## During the 1973-1975 recession, GDP growth was about -3% and the percent change in prices was about 13%

## 1973-1975 recession

**Part 1: 32 questions at 3 points each for a total of 96 points**

FOR FILL-IN-THE-BLANK questions: If your answer is in decimal form, round to 2 decimal places. For example, if your answer is .412, enter it into the fill-in-the-blank as .41, or if your answer is 1.415, enter it into the fill-in-the-blank as 1.42. If there are no decimals in your answer, you will simply enter the number; so if your answer is 2, enter 2 with no decimals. Do not enter any extra spaces, do not enter commas or $ or % symbols.

**Use the information below to answer questions 1-6**

Consider an economy that produces only two goods: fresh apricots and dried apricots. In this economy, the technology of producing dried apricots is to place fresh apricots on special racks and allow them to dry in the sun. **Fannie’s Farms **is the only company that grows fresh apricots, while **Darryl’s Dried Victuals **is the only producer of dried apricots. Fannie’s sells some of its apricots directly to consumers for consumption. The relevant revenue and cost information for each of the two firms in the economy is given below:

**Darryl’s Dried Victuals**

Revenue from selling dried apricots:

$2,300,000

Cost of buying fresh apricots from Fannie’s:

1,200,000

Interest on funds borrowed to buy drying racks:

250,000

Wages paid to employees

600,000

Taxes

100,000

**Fannie’s Farms**

Revenue from selling fresh apricots:

$2,000,000

Rent on land (including apricot trees)

300,000

Wages to employees

1,200,000

Taxes

200,000

1. Darryl’s profit from selling dried apricots is:

2. Fannie’s profit from selling fresh apricots is:

3. Use the **income approach **to calculate nominal GDP. Fill in the blanks in the table below. **Enter numbers with no commas, no dollar signs and no decimals. For example, if your answer is $12,000 you would enter 12000 into the appropriate box.**

4. Now let’s use the **expenditure approach **to calculate nominal GDP. So here we will add up all consumer spending on FINAL goods in this economy. Remember that the final goods in this economy are fresh apricots and also dried apricots. We have to be careful not to double count here though because some of the fresh apricots produced by Fannie are used by Darryl to make dried apricots. So first we find out how much money consumers spent on each of the final goods:

How much money was spent by consumers on Fannie’s fresh apricots?

5. How much money was spent by consumers on Darryl’s dried apricots?

6. Now we are ready to calculate nominal GDP using the expenditure approach. Add up your answers for #4 and #5. What is nominal GDP calculated using the expenditure approach equal to?

7. According to the cruise ship example what are the real objectives (goals) of macroeconomic policymakers?

8. According to the cruise ship example what are the nominal objectives (goals) of macroeconomic policymakers?

9. **Use the table below to answer questions 9-16**

**Good**

**2011**

**2012**

**Quantity**

**Price**

**Quantity**

**Price**

Tomatoes

500

$2.00

600

$2.20

Tofu

800

$4.00

1000

$4.25

Tacos

900

$3.00

900

$4.00

10.

11. Nominal GDP for 2011 is $

12. Nominal GDP for 2012 $

13. Assuming that 2011 is the base year, real GDP for 2011 is $

14. Assuming that 2011 is the base year, real GDP for 2012 is $

15. Again assuming that 2011 is the base year, the GDP deflator for 2011 is

16. Again assuming that 2011 is the base year, the GDP deflator for 2012 is

17. The rate of economic growth between the two years as defined by the percent change real GDP is

18. The rate of inflation between the two years is

19. Let’s consider some data on nominal GDP and GDP price deflator from the Federal Reserve Database:

Using the data in the table above, real GDP is equal to $__________.

20. During the 1973-1975 recession, GDP growth was about -3% and the percent change in prices was about 13%. This combination of GDP growth and percent change in prices is referred to as:

21. Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness?

22. **Use the table below to answer questions 20-23**

The table below shows the ‘hypothetical’ basket(s) of consumption goods for a ‘typical’ Penn State college student for 2012 and 2013.

Assume 2012 is the base year. The rate of inflation between 2012 and 2013 is ____%

23. Now update the base year to 2013. The rate of inflation between 2012 and 2013 is now _____%.

24. Which rate of inflation accounts for the substitution bias?

25. The ‘Chain Weighted’ rate of inflation is ___%.

26. **Use the table below to answer questions 24 – 27**

**Nominal Interest Rate**

**Price index (CPI)**

**Expected Inflation**

**June 1, 2008**

2.42

217.463

5.1

**June 1, 2009**

214.791

27. *Notes:*

*-June 2009 is the last month of the Great recession – the official recovery, began in July of 2009 -expected inflation data is one year hence, so expected inflation for the period from June 1, 2008 to June 1, 2009 is given in June 2008. So the data in the table indicates that in June of 2008, inflation was expected to be 5.1% over the next 12 months*

28.

29. Use the provided CPI data to calculate the actual inflation rate that occurred between June 2008 and June 2009 (hint: just calculate the % change in the CPI).

30. The ex-ante real rate of interest between June 2008 and June 2009 is:

31. The ex-post real rate of interest between June 2008 and June 2009 is:

32. We know that most decisions are in part, based on expectations of the future. Suppose we have two people who are trying to decide whether to consume today (assume it is currently June 2008) or save for the future and consume one year later, in June 2009. One person, let’s call him Joe, is basing his decision on the ex-ante real rate of interest like most of us do. The other person who has a crystal ball, we’ll call her Crystal, can see exactly what the actual rate of inflation is going to be and thus, has perfect foresight and bases her decision on the ex-post real rate. Look at the difference in the ex-ante and ex-post real rates you calculated in #25 and #26 above. Who would be more likely to save and who would be more likely to spend?

33. Use the information in “**Study shows costs of living for working families leveling off in Pa**.” to answer questions 28 – 31.

Using Allegheny county as the base county, the price index in Centre county is:

34. Using Allegheny county as the base county, the price index in Chester county is:

35. Using Allegheny county as the base county, if you are currently making $75,000 per year in Centre county, how much would you need to make in Allegheny county to have the same real purchasing power as you have in Centre county?

36. Using Allegheny county as the base county, if you are currently making $75,000 per year in Centre county, how much would you need to make in Chester county to have same purchasing power as you have in Centre county?

37. A friend of mine came to Penn State in the 1970s and told me that sticky buns at the College Diner cost $.75 (75 cents) in December of 1976. The CPI in December of 1976 was 58.4 and in December of 2012, the CPI was 230.979. Use this CPI data and assuming that the price of sticky buns rose in exact proportion to the CPI, what would the price of sticky buns have to be in December of 2012 so that the ‘real price’ of sticky buns remained constant?

38. Government spending on transfer payments is included in government purchases when calculating GDP because it results in the production of new goods and services.

39. If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided.