If in one year the price index is 50 and in the next year the price index is 55, what is the rate of inflation from one year to the next? c) Assume that next year’s wage rate will be 3 percent higher than this year’s because of inflationary expectations. The actual inflation rate is 4 percent. At the beginning of next year, will the real wage be higher, lower, or the same as today? d) Assume that Sara gets a fixed-rate loan from a bank when the expected inflation rate is 3 percent. If the actual inflation rate turns out to be 4 percent, who benefits from the unexpected inflation: Sara, the bank, neither, or both? Explain. Calculating Nominal and Real GDP FRQ Example (Answer Key)
2011 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS (Form B) 2009 Quantity 2009 Price (base year) 2010 Quantity 2010 Price Food 6 $2.5 (8x2.5 = $20.00) 8 $2.5 (8x2.5 = $20.00) Clothes 5 $6 (10x6= $60.00) 10 $10 (10x10 = $100.00) Entertainment 2 $4 (5x4 = $20.00) 5 $5 (5x5 = $25.00) 3. a) The outputs and prices of goods and services in Country X are shown in the table above. Assuming that 2009 is the base year, calculate each of the following. I. The nominal gross domestic product (GDP) in 2010 – To calculate nominal GDP for 2010 multiply the market basket quantities for 2010 using 2010 prices . Add up the totals and you should get $145. Answer: Nominal GDP = 145 II. The real GDP in 2010 – To calculate real GDP for 2010 using 2009 as the base year, you need to use the same quantity totals for 2010 and multiply each using 2009 prices . Add up the totals and you should get $100.