Comments on Problem Set #2

I know I'm going to get questions about this so I'm going to try to pre-empt them.

On problem #3 you might as "how am I supposed to calculate real GDP"? Well, a little algebra should help. Because you know the formula for the GDP deflator, right? (Well, check p. 213 in the Mankiw text). Solve that equation for real GDP and you'll see you just need nominal GDP and the deflator.

The other question I'll get asked is "how are we supposed to put this in 1996 dollars if we don't have the CPI in 1996?" OK, the CPI in 1996 is 100. You probably don't know much more than you did before. Why? Because it doesn't matter.

Problem 4: You should consider a "recession" as any period in which real GDP is lower than the previous period. Two or more sequential periods of falling GDP is still the same recession. However, if you read the text and read the claim that "2 quarters of falling real GDP" constitutes a recession, then make that claim and make your work easier. ;-)

Problem 5: In (B), yes, the CPI is less than 100. (For greater understanding, think about why.)

Problem 6: No, you don't need to know the CPIs. This isn't a question about CPIs. It's merely asking for comparing percentage changes over a thirty year period.

PLEASE, you need to master the calculation of a percentage change. It is crucial to your understanding of how to view the economy.