1.(40 points total) The Peanuts comic below motivated parts a) an...

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1.(40 points total) The Peanuts comic below motivated parts a) and b) of this question – as you may know, Charles Shulz was the creator of peanuts and wrote the strip for nearly 50 years. This comic appeared in the paper in August of 1970. a)(5 points) Snoopy mentions that bread is 39 (39 cents) per loaf referring to the price of bread back in August of 1970. Using the CPI data below, calculate what the real price, in terms of 1982-1984 dollars, of a loaf of bread is (this is in base period prices). b)(5 points) Now do the same exercise as above, but instead of using the CPI price index, use the Personal Consumption Expenditure price index (below). That is, what is the real price of a loaf of bread now using the PCE price index? Why it so different than your answer in part a) above? c)(5 points) Using the CPI and the most recent data, what would the price of bread need to be now to equal the same real price as 39 cents was in August 1970? Please take answer to 2 decimal places. d) (5 points) What is the rate of inflation between 1980 and 1981? (please take inflation rate to two decimals)   e) (5 points) What would the nominal minimum wage have to be in 2015 to equal the real purchasing power of the minimum wage in 1980? Use the two links below to answer question f) f)(5 points) Calculate the percent change in nominal wages between June 1997 and June 1998 and compare to the percent change in the CPI (aka inflation) over the same period. Which is larger and is this good news for workers? Explain. Pleas show all work. g)(10 points) Now calculate the percent change in the real wage in 2 ways: first, take the real wage in June of 1997 and then the real wage in June of 1998 and take the percent change (this is the most accurate) and then second – use the approximation of the percent change in the real wage by taking the %ΔW and subtracting the %ΔP. Please show all work. 2. (35 points) We discussed the port in the cruise ship analogy and the associated dual mandate given to the Fed by Congress. We also mentioned that we are doing quite well, at least statistically, with regard to achieving the dual mandate, the best in many years. In terms of achieving the dual mandate, we have a real goal and a nominal goal. One of the real goals is for real GDP to be at potential GDP and/or real GDP growth to equal potential GDP growth. You will need the following two links to answer this question: a)(5 points) Using the most recent data (2017:Q3), calculate real GDP using Nominal GDP and the GDP price deflator. b) (5 points) Now calculate the current GDP gap as defined by: [(Real GDP - Potential GDP)/ Potential GDP] x 100 c) (5 points) We discussed how disappointing the potential growth rate of the economy (the speed limit of the economy!) is as of now and also how it was higher in the past. What determines the potential growth rate of the economy? d) (5 points) Using the link for potential GDP, calculate what the potential growth rate of the economy was during 1998 and compare it to the potential growth rate for 2017? e) (5 points) According to the article titled "Economists Stick With Long View for Slower U.S. Growth Despite Recent Uptick," what is the source of the difference between the two potential growth rates above in part d)? f) (5 points) Using the link below, calculate the growth rate in the labor force in 1998 and compare to the growth rate in the labor force in 2017? Are your results consistent with your answer in part e) above? g) (5 points) Using the link below, calculate the growth rate in the output per hour (aka productivity) in 1998 and compare to the growth rate in output per hour in 2017? Are your results consistent with your answer in part e) above? 3. (40 points total) a) (5 points) The first indication of the great recession, as far as I know, occurred in August of 2007. Using the links below, calculate the ex-post real federal funds (interest) rate for July 2007. For this calculation, use the inflation rate from July 2016 to July 2017 and then the federal funds rate as of July 2007. Use this method for parts b) and c) below. b) (5 points) Now calculate the ex-post real federal funds (interest) rate for the trough of the great recession. Use link below to identify the trough. c) (5 points) Now calculate the ex-post real federal funds (interest) rate for the trough of the great recession but this time use the core rate of inflation (link below). d) (5 points) Why such a difference in the real rates of interest in parts b) and c)? e) (5 points) We now consider so labor market conditions. Most of the class is somewhere around 20 years old. So let's go back 20 years. Calculate how may people were employed in December of 1997 and compare to December of 2017. f) (5 points) Now calculate the real wage in December of 1997 and for December of 2017. Use the links below. Show all work. g) (10 points) Now draw a graph with 2 points (no lines). Put the real wage on the vertical axis and the amount of labor employed on the horizontal axis. Label as point A the conditions in December of 1997 and point B with the conditions as of December 2017.

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a)(5 points) Snoopy mentions that bread is 39 (39 cents) per loaf referring to the price of bread back in August of 1970. Using the CPI data below, calculate what the real price, in terms of 1982-1984 dollars, of a loaf of bread is (this is in base period prices).

CPI

To find out real price in Aug 1970 in terms of Aug 1982-84 prices
Multiply old price * new price index which gives
0.39*100 = 39
And divide the answer with the old price index which is given as 39
39/39 = $1 is the real price of a loaf of bread
Real price of loaf of bread in terms of 1982-84 prices
= nominal price * (CPI base year/CPI in 1970)
= 0.39 * (100/39)= $1

b)(5 points) Now do the same exercise as above, but instead of using the CPI price index, use the Personal Consumption Expenditure price index (below). That is, what is the real price of a loaf of bread now using the PCE price index? Why it so different than your answer in part a) above?

PCE Price Index

Here the base year is given as 1990 and the PCE-PI in Aug 1970 is at 22.508. Using this and the nominal price of loaf of a bread in Aug 1970 to be 39 cents, we have the real price of a loaf of bread to be
Real price of loaf of bread in terms of 1990 prices we have
= 0.39 * (100/22.508 ) = 39/22.508 = $1.73
It is so different than the answer in part (a) because, the base year is different and the PCE-PI is more consistent with the actual consumer behavior and the weights are allocated more efficiently in PCE than in CPI....

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