Question

Assume this economy only produces Pens, Limes, and Computers.

		Pens	Limes	Computers
2014	Price	$1.00	$0.50	$100
2014	Quantity	100	200	10
2015	Price	$1.10	$0.60	$103
2015	Quantity	110	210	12

1. What is the Nominal GDP growth rate (per cent) for 2015?  

2. What is the Real GDP growth rate (per cent) for 2015?  

Assume the standard basket of goods is 2 pens, 10 limes, and one computer.

3. What is the inflation rate (per cent) for 2015?  

Suppose the money supply was $4.70 Trillion and Velocity 0.6

4. What is the value of Nominal GDP in Trillions?  

5. Assuming the growth rate in velocity is 2% and the growth rate in the real GDP is 3%,
what is the target growth rate (in percentage) in the money supply for the FED if they wanted to keep prices stable?  

Answer 1

(1) Nominal GDP (NGDP) = $\sum$(Current year price x Current year quantity)

NGDP, 2014 ($) = 1 x 100 + 0.5 x 200 + 100 x 10 = 100 + 100 + 1,000 = 1,200

NGDP, 2015 ($) = 1.1 x 110 + 0.6 x 210 + 103 x 12 = 121 + 126 + 1,236 = 1,483

NGDP growth rate = (1,483 / 1,200) - 1 = 1.2358 - 1 = 0.2358 = 23.58%

(2) Real GDP (RGDP) = $\sum$(Base year (2014) price x Current year quantity) [Assumed: Base year = 2014]

RGDP, 2014 ($) = 1 x 100 + 0.5 x 200 + 100 x 10 = 100 + 100 + 1,000 = 1,200

RGDP, 2015 ($) = 1 x 110 + 0.5 x 210 + 100 x 12 = 110 + 105 + 1,200 = 1,415

RGDP growth rate = (1,415 / 1,200) - 1 = 1.1792 - 1 = 0.1792 = 17.92%

(3) Inflation rate = % Change in CPI

Cost of basket, 2014 ($) = 1 x 2 + 0.5 x 10 + 100 x 1 = 2 + 5 + 100 = 107

Cost of basket, 2015 ($) = 1.1 x 2 + 0.6 x 10 + 103 x 1 = 2.2 + 6 + 103 = 111.2

CPI, 2015 = (Cost of basket, 2015 / Cost of basket, 2014) x 100 = (111.2 / 107) x 100 = 103.93

Since base year CPI is 100, CPI in 2014 = 100.

Inflation rate = (103.93 / 100) - 1 = 1.0393 - 1 = 0.0393 = 3.93%

(4) Nominal GDP ($ trillion) = Money supply x Velocity = 4.7 x 0.6 = 2.82

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