Dr. Christos Shiamptanis
ECN 301
Recommended questions with Answer Key
Chapter 2: Policy exercises, pages 69-70
Question 1
In a particular year the (short-term) nominal interest rate on three-month Treasury bills averaged
10.0%, and the GDP deflator rose from 50.88 to 55.22. What was the annual rate of inflation? What
was the real interest rate? Were real interest rates higher in year A describe above, or in year B,
when the (short-term) nominal interest rate on three-month Treasury bills was 4.8%, and the inflation
rate was 2.6%?
In year A the inflation rate—the proportional rateof increase in the GDP deflator—was 55.22/50.88 – 1
= 8.53% per year. Thus the real interest rate in that year was 10.0% –8.53% = 1.467% per year: lower
than the real interest rate in year B of 4.8% – 2.6% = 2.2% per year.
Question 2
Suppose in a particular year the GDP deflator roseat an annual rate of 2.6%, and the short-term
interest rate on three-month Treasury bills averaged 4.8% What was the (short-term) nominal interest
rate? What was the (short-term) real interest rate?
The interest rates on Treasury bills, notes and bonds are nominal. Thus, the (short-term) nominal
interest rate was 4.8% per year. The (short-term) real interest rate was the difference between the
nominal interest rate and the inflation rate: 4.8%- 2.6% = 2.2% per year.
Question 6
Consider the following data for Canada for 2000 inmillions of dollars.
Consumption spending 594,089
Investment spending 194,177
Government purchases 219,816
Net exports 55,397
Capital consumption allowances 135,781
Indirect taxes less subsidies 127,745
a. Using this data calculate Gross Domestic Product (GDP) at market prices.
b. Calculate GDP at factor cost.
c. Calculate Net Domestic Product (NDP)at factor cost.
a. GDP at market prices = C+I+G+NX
=594,089+194,177+219,816+55,397=1,063,479
b. GDP at factor cost = GDP at market prices–Indirecttaxes less subsidies
=1,063,479–127,745 = 935,734
c. NDP at factor cost = GDP at factor cost – Capital consumption allowances
= 935,734 – 135,781 = 799,953

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