Exercise Sheet - Week 4

UNIVERSITY OF GUYANA
FACLTY OF SOCIAL SCIENCES

ACADEMIC YEAR 2019/2020 (Semester II)
DEPARTMENT OF ECONOMICS
ECN 1200- INTRODUCTION TO MICROECONOMICS
Week Four Exercise
Measuring inflation. The following is a worked example followed by worksheet questions.
Consumer Price Index (CPI) = Cost of Basket in current year
Cost of Basket in base year x 100
Cost of Basket in current year = quantity x price in current year (the year in question)
Cost of Basket in base year = quantity x price in the base year (the base year is always indicated)
Example
The base year is the year 2000
Quantity 2000 2005

2 units of X $25.00 $30.00
5 units of Y $50.00 $60.00
Cost of Basket In base year(2000): (2 x $25) + (5 x $50) = $50 + $250 = $300
Cost of Basket in current year:
Year: 2000
Cost of basket in current year = (2 x $25) + (5 x $50) = $50 + $250 = $300
Since the current year we are calculating for is 2000, the cost of basket in both current and base year
will be the same. Therefore, the CPI for 2000 which is the base year will equal to 100. (we will see this
below)
Year: 2005
Cost of basket in current year = (2 x $30) + (5 x $60) = $60 + $300 = $360

Consumer Price Index Calculations:
CPI for year 2000: ($300 / $300) x 100 = 100
CPI for year 2005: ($360 / $300) x 100 = 120
It is not compulsory that you multiply by 100. CPI can be expressed in decimal fractions.
The inflation rate can be calculated using the CPI information.
Inflation Rate = CPI (current year) – CPI (base year ) × 100
CPI (base year)
Therefore, the inflation rate - 2000-2005 = 120 – 100 x 100
100
= 20%
Inflation rate is 20%. The general price level has increased by 20% over the specified period.
Question 1
Using the information in the table below calculate the inflation rates from 2000 to 2004 and 2004 to
2005. The base year is 2000.
Basket 2000 2004 2005

2 units of good A $25.00 $30.00 $32.00
5 units of good B $50.00 $60.00 $63.50
Question 1.1
Using the information in the table below calculate the GDP deflator and the inflation rate thereafter. The
year 2000 is the base year…..
Production Prices
2000 2001 2002 2000 2001 2002
Good X 50 75 100 $1 $1 $1.20
Good Y 100 100 130 $0.60 $0.75 $1.00
Question 2
Discuss three policies adopted by governments to tackle inflation.
Policy type 1:_____________________________________
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Policy Type 2: __________________________
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Policy Type 3:_______________________________
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Question 3
Expalin three effects of higher interest rates (Contractionary monetary policy)

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Natural Rate of Unemployment (NAIRU)
Natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium.
The NAIRU is the difference between those who would like a job at the current wage rate and those who
are willing and able to take a job.
NAIRU: There are only two types of unemployment which exist
1. Frictional unemployment
2. Structural unemployment
Question 5
(a) Explain what is the Natural Rate of Unemployment (NAIRU)
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(b) Distinguish between the following pairs:

(i) Expansionary and Contractionary Fiscal Policy
(ii) Expansionary and Contractionary Monetary Policy
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The End

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UNIVERSITY OF GUYANA

FACLTY OF SOCIAL SCIENCES

Measuring inflation. The following is a worked example followed by worksheet questions.

Consumer Price Index (CPI) = Cost of Basket in current year

Cost of Basket in base year x 100

The base year is the year 2000

Quantity 2000 2005

Cost of Basket In base year(2000): (2 x $25) + (5 x $50) = $50 + $250 = $300

Cost of Basket in current year:

Cost of basket in current year = (2 x $25) + (5 x $50) = $50 + $250 = $300

Cost of basket in current year = (2 x $30) + (5 x $60) = $60 + $300 = $360

CPI for year 2000: ($300 / $300) x 100 = 100

CPI for year 2005: ($360 / $300) x 100 = 120

The inflation rate can be calculated using the CPI information.

Inflation Rate = CPI (current year) – CPI (base year ) × 100

CPI (base year)

Therefore, the inflation rate - 2000-2005 = 120 – 100 x 100

Basket 2000 2004 2005

Discuss three policies adopted by governments to tackle inflation.

Policy type 1:_____________________________________

Policy Type 2: __________________________

Policy Type 3:_______________________________

Expalin three effects of higher interest rates (Contractionary monetary policy)

Natural Rate of Unemployment (NAIRU)

NAIRU: There are only two types of unemployment which exist

(a) Explain what is the Natural Rate of Unemployment (NAIRU)

(b) Distinguish between the following pairs:

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