Midterm 1(2)

# Midterm 1(2) - Spring 2007 Principles of Macroeconomics...

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Spring 2007 1/6 Principles of Macroeconomics Midterm 1 (Key) 1) Even as crude oil prices moderate, we continue to hear talk in the media about the high price of gasoline, diesel fuel, and home heating oil (all of which are made from crude oil). A) To put all of this into perspective, complete the following table [15 points]: Date Nominal price per barrel of crude oil Consumer price index Real price per barrel of crude oil (December 2006 dollars) December 1980 \$37.00 86.3 \$86.52 December 1990 \$27.34 133.8 \$41.23 December 2000 \$28.46 174.0 \$33.01 December 2006 \$62.03 201.8 \$62.03 The key to answering this question is to have really mastered the equation you use for converting nominal prices into real prices: \$ \$ new old new old old old CPI P P CPI = Filling in the blanks in the table is just a matter of rearranging this equation. 06\$ 80\$ 06 80 80 80 201.8 \$37.00 \$86.52 86.3 CPI P P CPI = = = 90\$ 06\$ 90 90 90 06 133.8 \$41.23 \$27.34 201.8 CPI P P CPI = = = 00\$ 00 00 06 06\$ 00 \$28.46 201.8 174.0 \$33.01 P CPI CPI P = = = 06\$ 06\$ 06 06 06 06 201.8 \$62.03 \$62.03 201.8 CPI P P CPI = = = Actually, you don’t need any fancy calculations for this last one. You just need to recognize that nominal prices and real prices are the same when we’re talking about the base year (in this example, 2006).

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2/6 B) To get a better sense for just how concerned we should be about the recent change in (nominal) oil prices, complete the following table. You should use the CPI figures from part A to calculate real GDP. [15 points] Date U.S. crude oil consumption (billions of barrels) Real U.S. expenditure on crude oil (billions of 2006 dollars) Nominal GDP (billions of dollars) Real GDP (billions of 2006 dollars) Dollars spent on crude oil per dollar of real GDP * (2006 dollars) 1990 6.2 \$256 \$5,800 \$8,748 \$0.029 2006 7.5 \$465 \$13,300 \$13,300 \$0.035 What do your answers tell you about the relative importance of oil to the U.S. economy in 2006 versus in 1990?
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Midterm 1(2) - Spring 2007 Principles of Macroeconomics...

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