# PROBSET1 - Price of necessities Price of luxuries 2001 \$10...

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Economics 309 Fall 2004 Problem Set 1 1. Answer the following using the Economic Report of the President 2005. a. Discuss the behavior of employment during 2004 (see page 38). b. Discuss the behavior of productivity, wages and prices during 2004 (see page 39-41). c. Discuss the behavior of financial markets during 2004 (see page 42) 2. National Income Accounting : Fill in the diagram below. Let GDP = 1000, G = 200, the government’s budget deficit = 100, taxes = 200, and consumption = 600. 3. Suppose that the typical market basket of goods and services used to calculate the CPI contains 1000 units of necessities and 1000 units of luxuries. The prices of necessities and luxuries in three consecutive years are given by:

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Unformatted text preview: Price of necessities Price of luxuries 2001 \$10 \$10 2002 10 12 2003 11 13.20 a. Using 2001 as the base, find the CPI for 2002 and 2003. b . Find the inflation rate between 2001 and 2002 and between 2002 and 2003. c . Suppose that Jane is retired and received \$15,000 in Social Security benefits during 2001. How much did she receive in 2003? d . Suppose Jane actually consumed only luxuries. In real terms, was she better off in 2001 or 2003? Explain . e. In what ways does the CPI overestimate the cost of living? f . Jane borrowed \$1000 in 2001 at a 10% interest rate (so that she had to repay a total of \$1100 in 2002). Calculate the real interest rate on the loan....
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PROBSET1 - Price of necessities Price of luxuries 2001 \$10...

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