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Econ 3140
Fall 2009
Problem Set 2
Answer Key
1. Prior to 1996, the growth rate of real GDP depended on which year was chosen as
the base year. Now, however, the current year and preceding year are used as base
years, averaging results using each as base year. The advantages of this method are
that there is no longer a need to recompute historical data or to change base years.
However, a disadvantage is that real GDP is no longer the sum of its components.
2. Since In&ation
&
between 1983 and 2002 was
80%
, then, taking CPI
2002
as the base
year (CPI
2002
= 100
), from the in&ation formula we solve for CPI
1983
:
CPI
1983
=
CPI
2002
&
+1
=
100
1
:
8
= 55
:
6
Note: Please recall that CPIs are always expressed in absolute numbers, while in&ation
has to be expressed in percentage terms.
3. Under the old de±nition,
S
old
gov
= (
T
&
TR
&
INT
)
&
G
; under the new de±nition,
S
new
gov
= (
T
&
&
)
&
GCE
, where
=
government consumption expenditures,
G
=
,and
GI
=
government investment. With those de±nitions:
S
old
gov
= (
T
&
&
)
&
G
= (
T
&
&
)
&
(
GC
+
GI
) = [(
T
&
&
)
&
]
&
GI
=
S
new
gov
&
GI
The usesofsavings identity is
S
pvt
=
I
+
&
&
S
old
gov
±
+
CA
=
I
&
&
S
new
gov
&
GI
±
+
=
I
+
GI
+
&
&
S
new
gov
±
+
Using data for 2002, the old usesofsavings identity is (where
sd
is the statistical
discrepancy):
S
pvt
+
sd
=
I
+
&
&
S
new
gov
±
+
,
1595 + (
&
117) = 1593 + 374 + (
&
489)
,
1478 = 1478
so the identity holds
The new usesofsavings identity is:
S
pvt
+
sd
=
I
+
GI
+
&
&
S
old
gov
±
+
,
1595 + (
&
117) = 1593 + 352 + 22 + (
&
489)
,
1478 = 1478
4. Expected in&ation
2%
(a) Expected interest rate
)
8%
&
2% = 6%
(b) Real interest rate with in&ation
3%
)
8%
&
3% = 5%
Ted gains from unexpect
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 '07
 MBIEKOP
 Macroeconomics

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