problem set#3 A: If the price index was 110 last year and is 121 this year, what
ID: 1254102 • Letter: P
Question
problem set#3A:
If the price index was 110 last year and is 121 this year, what is this year’s rate of inflation? What is the “rule of 70”? How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?
B:
Use the following data to calculate (a) the size of the labor force and (b) the official unemployment rate: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10.
C:
Use the Keynesian Consumption Theory to explain how each of the following will affect aggregate consumption spending:
1. A significant decrease in the value of residential real estate.
2. A significant increase in Federal personal income taxes.
Explanation / Answer
inflation rate = 121-110/110 * 100 = 10% rule of 70: A liittle article on the old financial rule of 70. It explains how it works and introduces some new "rules" of my own:) One day I was talking to a friend of mine about how house prices have appreciated in our region. He mentioned casually that prices had doubled in about 10 years. The conversation went something like this: Him: I wonder how much of an annual percentage growth this is... Me: Ooh..., about 7%. He then pulled-out his scientific calculator and made the actual calculation. Him: Man.., you are right!... Are you some sort of human calculator? Now, before you start thinking that I'm some sort of genius that can do logarithms in his head, I'll tell you my little secret: I just used the "rule of 70". This is nothing new. People in the finance field have been using this rule-of-thumb for a long time. But as the Engineer that I still am in the heart, I wondered where this "rule' came from, and hence, this article. the rule of 70 Simply stated, the "rule of 70" says that the number of years it takes for an amount growing at x % per year to double is roughly equal to 70/x. So, in the example above if 70/x = 10 years, (it took ten years for house prices to double) then x = 7%. 2) x = 2% no of years = 70/2 = 35 yrs, price takes to double x = 5% no of yrs = 70/5 = 14 yrs x = 10% no of yrs = 70/10 = 7 yrs. B). size of labour force = total popn - 120 - 150 500 - 270 = 230. C). 1. real estate value decreases. the disposable income increases and consumption increases , increasing the aggregate consumption. 2. federal personal income taxes decrease, again disposable income increases increasing the consumption pattern, increasing directly the aggregate consumption. please rate lifesaver! :)
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