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ECON201, Spring 2008: Problem Set 2 Solution Sketch
Prof. John Shea
1.Suppose I put $1000 in a bank account that earns 4 percent interest annually.
Assuming I make no more deposits or withdrawls, how many years until my account is
worth $2000? $4000?
Answer: The way to do this is to use the “RULE OF 70”.
According to the `Rule of 70', a variable will approximately double in 70/r years if it is growing
at r% per year. Here r = 4%.
So we can approximately claim that the account will be worth $2000( i.e it doubles) in 70/4 =
17.5 years
It will double again in 17.5*2= 35 years. So the account will be worth $4000 in approximately
35 years.
2.
Currently, a gallon of regular gasoline costs about $2.80 in the DC metro area on
average.
Suppose that in 1988, gas cost about $1.50 per gallon.
Which price was
higher in real terms?
(The information you need to answer this question can be found
in your textbook, and also online from a number of sources, such as the Economic
Report of the President.
You may use a price index for 2006 if you cannot find one for
2007).
The formula for converting nominal data to real data is:
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This note was uploaded on 04/07/2008 for the course ECON 201 taught by Professor Shea during the Spring '08 term at Maryland.
 Spring '08
 SHEA
 Macroeconomics

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