Scribd
Upload
17 views

Tutorial Week 3

Uploaded by

molly100805
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
17 views

Tutorial Week 3

Uploaded by

molly100805
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

ECON1002 Introductory Macroeconomics, Semester 2, 2024 1

TUTORIAL 3
(Week beginning August 12)

READING GUIDE: REVIEW WEEK 2 LECTURE AND TEXTBOOK CHS 3 & 4.

KEY CONCEPTS: MEASUREMENT AND MEANING OF THE CPI AND


INFLATION; SAVINGS AND WEALTH

SELF-REVIEW OF CONCEPTUAL UNDERSTANDING

These are to be attempted before the tutorial. They will not normally be covered in the
tutorial, maybe, except for a quick review, time permitting. The answers are typically found
in the textbook and lecture notes.

1. What are the costs of inflation? Who, if any, benefits from inflation? How does
inflation redistribute income?
2. In what sense is inflation a tax?
3. What are the problems caused for the measurement of inflation by changes in the
quality of goods and services over time?
4. What is meant by the distortions in the tax system introduced by inflation? [Hint:
What is bracket creep?]
5. Distinguish between household savings and national savings. For Australia, what
factors have contributed to a persistent decline in household savings over the past
two decades?

PRACTICE PROBLEMS (FOR IN-CLASS DISCUSSION)

STUDENTS SHOULD BE PREPARED TO PRESENT ANSWERS TO THE PROBLEMS WITH AN ASTERISK (*).

1. A typical consumer’s food basket in the base year 2022 is as follows:


30 chickens at $3 each
10 hams at $6 each
10 steaks at $8 each
A chicken feed shortage causes the price of chickens to rise to $5 each in the year 2023.
Hams rise to $7 each, and the price of steaks is unchanged.
(a) Calculate the change in the ‘cost-of-eating’ index between 2022 and 2023.
(b) Suppose that consumers are completely indifferent between 2 chickens and 1 ham.
For this example, how large is the substitution bias in the official ‘cost-of-eating’
index?

Tutorial Tasks
ECON1002 Introductory Macroeconomics, Semester 2, 2024 2

*2. A typical family’s expenditures each month are as follows:


20 pizzas at $10 each
Rent of apartment, $600 per month
Petrol and car maintenance, $100
Phone service, $50.
In the following year, the price of pizzas have risen to $11 each, apartment rent is $640,
petrol and maintenance has risen to $120, and phone service has dropped in price to
$40.
(a) Find the CPI in the subsequent year and the rate of inflation between the base
year and the subsequent year.

(b) The family’s nominal income rose by 5% between the base year and the
subsequent year. Are they worse off or better off in terms of what their income
is able to buy?

(c) What are the main costs of inflation?

*3. Visit the following website by the Reserve Bank of Australia,


https://www.rba.gov.au/statistics/tables/, and scroll down to ‘Inflation and Inflation
Expectations’.
(a) Download ‘Consumer Price Inflation – G1’. Using data in ‘Column B’, ‘Consumer price
index’, calculate (four-quarter ended) year-ended inflation from Mar-1993 (this
means you have to use data from Mar-1992). [Hint: Create a column using right
mouse button and enter the year-ended inflation formula, and then fill down the
column]. Verify if you got the same numbers as shown in ‘Column C’, ‘Year-ended
inflation’. (i) What is the current inflation rate? (ii) What is average inflation since
1993; (iii) What and when was the highest inflation rate since 1993?

(b) Compare the year-ended inflation rates for Mar-2022 in Column C with the ‘Year-
ended inflation – excluding volatile items’ for the same year in Column E (or Column
F, if following on from a). Explain the difference?

(c) Download ‘Inflation Expectations – G3’. You can see 1-year ahead inflation
expectations (forecasts) produced by consumers (Column B), union officials (Column
D), and market economists (Column F). In March-2021, which group produced the
most accurate inflation forecasts? Suppose you are a union official negotiating with
your employer to keep real wages constant. Would you have been better off if you
based your wage negotiation based on their forecasts? Why or why not?

Tutorial Tasks
ECON1002 Introductory Macroeconomics, Semester 2, 2024 3

4. Frank is lending $1000 to Sarah for two years. Frank and Sarah agree that Frank should
earn a 2 percent real return per year.
(a) The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be
110 in one year and 121 in two years. What nominal rate of interest should Frank
charge Sarah?

(b) Suppose Frank and Sarah are unsure about what the CPI will be in two years. Show
how Frank and Sarah could index Sarah’s annual payments to ensure that Frank gets
an annual 2 percent real rate of return

5. In each part that follows, use the economic data given to find national saving, private
saving, public saving and the national saving rate.
(a) In a closed economy,
Household saving = 200
Business saving = 400
Government purchases of goods and services = 220
Government transfers and interest payments = 125
Tax collections = 225
GDP = 2800

(b) In a closed economy,


GDP = 6300
Tax collections = 1725
Government transfers and interest payments = 400
Consumption expenditures = 4550
Government budget surplus = 100

(c) In an open economy,


Consumption expenditures = 4600
Investment = 1000
Government purchases = 1000
Net exports = 12
Tax collections = 1650
Government transfers and interest payments = 500

Tutorial Tasks

You might also like