Problem Set 1
1.
(30 points)
Below are some data from the land of milk, honey, and cheese. EXPLAIN YOUR
ANSWERS WELL. SHOW ALL EQUATIONS YOU USED IN
CALCULATIONS.
Year
Price of
milk
Quantity
of milk
Price of
Honey
Quantity
of Honey
Price of
cheese
Quantity
of cheese
2012
$3
100
$3
50
$10
50
2013
$3
150
$4
50
$15
100
2014
$5
200
$5
120
$20
150
a.
Calculate nominal GDP, real GDP, and the GDP deflator for each year,
using 2012 as the base year.
b.
Compute the growth rate of nominal GDP, real GDP and GDP deflator in
2013 and 2014.
c.
Did economic well-being (measured by the growth rate of real GDP) rise
more in 2013 or in 2014? Explain.
2.
(30 points)
Assume that the typical consumer basket consists of 20 pounds of apple and 10
pounds of cheese. Assume that the base year is 2015. The prices are given in the
following table:
Apple
Cheese
Price
Price
2013
$2
$15
2014
$2
$20
2015
$4
$30
Calculate CPI and compute the inflation rate of CPI.
EXPLAIN YOUR ANSWERS WELL. SHOW ALL EQUATIONS YOU USED