# Exam #1 Practice Problem Answers - Year 2000 2001 2002...

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Year Price of Coffee Quantity of Coffee Price of Red Bull Quantity of Red Bull GDP Real GDP GDP Deflator CPI 2000 \$2.00 10 \$1.00 5 25 25 100 100 2001 \$2.50 10 \$1.00 7 32 27 119 120 2002 \$3.00 12 \$1.25 8 46 32 144 145 Above is the price and quantity for all the goods produced and consumed in The People's Republic of Stimulus. Assume the year 2000 is used to fix the basket of goods for the CPI. Fill in the blanks and calculate inflation using both the CPI and the GDP deflator. Π GDP 2001 = (119 - 100)/100 = 19% Π GDP 2002 = (144 - 119)/119 = 21% Π CPI 2001 = (120 - 100)/100 = 20% Π GDP 2002 = (145 - 120)/119 = 20.8% Suppose minimum wage in TPRS is \$5.00/hour in the year 2000 and is raised to \$7.00/hour in the year 2002. What is the percentage increase in the minimum wage? By how much did the price level increase over these years? Are the minimum wage workers better off in 2002 than they were in 2000 (according to your estimation)?
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Unformatted text preview: %change = (7-5)/5=.4 or 40% inflation = (145-100)/100=45% Min Workers are worse off because prices rose more than their income. Now inflate the 2000 minimum wage to 2002 prices. Does this imply the same conclusion? Deflate the 2002 minimum wage to 2000 prices. Does this imply the same conclusion? 2002 prices = (\$5)(145/100) = \$7.25 => workers were better off in 2000 \$7 = 2000 prices (145/100) => 2000 prices = \$4.83 => workers were better off in 2000 Suppose you borrow a large sum of money in 2001 to be repaid in 2002 at an interest rate of 10% which, at the time, seems like a lot but you really need the money. What is the real interest rate that you'll have to pay? Inflation was 20.8% so r = i - pi = 10 - 20.8 = -10.8 So the money you pay back is worth 10.8% less than what you borrowed....
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• Spring '08
• KAPLAN,JUL
• Inflation, GP D, GDP CPI Deflator

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