ECON 201 Penn State University Finances Business Worksheet

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Just need 3.3, 3.4 and 3.5 in the doc. Should be clearly handwritten or typed

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ECON 201 HOMEWORK IV
Summer II 2020
Due July 25th, 2020
Chapters 9 (Part 2), 10, and 11
I. Consumer Price Index
1.1 Suppose Econ 201 is a country that only consumes textbooks, study guides, and calculators:
Product
Textbook
Study
guide
Calculator
Total
Base Year (2011)
Quantity Price
Expenditure
Price
2014
Expenditure
Price
120
60
$16
10
$20
15
$28
21
80
3
5
6
2015
Expenditure
Fill all expenditures including total expenditures in the above table. Using the year 2011 as the
base year, calculate the Consumer Price Index in 2014 and 2015. What is inflation rate from 2014
to 2015? Show your works.
1.2 The table below lists the actual minimum wage and CPI in 1974 and in 2017. Using the table,
calculate the real minimum wage for 1974 and 2017. Are workers better off in terms of the
purchasing power of a dollar in 1974 or 2017? Explain why.
Year
1974
2017
Nominal Minimum
Wage
2.00
7.25
CPI
(1982=100)
49.3
244.3
II. Long Run Economic Growth and Loanable Funds Market (Chapters 10 and 11)
3.1 If real GDP in a small country in 2017 is $8 billion and real GDP in the same country in 2018 is
$8.3 billion, the growth rate of real GDP between 2017 and 2018. Show your work.
3.2 If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of
real GDP per capita? Show your work.
3.3 Explain and show graphically how an increase in household saving affects the equilibrium interest
rate and the equilibrium quantity of loanable funds.
3.4 Explain and show graphically how an increase in expected profits from firm investment projects
affects the equilibrium interest rate and the equilibrium quantity of loanable funds.
3.5 Explain and show graphically how an increase in government spending (i.e. budget deficit) affects
the equilibrium interest rate in the market for loanable funds.
1.1
Base Year (2011)
Product
Textbook
2014
2015
Quantity
Price
Expenditure
Price
Expenditure
Price
Expenditure
120
$16
$1,920
$20
$2,400
$28
$3,360
60
10
$600
15
$900
21
$1,260
80
3
$240
5
$400
6
$480
Study
guide
Calculator
Total
$2,760
$3,700
$5,100
Consumer Price Index 2014: Cost in 2014/Base year cost * 100 = 3700/2760 * 100 = 134.06
Consumer Price Index 2015: Cost in 2015/Base year cost * 100 = 5100/2760 * 100 = 184.78
Inflation rate: (184.78 – 134.06)/134.06 * 100% = 37.84%
1.2
Real Wage rate 1974: Nominal wage/CPI * 100 = 2/49.3 * 100 = 4.06
Real Wage rate 2017: Nominal wage/CPI * 100 = 7.24/244.3 * 100 = 2.97
The nominal wage or rather the actual wage has risen by 262.5% over the 43 years from $2 in
1974 to $7.24 in 2017. However, the CPI indicates that the inflation rate over the same years is
394.54% (i.e. (244.3-49.3)/49.3. This means the purchasing power of wages has gone down and
as such workers are worse off as prices have increased at a faster rate than wages.
3.1 Growth rate of Real GDP: (8.3B-8B)/8B * 100% = 3.75%
3.2 Average annual growth rate of Real GDP per capita:
Say, Real GDP in 2005 was 100 Billion USD; then in 2020 it should be 200 Billion USD.
This was over a period of 15 years.
The average annual growth rate is: (Growth rate from 2005 to 2006 + Growth rate from 2006 to
2007+……Growth rate from 2015 to 2020)/15
If the growth rate was constant over the years, it would be equal to the compounded annual
growth rate.
Assuming a constant growth rate over the years:
1
200 15
) ? 1 = 4.73%
??=(
100
The average annual growth rate is 4.73%(15)/15 = 4.73%.

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Explanation & Answer:
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Tags:
economic growth

market

loanable funds

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