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keyps2s08 - ECON201 Spring 2008 Problem Set 2 Solution...

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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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