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Problems for Chapter 11

1.  The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2010, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2011, they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100.

a.   Calculate the price of each vegetable in each year

b.  Using 2010 as the base year, calculate the CPI for each year (use 100 heads of cauliflower, 50 bunches of broccoli, and 500 carrots as the market basket).

c.  What is the inflation rate in 2011?

2.  The government makes cost of living adjustments to Social Security benefits each year in proportion to the increase in the CPI, even though most economists believe that the CPI overstates inflation.

a.  If the elderly consume the same market basket as other people, does Social Security provide the elderly with an improvement in their standard of living each year? Explain.

b.  In fact, the elderly consume more healthcare compared to younger people, and healthcare costs have risen faster than overall inflation. What would you do to determine whether the elderly are actually better off from year to year?

3.  Out of each of the following pairs of goods, which is more expensive when the price of the good is expressed in the value of today’s dollars?  You will need to use CPI data from FRED to answer these questions.  Please show your work.

a.  A $0.15 copy of the New York Times in January 1970 or a $2.50 copy of the New York Times today (note:  use December 2014 CPI data for the CPI “today”).

b.  A $1,300 Apple IIc computer in April 1984 or a $1,799 MacBook Pro today.

c.  A $305 economy class round trip plane ticket from Los Angeles to New York in July 1974 or a $1,286 first class round trip plane ticket from Los Angeles to New York today.

d.  A $2.48 gallon of milk in July 1991 or a $3.58 gallon of milk today.

Problems for Chapter 12

4.  International data show a positive correlation between income per person and the health of a population.

a.  Explain how higher income might cause better health outcomes.

b.  Explain how better health outcomes might cause higher incomes.

c.  How might the relative importance of your two hypotheses be relevant for public policy?

5.  International data show a positive correlation between political stability and economic growth.

a.  Through what mechanism could political stability lead to strong economic growth?

b.  Through what mechanism could strong economic growth lead to political stability?

6.  There are many sources of estimates of countries’ real per capita GDP, but the most trusted and commonly used estimates come from the Penn World Tables.  However, we’ll focus on real GDP per capita for the United States for this problem, which is available through FRED.

a.  Calculate the annual growth rate of real GDP per capita (percentage change in real GDP per capita compared to the same quarter in the previous year) from the 1st quarter of 1948 to the present.  What is the average annual growth rate of real GDP per capita since 1948?

b.  What is the average annual growth rate of real GDP per capita since 2000?

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