Suppose that people consume only three goods, as shown in this table:

Tennis Balls Gold Balls Bottle of Gatorade

2009 price 2 dollars 4 dollars 1 dollar

2009 quantity 100 100 200

2010 price 2 dollars 6 dollars 2 dollars

2010 quantity 100 100 200

a) What percentage change in the price of each of the three goods?

b) Using a method similar to the consumer price index, compute the percentage change in the overall price level.

c) If you were to learn that a bottle of Gatorade increased in size from 2009 to 2010, should that information affect your calculation of the inflation size? If so, how?

d) If you were to learn that Gatorade introduced new flavors in 2010, should that information affect your calculation of the inflation rate? If so, how?

Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.

a.The invention of the iPod

b. the introduction to air bags in cars

c.increased personal computer purchases in response to a decline in their price.

d.more scoops of raisins in each package of Raisin Bran

e.Greater use of fuel-efficient cars after gasoline prices increase.

PART B

1. Suppose that this year's money supply $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion

A. what is the price level? What is the velocity of money?

B. Suppose the velocity is constant and the economy's output of goods and services rises by 5% each year. What will happen to nominal GDP and the price level next year if the FED keeps the money supply constant?

C. What money supply should the FED set next year if it wants to keep the price level stable.

D.What money supply should the FED set next year if it wants inflation of 10 percent?