1)State whether the following statements are true or false. a) There are no cost
ID: 1113788 • Letter: 1
Question
1)State whether the following statements are true or false.
a) There are no cost associated with inflation if the inflation rate is perfectly anticipated
b) The CPI somewhat overstates changes in the cost of living because it does not allow for substitutions that consumers might make in response to price changes
c)The government is negatively impacted if inflation turns out to be higher than expected 2) Answer the following questions, based on the following information.
2) Answer the following questions, based on the following information.
Nominal
Price
Real
GDP (bill)
Index( GDP deflator
GDP (bill)
YEAR
Year 1
$4,486.0
108
Year 2
$4,710.3
112
a)Between year 1 and year 2, state whether nominal GDP has increased or decreased and by what percentage.
Nominal
Price
Real
GDP (bill)
Index( GDP deflator
GDP (bill)
YEAR
Year 1
$4,486.0
108
Year 2
$4,710.3
112
Explanation / Answer
PART-1)
a) There are no cost associated with inflation if the inflation rate is perfectly anticipated
Solution: FALSE
Explanation: There are costs associated to inflation even if future rates of inflation are perfectly anticipated
b) The CPI somewhat overstates changes in the cost of living because it does not allow for substitutions that consumers might make in response to price changes
Solution: TRUE
Explanation: The CPI gives ignorance to the fact that substitute goods have become relatively less expensive
c) The government is negatively impacted if inflation turns out to be higher than expected
Solution: FALSE
Explanation: The economy’s of United States as biggest debtor, gains from unanticipated inflation and loses when inflation is less than anticipated. Due to this the federal government is biased toward higher inflation
********
PART-2)
Nominal GDP (bill)
Price Index( GDP deflator
Real GDP (bill)
YEAR
Year 1
$4,486.0
108
4153.70
Year 2
$4,710.3
112
4205.36
Real GDP = (Nominal GDP / GDP Deflator) x 100
= 4486 /108 *100; 4,710/112*100
a)Between year 1 and year 2, state whether nominal GDP has increased or decreased and by what percentage
Nominal GDP increased by 224.30 (= 4710.3-4486) by 5% (=224.30/4486*100)
Nominal GDP (bill)
Price Index( GDP deflator
Real GDP (bill)
YEAR
Year 1
$4,486.0
108
4153.70
Year 2
$4,710.3
112
4205.36
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