Module 15

Price Index

Measures the cost of purchasing a market basket.

1. Calculate the price of market baskets (Ex. CPI - Consumer Price Index)
2. Calculate the price index.
3. Using a base year, we will then be able to calculate the rate of inflation from one time period to another.

You need to have a base year to calculate a price index.

The real CPI tracks the price level change for over 120,000 goods and services.

Price Index = Market Basket (Final) / Market Basket (Initial) * 100

There is no percentage sign.

The CPI of the base year is always 100.

% Rate of Inflation

% Rate of Inflation = [ Price Index (Final) - Price Indiex (Initial) ] / Price Index  (Initial)

Also known as % Change in Price.

FRQ List:

Consider the following transactions involving the nation of Foxystan. For each of the following, determine which transaction would be added to the ccureent GDP Of Foxystan. Explain why or why not.

A. Consumer in Foxystan pays the rent to the owner of an apartment complex.

A firm pays wages to consultants in foreign country.

A goernment builds a national museum.

Someone in a country sells their used car to a foreign country.

If a company pays an interest on repayment of a loan to a bank (Do we count interest payments in GDP).

The nation of Muffet produces only two goods, curds and whey. 

Compute nominal GDP per capita.

Compute real GDP and real GDP per capita in year two.

Is the average citizen more or less prosperous in year two vs year one. Show your work.

Labor Force

What is the size of the labor force, what is the labor force participation rate.

Use the data above to calculate the unemployment rate.

Suppose that half of those official counted as unemployed become discouraged and drop out of the labor force.

Will this increase, decrease, or have no impact on the nation's unemployment rate? Explain.

8-9 Equations to memorize.

Determine True or False

When the economy is in a recession, cyclical unemployment is rising and the natural rate of unemployment is falling?

When the economy is operating at full employment, the natural rate of unemployment is equal to zero?

Internet job placement websites can lower frictional unemployment and also lower the natural rate of unemployment?

Inflation

You have borrowed 200 dollars for one year to purchases furniture for your apartment. The bank is offering you an interest rate of 5.5%, and the expected rate of inflation is 2. for the next year.

 At the beginning of the year, what is the nominal rate of interest rate and real rate of interest. 

Suppose the actual inflation rate is 2%. Suppose Once the loan has been paid, what is the nominal rate of interset and reh treal relate of interest.

In a borrowing agreement, who wins and loses when inflation is unexpectedly low. Explain how unexpectedly low inclination creates a transfer of purchasing power when money is borrowed and lent.

 

The table below show the Consumer price index for Thoreneant economy.

What year is being used as the base year?

What is the inflation rate for between year 2 and year 5?

Suppose your nominal wage in year 2 is 10 dollars per hour. What normal wage must you receive in year 4 to keep your real mage from following.

Was there any years in which deflation occurred? Explain.