Question

1. The CPI is 1.00 in year one and 1.25 in year two. If the nominal wage is $20 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

2. If in the economy, business saving equals $220 billion, household saving equals $35 billion and government saving equals –$150 billion, what is the value of private saving?

3. In country Alpha with 400 million people aged 16 years and older, 240 million are in the labor force, and 200 million are employed, what is the participation rate?

4. Suppose real GDP per person were $1,000 in 1900 and grew at a two percent annual rate, what would be the value of real GDP per person 150 years later?

Answer 1

(1) CPI in year one = 1

CPI in year two = 1.25

Nominal wage in year 1 = $20

Nominal wage in year 2 = $20 * (CPI in year 2)

Nominal wage in year 2 = $20 * 1.25

Nominal wage in year 2 = $25

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(2) Priavte saving = Business saving + household saving

Private saving = $220 billion + $35 billion

Private saving = $$255 billion

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(3) Participation rate = (Labor force / Population aged 16 or above)

Participation rate = (240 million / 400 million)

Participation rate = 0.6

Participation rate = 60%

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(4) GDP per person in 1900 = $1000.

Annual growth rate of GDP per person = 2% = 0.02

GDP per person 150 years later = $1000 (1 + 0.02)^150

GDP per person 150 years later = $19500.