# CPI, GDP, tax, inflation

User Generated

rpbabzvpfuryc67

Economics

## Description

### Unformatted Attachment Preview

4. Consider the following classical model of the economy, where the interest rater is expressed in percentage terms. Supply: Y=F(K, L) = 10 (KL)0.5 with K=100 and L=64 Demand: Consumption C= 100+ 0.8 (Y-T) Investment 1= 50 - 2r Government G= 100 and T=100 Net exports NX = 0 (a) What is the level of GDP in the economy? Derive how much national income goes to workers, and how much goes to the owners of capital. Briefly explain your answer in words. (6 marks) (b) Find the interest rate that produces an equilibrium in the goods market. Then use a demand-supply diagram (with r on the vertical axis) to show how the equilibrium interest rate would change if the government decided to cut taxes. Do not forget to label your diagram. Briefly explain your answer in words. (8 marks) (c) Assume that the tax cut decreases taxes to T = 90. Find the new equilibrium interest rate. Explain briefly in words how this outcome can be interpreted as the clearing of the market for loanable funds. How big are they? (4 marks) 6. Consider a macroeconomy that produces three goods with the following quantities and prices in the years 2000 and 2010: Good A B с 2000 30 20 10 Quantity 2010 20 20 10 2000 £20 £15 £10 Price 2010 £30 £20 £10 (a) Calculate nominal and real GDP for 2000 and 2010 using 2000 as the base year. What are the growth rates in nominal and real GDP over this period? Which growth rate better captures the change in the size of the economy? Why? (6 marks) (b) Assume that the typical consumer's basket of goods is one unit of good A, two units of good B and three units of good C. Calculate the consumer price index (CPI) for 2010 using 2000 as the base year with the CPI for the year 2000 normalized to CP12000 = 100. What is the inflation rate based on the CPI? (6 marks) (©) Do you think the CPI inflation rate may overstate the true underlying inflation rate? Explain. (8 marks)
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Thank you.

Running head: CPI, GDP, & inflation

1

CPI, GDP, & inflation:
Name:
Institution affiliation:
Date:

CPI, GDP, & inflation

2

4 a)
The level of GDP= G+I+C+ (X-M)
Where: C=100+0.8(Y-T) but Y= 10(KL) 0.5 = 10(100*64)0.5= 800.
This implies that C=100+0.8 (800-100) = 660
I=50-2r
G=100
X-M=0
GDP= 100+ (50-2r) +660+0= 810-2r
The amount of national income that goes to workers
Whenever output is produced, a portion of the output goes to workers and remainder goes
to the owners of capital. In this case the production function is Y= 10(KL) 0.5. This implies that
the worker’s share of income is equal to 0.5 & the share of national income that goes to the
owners of capital is equal to 0.5. Therefore
Workers share of income = total wages paid to labor/ output= (0.5*64)/800 = 1/25
The share of national income that goes to owners of cap...

### Review

Anonymous
Excellent! Definitely coming back for more study materials.

Studypool
4.7
Indeed
4.5
Sitejabber
4.4