Reference no: EM131397178

Q1 - Use data from this table in the next 7 questions:

Year	CPI	%ΔCPI	Real GDP (trillions)	%Δ real GDP	GDP deflator	%ΔGDP deflator	Nominal price of a cup of coffee	%Δ nominal price of a cup of coffee	Nominal interest rate on home loans
1985	105	3.0%	$7	4.2%	75	3.1%	$1.10	4.1%	4%
1995	150	2.5%	$10	2.7%	85	2.8%	$1.20	5.2%	5%
2005	195	3.0%	$14	3.3%	95	2.2%	$1.50	3.2%	6%
2015	238	0.1%	$16	2.1%	109	2.0%	$1.90	1.0%	8%
2016	240	1.1%	$17	1.2%	110	1.8%	$2.00	-2.6%	1%

1. What was the average annual rate of inflation for consumers from 1985 to 1995? Please show your calculation. If you need an exponent and have trouble typing it, please use a^. Thus, x2 (or x·x) would be x².

2. By how much did the real price of coffee change in 2015?

3. Convert the nominal price of coffee in 1985 to what it would be in the CPI's base year.

4. What was the average annual growth rate of the economy from 1985 to 2015?

5. If the economy grew at its 2016 rate, about how long would it take for the economy to double in size?

6. Calculate the real interest rate for home loans in 1995.

7. In the course pack (i.e. the "Macroeconomics Supplement" that is purchased in bookstores with our textbook) you'll find an article titled "Inflation is Now the Lessor Evil." When reading it, please note that it was written in the depths of the Great Recession of 2007-2009 when economic conditions were quite dire (real GDP ultimately fell more than 4%, some months saw job losses of 700,000 or more, and the unemployment rate peaked at 10%). Also, the author briefly mentions "non-indexed debts." By this he means debts whose repayments are not tied to inflation; put another way, these debts are in nominal interest rates that do not automatically adjust for inflation. As you know from class, this is very common.

First, what does he mean by "necessary policy actions involve aggressive macroeconomic stimulus?" Specifically, what should central banks, which are in charge of a country's monetary policy, like the U.S. Federal Reserve, do with interest rates? What does he argue should be done with fiscal policy?

Second, earlier in the article he proposes that there should be more inflation (which central banks can create by creating more money; recall the extreme case of Zimbabwe in the video clip we watched in class) as it "would be extremely helpful in unwinding today's epic debt morass." How would this work? Hint: consider the clicker question we had on Friday, September 23 that started with "Say that you have a student loan with an interest rate of 3.5% that is fixed for the life of the loan." Note that in the terms used by the author of this article, the 3.5% loan is a "non-indexed debt."

Q2 -

Year	1	2
Nominal GDP	$10 trillion	$11 trillion
Real GDP	$10 trillion	$11 trillion

1. Which of the following best describes what happened from year 1 to year 2?

the GDP deflator fell and prices in the economy fell

the GDP deflator fell and prices in the economy rose

the GDP deflator rose and prices in the economy fell

the GDP deflator rose and prices in the economy rose

One cannot say what happened to the GDP deflator or prices given this information.

2. Please read "America is Slipping to No. 2! Don't Panic' in our course packet. Which of the following accurately represents a point or points made by the author of this article? Note that there might be more than one correct answer.

Overall, China's growth is likely to harm the U.S.

GDP does a good measure of measuring things that truly matter in the economy. It might become more expensive for Americans to borrow as China grows.

By and large, the author has a zero-sum view of U.S. economic relations with China

U.S. exports to China will likely grow.

U.S. citizens will likely benefit from goods and services made in a richer China.

China will take export markets from the U.S.