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>At 04:46 PM 2/25/99 -0500, you wrote:
>>I have some questions on the courebook material.  Could you explain:
>>Chapter 6:
>>Problem 5
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>CPI = consumer price index = (cost of fixed basket of goods now)/(cost of same basket in base year) times 100.  What is the basket?  The "typical consumption" in the base year, 1992, i.e. 60 pizzas + 10 shirts.  Cost in 92 is 60x5 + 10x10 = 400; cost in 95 is 60x8 + 10x12 = 480+120 = 600; so CPI is (600/400)x100 = 150.
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>GDP deflator is trickier, and really the question shouldn't be here because the book does not make clear how to calculate it now it has gone to a chain index.  The GDP deflator is the price index you use to go from real GDP to money GDP, so the way to calculate it is to find money and real GDP for 1995, then take (money GDP)/(real GDP) times 100.  With only two years, you cannot actually do what is really done now, but you can do something close (what used to be done until a few years ago).
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>Money GDP is sum of output x price, so in 1995 is 360x8 + 180x12 = 2880 + 2160 = 5040
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>Real GDP we can approximate by 1995 output valued at 1992 prices, i.e. 360x5 + 180x10 = 1800 + 1800 = 3600
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>GDP deflator is then (5040/3600) x 100, i.e. 140.
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>Then price change is +50% according to CPI and +40% according to GDP deflator.
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>>Number 11 in second multiple choice section
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>1987 to 1995, min wage goes from $3.35 to $4.25; CPI goes from 113.6 to 148.2.
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>% increase in min wage is (4.25/3.35) - 1 times 100, i.e. 26.9%
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>% increase in CPI is (148.2/113.6) - 1 times 100, i.e. 30.5%
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>So in % terms the price level (measured by CPI) went up more than the money minimum wage.  Right answer to question is
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>"the minimum wage rose in nominal terms (i.e. money, how many $s), but fell in real terms (i.e. how much it would buy, corrected for price change).
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>>Chapter 8:
>>Problem 4b
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>Question is "What is the current value of nominal GDP?"
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>You need to look for where AD and AS are equal; this is going to be at $300 billion REAL GDP; at that value, P (the price level) is going to be 130.  To get nominal GDP, you need to multiply by the price level (divided by 100 because it is an index based on 100), i.e. multiply by 1.3, so nominal GDP is $390 billion.
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>>Problem 5b
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>A minimum wage law that had any effect would be higher than the equilibrium wage in the center graph, so there would be an excess supply of labor, and actual employment would fall.  The lower employment would imply less production, so LRAS and SRAS would both shift slightly in to the left.  Whether AD moved or not would depend on what happened initially to total income (emplyment is down, but wages are up) and its distribution and therefore spending.
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>The usury law means a maximum interest rate, i.e. an interest rate below the equilibrium interest rate in the right hand graph, if it has any effect.  That would mean excess demand for loans, less actual loans than at the equilibrium interest rate.  That means less loan-financed expenditure, i.e. the AD curve shifts in to the left.
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>>   Thank you,  (eco2013-12)
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>May I copy these answers to the rest of the class (removing your name and email address)?
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>[permission granted]
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