranges 30 10

Apples 10 20

Year 2

Oranges 20 .20

Apples 20 .25

Year 3

Oranges 15 30

Apples 25 30

The base year will be year 1. Let the base year index be 1.00 without multiplying by 100. Compute the Laspeyres Index for year 2 over 1,

Compute the Paasche Index for year 2 over 1.

Take the geometric mean (i.e. the square root of their product.) This is the price index for year 2. Then for year 3 the BEA would no longer compare it with year 1. It would make a comparison of year 3 to year 2 and then link the geometric mean price index for year 3 to year 2 by multiplying these numbers.

This means compute the Laspeyres Index for year 3 over year 2 and the Paasche Index for year 3 over year 2. Take their geometric mean. This geometric mean tells you the growth in price for year 3 over year 2. To get the compound change from year 1 to year 3, multiply the year 3 geometric mean times the year 2 geometric mean.

Summarize your results:

Base Year 1 price index = 1.0

Year 2 price index =

Price Index Year 3 as compared to Year 1 =

You have now chain-linked price indexes with continually updated market baskets.

5. Using the National Income and Product Accounting definition of investment, which of the following is investment?

A. Gilead’s stock price doubles.

B. Verizon increases its inventory of mobile phones at the end of this year compared to last year.

C. You buy 100 shares of Amazon stock.

D. You buy a $10,000 Treasury bond,

E. You buy a house that used to belong to Julia Roberts.

MCQs (Multiple Choice Questions)

7. I. If consumers get a new expectation of higher inflation, their present consumption function will fall.

II. If consumers get a new expectation of deflation, their present consumption function will rise.

A. Only I is true

B. Only II is true.

C. Both I and II are true.

D. Neither I nor II is true. .

8. Dead weight losses from inflation include all of the following except:

A. Executives increase the time spent protecting their companies from inflation and devote less time to production.

B. Inflation is felt first in the increase in the price of aluminum so a company switches to plastic but then the price of plastic rises proportionally to the previous increase in aluminum.

C. Nominal interest rates rise by the amount of inflation.

D. None of the above is an exception.

9. I. If jobs are lost from a lack of aggregate demand in an economy, that is called cyclical employment.

II. At full employment there will be frictional unemployment and there may also be structural unemployment.

A. Only 1 is true,

B. Only II is true.

C. Both I and II are true.

D. Neither I nor II is true. .

10. I. The real rate of interest equals the market rate plus the rate of inflation.

II. Increases in the market (nominal) rate of interest are more likely to reduce investment than increases in the real rate.

A. Only I is true.

B. Only II is true.

C. Both I and II are true.

D. Neither I nor II is true.

Billions

2016 2017

Nominal GDP 18,626.90 19,390.60

Real GDP ———- 17,095.50

GDP deflator 111.42 ———-

(Price Index)

(2009=100)

(These are actual U.S. data)

What was the percent change in Real GDP between 2016 and 2017.

2. A. How does inflation tend to cause inefficient business decisions?

B. How does deflation affect business decisions?

C. In conditions of a lot of leverage, how can a decrease in financial asset prices cause further decreases?

3. Using the data given below, you are going to construct 2 different student price indexes.

Q 2005 P2005 Q2012 P2012

Cell Phones 100 100 100 200

iPads 0 – 100 500

Ski Jackets 50 300 40 400

Bicycles 60 400 50 600

Computers 10 1000 20 500

A. Compute the student price index for 2012, using the base of 2005=100 and using the 2005 market basket of goods. What type of index is this?

B. Compute a second student price index for 2012 using the base of 2005=100 and using the 2012 market basket of goods. What type of index is this? (Since price indexes need 2 sets of data you cannot include the iPad in your index).

C. Why is the Paasche Index lower than the Laspeyres?

D. This simple problem reveals some problems in constructing meaningful price indexes.

(i) What is the problem for price indexes represented by iPads?

(ii) Are cells phones, which went up in price, really the same product in 2012 as in 2005? What problem is that?

4. Because market baskets change over time, we have to decide which market basket to use. In 1995, the U.S. Bureau of Economic Analysis decided to change to chain-linked annual-weighted calculations of price indexes. In essence, this allows the BEA to change the market basket every year instead of once a decade. (The following is adapted from the July 1995 Survey of Current Business).

Year 1

Quantity Price

Oranges 30 10

Apples 10 20

Year 2

Oranges 20 .20

Apples 20 .25

Year 3

Oranges 15 30

Apples 25 30

The base year will be year 1. Let the base year index be 1.00 without multiplying by 100. Compute the Laspeyres Index for year 2 over 1,

Compute the Paasche Index for year 2 over 1.

Take the geometric mean (i.e. the square root of their product.) This is the price index for year 2. Then for year 3 the BEA would no longer compare it with year 1. It would make a comparison of year 3 to year 2 and then link the geometric mean price index for year 3 to year 2 by multiplying these numbers.

This means compute the Laspeyres Index for year 3 over year 2 and the Paasche Index for year 3 over year 2. Take their geometric mean. This geometric mean tells you the growth in price for year 3 over year 2. To get the compound change from year 1 to year 3, multiply the year 3 geometric mean times the year 2 geometric mean.

Summarize your results:

Base Year 1 price index = 1.0

Year 2 price index =

Price Index Year 3 as compared to Year 1 =

You have now chain-linked price indexes with continually updated market baskets.

5. Using the National Income and Product Accounting definition of investment, which of the following is investment?

A. Gilead’s stock price doubles.

B. Verizon increases its inventory of mobile phones at the end of this year compared to last year.

C. You buy 100 shares of Amazon stock.

D. You buy a $10,000 Treasury bond,

E. You buy a house that used to belong to Julia Roberts.

MCQs (Multiple Choice Questions)

7. I. If consumers get a new expectation of higher inflation, their present consumption function will fall.

II. If consumers get a new expectation of deflation, their present consumption function will rise.

A. Only I is true

B. Only II is true.

C. Both I and II are true.

D. Neither I nor II is true. .

8. Dead weight losses from inflation include all of the following except:

A. Executives increase the time spent protecting their companies from inflation and devote less time to production.

B. Inflation is felt first in the increase in the price of aluminum so a company switches to plastic but then the price of plastic rises proportionally to the previous increase in aluminum.

C. Nominal interest rates rise by the amount of inflation.

D. None of the above is an exception.

9. I. If jobs are lost from a lack of aggregate demand in an economy, that is called cyclical employment.

II. At full employment there will be frictional unemployment and there may also be structural unemployment.

A. Only 1 is true,

B. Only II is true.

C. Both I and II are true.

D. Neither I nor II is true. .

10. I. The real rate of interest equals the market rate plus the rate of inflation.

II. Increases in the market (nominal) rate of interest are more likely to reduce investment than increases in the real rate.

A. Only I is true.

B. Only II is true.

C. Both I and II are true.

D. Neither I nor II is true.