Solution+to+Midterm1 - Solution to Midterm 1 Instructor...

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Solution to Midterm 1 Instructor: Bulent Guler TA: Wandi Zhang Oct. 2, 2015
1 1 a nominal GDP 2000 = 10 * 200 + 4 * 500 + 1000 * 1 = 5000 nomianl GDP 2010 = 12 * 300 + 6 * 400 + 1000 * 1 = 7000 growth rate of nominal GDP = ( 7000 - 5000 5000 - 1) * 100% = 40% b real GDP 2000 = nominalGDP 2000 = 5000 real GDP 2010 = 12 * 200 + 6 * 500 + 1000 * 1 = 6400 growth rate of real GDP = ( 6400 - 5000 5000 - 1) * 100% = 28% c GDP deflator 2000 = nominalGDP 2000 realGDP 2000 * 100 = 5000 5000 * 100 = 100 GDP deflator 2010 = nominalGDP 2010 realGDP 2010 * 100 = 7000 6400 * 100 109 inflation = 109 - 100 100 * 100 = 9 1 This solution is prepared by Wandi Zhang. If you find any mistake or do not agree with the answers, feel free to email me (wz27 at indiana.edu). 1
d CPI 2000 = Price 2 000 * Quantity 2 000 Price 2 000 * Quantity 2 000 * 100 = 100 CPI 2010 = Price 2 010 * Quantity 2 000 Price 2 000 * Quantity 2 000 * 100 = 300 * 10 + 400 * 4 + 1 * 1000 200 * 10 + 500 * 4 + 1000 * 1 * 100 = 5600 5000 * 100 = 112 inflation = 112 - 100 100 * 100 = 12 e We get larger inflation from CPI than GDP deflator. CPI overstate price increases since it ignores substitution of goods by households. GDP deflator understate price increases since it ignores reduction in welfare as a result of substitution.
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