Question

Year 1 $4 486.0 1O0 Year 2 S4,710.3 112 4000 a)Between Year arnd Yean osial C as b) Betweon Year and Year 2, the rice sv Frank loaned reda $500 in Year 1 to be palt bk ccordingly incrased h intcrest rar o he lon tn has by%. Year 2. He guessed inflation would run at 5% zd ircumstances, who won )Calaulate the ra GOPfigus e) Now calculatete ral wage of th yial erecin year To have maintained herhis er I sandad f ling ypical worker would ned to have recvid sno wage of in Year

Answer 1

(a)

% Increase in Nominal GDP = (4,710.3 / 4,486) - 1 = 1.05 - 1 = 0.05 = 5%

(b)

% Increase in price level = (112 / 108) - 1 = 1.0370 - 1 = 0.0370 = 3.70%

(c)

Frank won.

Frank's expected inflation rate is higher than actual inflation rate (5% > 3.7%), therefore real value of the loan (= nominal value / price level) has increased more than what Frank anticipated. Since the loan as an asset for Frank (as a lender), increase in real value of loan means Frank won (and Freda was hurt).

(d)

Real GDP = (Nominal GDP / Price level) x 100

Real GDP, year 1 ($ Billion) = (4,486 / 108) x 100 = 4,153.70

Real GDP, year 1 ($ Billion) = (4,710.3 / 112) x 100 = 4,205.625

NOTE: As per Answering Policy, 1st 4 parts are answered.