Inflation Cheat Sheet

Inflation Cheat Sheet

ALL GDP FRQ's

ALL GDP FRQ's

2011B AP Macroeconomics Exam

(A.) 2009 is the base year calculate the following

(i) NGDP in 2010

NGDP = P x Q

so, 8 x 2.5 = $20

10 x 10 = $100

5 x 5 = $25

Total 2010 NGDP = $145

(ii) The Real GDP in 2010

We find the RGDP 

by using the quantity produced in the current year x prices of the base year

2.5 x 8 = $20

6 x 10 = $60

4 x 5 = $20

RGDP 2010 = $100

(B.) If one years price index is 50 and in the next year the index is 55, what is the rate of inflation from one year to the next?

Rate of Change Formula ((New - Old)/Old) x 100

55-50 = 5

5/50 = .1 x 100 = 10

rate of inflation = 10%

I also like the method in this scenario of doubling both numbers

50 x 2 = 100

55 x 2 = 110

rate of inflation from one year to the next = 10%

this works well if you can divide by 2 also

if the price index = 200 one year and 250 the next

200/2 = 100

250/2 = 125

Rate of inflation from 100 to 125 = 25% inflation

(C.) Next years wages will be 3% higher, but the actual inflation rate is 4%. At the beginning of next year will the real wage be higher or lower or the same as today?

If we get a raise and Nominal Wages increase by 30% we are very happy

but ,, if the PL (Inflation) rises by 4%, all things are 4%more expensive

then we are worse off even with our wage increase

Our Real wages fell by 1%

(D.) Sara gets a fixed rate loan from a bank when the expected inflation rate is 3%.

If actual inflation is 4%who benefits from the unexpected inflation, Sara, the Bank or neither?

If Sara got a loan at 3% and actual inflation is more than expected then Sara benefits

for now she is paying back money that has a lower purchasing power

2008B AP Macroeconomics Exam

(A.) Calculate the NGDP.

NGDP = P x Q

400 x $6 = $2,400

1,000 x $2 = $2,000

800 x $2 = $1,600

NGDP = $6,000

(B.) GDP Deflator is 100 in the base year,, and 150 this year. Calculate each of the following.

(i) The inflation rate, expressed as a percentage, between the base year and this year.

Rate of Change Question

100 to 150 = 50% increase

(ii) This years RGDP

If given the NGDP and the Index (CPI or Deflator)

NGDP/Index = RGDP

6,000/1.5 = $4,000

(C.) The workers received a 20% increase in nominal wages, but workers face the inflation you calculated in B(ii), what happened to their real wages?

Nominal - Inflation = Real

Nom Wages increase by 20% (Yippe) but inflation (the price of everything) went up by 50%

your real wages fell by 30%

Your real wages = the actual goods you can buy after the inflation increase

(D.) If the GDP deflator increases unexpectantly, would a borrower be better off , worse off, Explain.

If you borrow and inflation increases, you are paying back the loan with money that can buy less stuff

Ha, ha, take that lender.

The borrower benefits.

Cheat sheet for inflation here

2007 AP Macroeconomics Exam

(A.) Vale if a used textbook. 

No, Why? Used - already counted in previous year

(B.) Rent Paid in 2006 by resident in an apartment building built in 2000.

Yes, Why? Rent is a service in the market economy.

(C.) Commissions earned in 2006 by a stock broker.

Yes, Why? Commissions are a service in the market economy.

(D.) The value of an automobile produced in 2006 in South Korea by a firm fully owned by the US citizens.

No, Why? Produced in a foreign country (not domestically produced)