In 1997, GDP in the tiny country of Lindora was $4 million and the price of a market basket of goods was $15. In 2011, GDP in Lindora was $5 million and the price of a market basket of goods was $35. Given this information, it is clear that Lindora GDP
had a higher level of production in 2011 than 1997. Evaluate this statement.
What will be an ideal response?
Whether or not the level of production in Lindora was higher in 2011 than 1997 depends on whether the GDP figures given are nominal or real GDP. If they are real GDP then production in 2011 is clearly higher than production in 1997. If the figures are nominal GDP, then we have to calculate the real GDP figures to be able to make an accurate comparison.
To calculate the real GDP for 1997, we use the market basket value for that year as the base year. Calculating the consumer price index, we find: 15/15 = 1 ? 100=100. So calculating the real GDP value for 1997 we find: 4 million/1 (price index in hundredths) = $4 million. Calculating the consumer price index for 2011, we find: 35/15=2.233 ? 100 = 223.3. To calculate real GDP for 2011, we find: $5 million/2.233 = 2.4 million. If the figures are nominal GDP figures, then real GDP in 1997 was higher than real GDP in 2011 in Lindora.
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Everything else remaining unchanged, if the demand curve for reserves shifts to the left and borrowed reserves is zero:
A) there will be a decrease in both the federal funds rate and the quantity of reserves. B) there will be a decrease in the federal funds rate but no change in the quantity of reserves. C) there will be an increase in the federal funds rate but no change in the quantity of reserves. D) there will be an increase in both the federal funds rate and the quantity of reserves.
The purchasing power parity theory is a good predictor of
a. all of the following b. the long-run tendencies between changes in the price level and the exchange rate of two countries c. interest rate differentials between two countries when there are strong barriers preventing trade between the two countries d. how intervention in exchange markets by central banks influences prices in various countries e. the day-to-day relationship between changes in the price level and the exchange rate of two countries