4. Suppose that in a given country, the price level over several years looks lik
ID: 1130435 • Letter: 4
Question
4. Suppose that in a given country, the price level over several years looks like this. (12 points) Price Index 2011 220 2012 242 2013 254 2014 264 (a) What were the inflation rates in 2011-2012, and in 2012-2013 (the first two years (b) Suppose that nominal GDP in the country grew at 7% between 2012 and 2013. (c) Suppose that in 2011 you had a salary of 50,000 in this country's currency. What in the table)? (Your answer should be two percentages.) What was the change in real GDP? would the equivalent of that be in 2014? In other words, how much would you have to earn in 2014 for your real income to be the same as it was in 2011?Explanation / Answer
(a)
calculate the inflation rate in 2011-2012
Price index in 2011 = 220
Price index in 2012 = 242
Inflation rate = [(Price index in 2012 - Price index in 2011)/Price index in 2011] * 100
Inflation rate = [(242 - 220)/220] * 100
Inflation rate = 10%
The inflation rate in 2011-2012 is 10 percent.
calculate the inflation rate in 2012-2012
Price index in 2012 = 242
Price index in 2013 = 254
Inflation rate = [(Price index in 2013 - Price index in 2012)/Price index in 2012] * 100
Inflation rate = [(254 - 242)/242] * 100
Inflation rate = 4.96%
The inflation rate in 2012-2013 is 4.96 percent.
(b)
Growth rate of nominal GDP between 2012 and 2013 = 7%
Inflation rate in 2012-2013 = 4.96%
Calculate the growth rate of real GDP -
Growth rate of real GDP = Growth rate of nominal GDP - Inflation rate = 7% - 4.96% = 2.04%
The real GDP grew at 2.04% between 2012 and 2013.
(c)
Salary in 2011 = 50,000
Price index in 2011 = 220
Price index in 2014 = 264
Calculate the equivalent salary in 2014 -
Equivalent salary = Salary in 2011 * [Price index in 2014/Price index in 2011]
Equivalent salary = 50,000 * [264/220]
Equivalent salary = 60,000
The equivalent salary in 2014 would be 60,000.
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