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Chapter 6 Macro (17 Econ)

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You must read each slide, and complete any questions on the slide, in sequence.

Suppose the country of Snowland uses the following market basket of goods to determine its consumer price index, with Year 1 being the base year with a CPI of 100. Nominal GDP is also provided.

Market basket items: Year 1 Year 2 Year 3 Year 4
Loaf of bread $2.50 $2.80 $3.00 $3.10
Movie ticket $8.00 $8.80 $9.20 $9.50
Gallon of gasoline $3.50 $4.20 $4.00 $3.60
Scented candle $12.00 $13.20 $14.00 $14.30
Nominal GDP $5 billion $5.6 billion $6.1 billion $6.5 billion

A. Calculate the CPI in Snowland for each year, using Year 1 as the base year with CPI = 100. Round to three decimal places where necessary.

Year 1:

Year 2:

Year 3:

Year 4:

Incorrect! Use the formula CPI = (Cost in Current Period ÷ Cost in Base Period) × 100. For each column, first calculate the sum of the four listed product prices. The Year 1 total is $26. Since we are told that the base year is Year 1,CPI in Year 1 is ($26 ÷ $26) × 100 = 100. For Year 2, the total is $29, and ($29 ÷ $26) × 100 = 111.538. Year 3’s CPI is ($30.20 ÷ $26) × 100 = 116.154, and Year 4’s CPI = ($30.50 ÷ $26) × 100 = 117.308.
Correct! Use the formula CPI = (Cost in Current Period ÷ Cost in Base Period) × 100. For each column, first calculate the sum of the four listed product prices. The Year 1 total is $26. Since we are told that the base year is Year 1,CPI in Year 1 is ($26 ÷ $26) × 100 = 100. For Year 2, the total is $29, and ($29 ÷ $26) × 100 = 111.538. Year 3’s CPI is ($30.20 ÷ $26) × 100 = 116.154, and Year 4’s CPI = ($30.50 ÷ $26) × 100 = 117.308.
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      B. Calculate the rate of inflation (based on CPI) in Year 2, Year 3, and Year 4. Round your answers to three decimal places.

      Year 2: %

      Year 3: %

      Year 4: %

      Incorrect! The percentage change in price is calculated by the formula [(CPI in Current Year ÷ CPI in Original Year) × 100] – 100. For Year 2, inflation is [(111.538 ÷ 100) × 100] 100 = 11.538%. For Year 3, inflation is [(116.154 ÷ 111.538) × 100] – 100 = 4.138%. In Year 4, inflation is [(117.308 ÷ 116.154) × 100] – 100 = 0.994%.
      Correct! The percentage change in price is calculated by the formula [(CPI in Current Year ÷ CPI in Original Year) × 100] – 100. For Year 2, inflation is [(111.538 ÷ 100) × 100] 100 = 11.538%. For Year 3, inflation is [(116.154 ÷ 111.538) × 100] – 100 = 4.138%. In Year 4, inflation is [(117.308 ÷ 116.154) × 100] – 100 = 0.994%.
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          C. Using the CPI, calculate the real GDP in each of the four years. Round your answers to three decimal places where necessary.

          Year 1: $ billion

          Year 2: $ billion

          Year 3: $ billion

          Year 4: $ billion

          Incorrect! Use the formula for real GDP: Real = Nominal × (Base Year Index ÷ Current Year Index). For year 1, real GDP (in billions of dollars) = 5 × (100/100) = 5. Year 2’s real GDP (in billions of dollars) is 5.6 × (100/111.538) = 5.021. Year 3’s real GDP (in billions of dollars) is 6.1 × (100/116.154) = 5.252. In Year 4, real GDP (in billions of dollars) is 6.5 × (100/117.308) = 5.541.
          Correct! Use the formula for real GDP: Real = Nominal × (Base Year Index ÷ Current Year Index). For year 1, real GDP (in billions of dollars) = 5 × (100/100) = 5. Year 2’s real GDP (in billions of dollars) is 5.6 × (100/111.538) = 5.021. Year 3’s real GDP (in billions of dollars) is 6.1 × (100/116.154) = 5.252. In Year 4, real GDP (in billions of dollars) is 6.5 × (100/117.308) = 5.541.
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              D. Between Year 1 and Year 4, the proportion of the total increase in nominal GDP due to inflation was about %. (Please round your answer to a whole number.)
              Incorrect! First calculate the increase in nominal GDP between Year 1 and Year 4: ($6.5/$5 – 1) × 100 = 30%. Next, calculate the increase in the CPI between Year 1 and Year 4: (117.308/100 – 1) × 100 = 17.31%. Finally, calculate the portion of the increase in nominal GDP due to inflation: 17.31/30 = 57.8%.
              Correct! First calculate the increase in nominal GDP between Year 1 and Year 4: ($6.5/$5 – 1) × 100 = 30%. Next, calculate the increase in the CPI between Year 1 and Year 4: (117.308/100 – 1) × 100 = 17.31%. Finally, calculate the portion of the increase in nominal GDP due to inflation: 17.31/30 = 57.8%.
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