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Economics 302 Spring 2005 Answers to Practice Questions 1 (Covers Chapters 1 and 2 in Mankiw text) 1. a. Year Real GDP in 1990 Prices Price Index 1990 400 100 2000 500 150 i. Real GDP =money GDP in the base year ii. Real GDP = [(Money GDP)/(Price Index)] * 100 b. Year Real GDP in 2000 prices Price Index 1990 iv) 600 ii) (100/150)*100 = 66.7 2000 iii) 750 i) (150/150)*100 = 100 To get the answer you first need to recalculate the price index using year 2000 as your base year. Then use the money values from part (a) and the new price index to calculate real GDP using year 2000 prices. i) Base year price index ii) Price index for 1990 using year 2000 as the base year iii) Real GDP = Money GDP in the base year iv) Real GDP in 1990 using year 2000 prices = money GDP in year 1990 divided by the price index for 1990 times 100 2. Productivity Gain Wage Increase Labor cost/Unit of Output 0% 0% i) 0% 10% ii) 0% 20% iii) 10% 0% iv) 10% 10% v) 10% 20% vi) 20% 0% vii) 20% 10% viii) 20% 20% ix) a. Fill in the above table i) through ix). To fill in the table it will be helpful to make a table to organize the necessary data.

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Productivity Gain Output Wage Increase Wage Rate Labor Cost/Unit of Output 0% 10 units 0% \$10 \$1/unit of output 0% 10 units 10% \$11 \$1.1/unit of output 0% 10 units 20% \$12 \$1.2/unit of output 10% 11 units 0% \$10 Approx. \$.91/unit of output
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