Question

a) The consumer price index is 185 in 2015 and 150 in 2016. All inflation is anticipated. Suppose that commercial banks charge an interest rate of 10 per cent in 2015.

What is the real interest rate? Is it a good idea to obtain a credit from a bank at this interest rate? Why or why not? Explain.

b) If the saving function is of the form S = -15 + 0.4Y, what is the amount of consumption at an income level of 200?

c) If the number of unemployed equals 10,000, the number of employed equals 70,000, and the number not in the labor force is 20,000, what is the labor-force participation rate?

d) If nominal GDP is $250 billion and real GDP is $200billion, calculate GDP deflator.

e) If GDP is $400 billion, depreciation is $100 billion, and net factor income from the rest of the world is -$60 billion, what is the net national product ?

Answer 1

(a)

Inflation rate = % Change in CPI = (150/185) - 1 = 0.8108 - 1 = - 0.1892 = - 18.92%

Real rate = Nominal rate - Inflation rate = 10% + 18.92% = 28.92%

Since real interest rate is higher than nominal rate, it is not a good idea to get credit from this bank.

(b)

When Y = 200, S = - 15 + 0.4 x 200 = - 15 + 80 = 65

C = Y - S = 200 - 65 = 135

(c)

Labor force (LF) = Employed + Unemployed = 70,000 + 10,000 = 80,000

Working-age population (WP) = LF + Not in labor force = 80,000 + 20,000 = 100,000

LFPR = LF / WP = 80,000 / 100,000 = 0.8 = 80%

(d)

GDP deflator = (Nominal GDP / Real GDP) x 100 = (250 / 200) x 100 = 125

(e)

NNP ($B) = GDP - Depreciation + Net factor income from abroad = 400 - 100 - 60 = 240