(a) Let Y denote denote national income and E total expenditure. Explain why we have the identity Y ‰¡ E
(b) Consider an economy that produces only two goods-milk and honey. The price of milk is pm, the price of honey, ph, and the quantities, in quarts, are Qm and Qh respectively. The facts are as follows:

(i) Suppose the base year is 2013. Calculate nominal GDP, real GDP, and the GDP deflator in each year.
(ii) Calculate the percentage change in each variable, from the preceding year, in 2014 and 2015. Explain why these findings make sense.
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(c) Best-bread Inc. bakes a loaf of bread that it plans to sell today for $7. To do so, it hires Betsy and pays her $3. Suppose, however, that it fails to sell the loaf today and that it puts it in the freezer. What happens (to GDP) in each of the following two cases,
(i) it sells the bread next month for $7
(ii) the bread spoils and it never sells it?
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(d) After careful research, it is found the typical shopping basket contains 4 apples (with a generic price, pa) and 2 bananas (with generic price, pb). Suppose that the facts are as follows:

(i ) Calculate the consumer price index in each year, using 2013 as the base year.
(ii) Calculate the rate of inflation (from the previous year) in 2014 and in 2015.

Transcribed Image Text:

Year Pm Qm Qh Ph $2 $1 2013 100 50 $1 200 $2 100 2014 $2 $4 2015 200 100 Year Pa | Pb 2013 $1 $2 2014 $2 $3 2015 | $3 $4