8. Suppose the consumer price index (CPI) at the end of 2016 was 125 and the CPI

Question

8. Suppose the consumer price index (CPI) at the end of 2016 was 125 and the CPI at the end of 2017 was 131. Then what was the rate of inflation during 2017?

A. zero percent, prices were stable during 2017 B. 4.8 percent C. 6.0 percent D. 125 percent

9. John’s nominal income in 2008 was $45,000. The consumer price index in 2008 was 150. What is Frank’s real income?

A. $51,750 B. $45,000 C. $38,250 D. $30,000

1. Now suppose in a country, Its GDP equals $15 billion. Consumption equals $9 billion. Government purchases equal $1.5 billion. Tax revenue equal $1 billion. Let’s assume that we’re in a closed economy, and find investment, national saving, private saving, and public saving. (Tip: Y = C + I + G)

a. The value of Investment (I) is:

b. How much is the National Saving (S)?

c. How much is the private saving?

d. How much is the public saving?

Explanation / Answer

8. CPI2016 = 125, CPI2017 =131

Rate of Inflation is the rate of change in prices.

Rate of Inflation in 2017 = % change in CPI = (131-125/125)*100 = (6/125)*100 = 4.8

Option B is the correct answer.

9.Real Income = (Nominal Income / Consumer Price Index )*100

=(45,000/150)* 100

=300*100

=30,000

Answer is Option D.

1. a. The Value of Investment

Y = C+I+G

Substituting the value from the Question, we get

15 = 9+ I +1.5

I = 15-9-1.5

I = 4.5.

The value of Investment is $4.5 Billion

1.b. How much is the value of National Savings?

The National Savings is also equal to the Value of Investments i.e $4.5 Billion

1.c How Much is the Private Savings

We Know that Y = C+ I+ G

Y - C - G=I

Adding and Subtracting Taxes T, We get

Y - C - T + T - G = I

We Know that (Y - C - T) is private savings and (T - G) is public savings

Private Savings = Y - C -T

= 15-9-1= 5

The private savings is equal to $5 Billion.

1.d. Public Savings is Tax Revenue - Government Expenditure.

Public Savings = 1- 1.5=-0.5

Therefore there is negative public Savings of $ 0.5 Billion.

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