Question 1

1 point possible (graded)

In a simple economy with two final goods (lattes and pizzas) the quantities produced of each
good in 2014 are 2 lattes and 4 pizzas and 3 lattes and 6 pizzas in 2015. Their prices have been 1
euro per latte and 2 euros per pizza in 2014 and 1.5 euros per latte and 3 euros per pizza in 2015.
The base year for the calculation of the deflator is 2014.

# the increase in the nominal GDP between 2014 and 2015 is 10%.
# the increase in the real GDP between 2014 and 2015 is 25%.
# Real GDP has increased more than nominal GDP between 2014 and 2015.
# the inflation rate between 2014 and 2015 measured by the deflator is 50%.

Please see calculations in the attached excel sheet

Consider an economy with GDP=1000 in 2014, with private consumption C=500 and net exports
of 0. We know that in 2015 government spending increased by 100 units and that consumption
was equal to 600 (C=600). If GDP and net exports remained constant (NX=0 and GDP=1000)
then it must be the case that:

# Investment increased by 100 units.

# Consumption increased by 200 units.
# Investment decreased by 200 units.
# Investment remained constant.

C increased by 100 and G increased by 100, therefore GDP should have increased by 200
(if I remained constant). SinceGDP remained constant and did not increase by the 200,
therefore investment must have decreased by those 200

In a simple economy only three kinds of goods are produced: 200 kilograms of coconuts, 100
kilograms of bananas and 100 cocktails of coconut and banana. The price of the goods are: 8
euros per kilogram of coconuts, 4 euros per kilogram of bananas and 10 euros each cocktail. Half
kilogram of coconuts and half kilogram of bananas are required to produce a cocktail; all the
cocktails and every coconut and banana not used to produce cocktails are considered final goods.
Then the GDP in this economy is (in euros)

Total value of coconuts = 200 x 8 = 1600 euros (Half of that is 800)

Total value of bananas = 100 x 4 = 400 euros (Half of that is 200)

Total value of cocktails = 100 x 10 = 1,000 euros

Since “Half kilogram of coconuts and half kilogram of bananas are required to produce a
cocktail”, therefore GDP = 800 + 200 + 1,000

= 2,000 euros