Question

The first 8 questions use data from this table. Thus, you'll need to select what you need for each calculation. Be sure to show your calculations for the short answer questions. cup of federal car loan nominal real funds interest Year GDP GDP CPI coffee rate rate (billions) (billions) (nominal) (nominal) (nominal) 1990 $4.00 $5.000 100 $0.75 10.0% 15.0% 2000 $6.00 $7.000 125 $1.00 5.0% 10.0% 2010 $10.00 $10.000 160 $1.50 3.0% 8.0% 2019 $16.83 $15.300 200 $2.00 1.0% 6.0% 2020 $17.68 $15.606 205 $2.00 1.5% 6.5%

What was the rate of economic growth from 2019 to 2020? For this and the following short answer questions, be sure to show your calculations.

What would be the rate of inflation for consumers from 2019 to 2020?

Adjusting for consumer inflation, in which year was the price of coffee the cheapest? Hint: use the deflating method to convert prices to a common year.

Answer 1

a) The economic growth can be calculated by using GDP numbers.

Rate of Growth = ( Final Value / Initial Value ) - 1

Nominal Growth Rate = ( 17.68 / 16.83 ) - 1 = 0.05 or 5%
Real Growth Rate = ( 15.606 - 15.300 ) - 1 = 0.02 or 2%

b) Inflation can be calculated using CPI numbers
Inflation = ( Final CPI Value / Initial CPI Value ) - 1
CPI in 2019 = 200
CPI in 2020 = 205
( 205 / 200 ) - 1 = 0.025 or 2.5%

c) CPI is 100 in the 1990 so it is the base year.
Real Price = Nominal Price in Year t / ( CPI in Base Year / CPI in Year t )

Year 2000 = 1.00 * ( 100 / 125 ) = 1.00 * 0.8
= 0.8
Year 2010 = 1.50 * ( 100 / 160 ) = 1.50 * 0.625
= 0.9375
Year 2019 = 2.00 * ( 100 / 200 ) = 2.00 * 0.5
= 1.00
Year 2020 = 2.00 * ( 100 / 205 ) = 2.00 * 0.4878
= 0.9756

The price of coffee was cheapest in 1975.