# PS2 Answer Key - Econ 3140 Fall 2009 Problem Set 2 Answer...

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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 uses-of-savings 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 uses-of-savings 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 uses-of-savings 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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PS2 Answer Key - Econ 3140 Fall 2009 Problem Set 2 Answer...

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