Exam 35: The Miracle of Compound Growth

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Suppose real GDP per capita grows at a rate of 2.5 percent.How many years will it take for it to double? What if the growth in real GDP per capita were 3 percent?

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Question 1

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Using the years-to-double rule,divide 72 by 2.5 to get 28.8 years and divide 72 by 3 to get 24 years.

Why would it be a good idea to plot time-series data on a ratio scale instead of a regular scale? What is the difference between the two types of graphs?

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Question 2

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On a ratio-scale graph,the vertical scale shrinks as the economic variable being plotted gets bigger.Equal percentage changes in the variable will have the same vertical distance instead of equal dollar differences having the same vertical distance.With a ratio-scale graph,a variable that grows at a constant rate will look like a straight line.On a regular graph,the same variable would look as if it were increasing at an exponential rate,which is misleading.

Suppose you win a million dollars in the state lottery.What is the present discounted value of your winnings if you are scheduled to receive $200,000 at the end of each year for the next five years and the rate of interest is 5 percent?

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Question 3

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The present value of the lottery winnings is: = $190,476.19 + $181,405.990 + $172,767.52 + $164,540.50 + $156,705.23
= $865,895.33

Find the present discounted value of: (A)$500 to be paid at the end of 5 years. (B)$100 to be paid at the end of 2 years and $100 to be paid at the end of 3 years. (C)$8 to be paid at the end of 1 year,$8 to be paid at the end of 2 years,and $80 to be paid at the end of 3 years.

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Question 4

Suppose,when you retire 40 years from now,you will want to live on what is $5,000 per month at today's prices.How much will this be 40 years from now if the average annual rate of inflation is the same as that between 1965 and 2010? In 1965 the CPI was 29.9,and in 2010 the CPI was 201.6.

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Question 5

A zero-coupon bond pays only its face value at the end of a fixed number of years (its term to maturity)with no other interest or coupon payments.How much would you pay for this type of bond if the face value of $100 would be paid back at the end of 20 years and the interest rate were 7 percent? How much would you pay if the interest rate were 6 percent?

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Question 6

How long will it take a $100 deposit to increase to $200 if the rate of interest is 4 percent?

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Question 7

The purpose of a ratio scale is

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Question 8

Between 1980 and 2000,China's GDP grew at an annual rate of 9.7 percent.China's GDP in 2006 was estimated to be $2.5 trillion.If China continues to grow at the same rate as it did between 1980 and 2000,what will its GDP be in 2026? How many years will it take for China's GDP to be twice as large as it was in 2006?

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Question 9

Suppose you deposit $100 in the bank and leave it there for 10 years.At the end of 10 years,how much will be in my account if the annual rate of interest is 5 percent?

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Question 10

Suppose the CPI in 2010 was 188.9.In 1980,it was 49.3.What was the average annual rate of inflation over this 30-year period?

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Question 11

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Exam 35: The Miracle of Compound Growth

Suppose real GDP per capita grows at a rate of 2.5 percent.How many years will it take for it to double? What if the growth in real GDP per capita were 3 percent?

Why would it be a good idea to plot time-series data on a ratio scale instead of a regular scale? What is the difference between the two types of graphs?

Suppose you win a million dollars in the state lottery.What is the present discounted value of your winnings if you are scheduled to receive $200,000 at the end of each year for the next five years and the rate of interest is 5 percent?

Find the present discounted value of: (A)$500 to be paid at the end of 5 years. (B)$100 to be paid at the end of 2 years and $100 to be paid at the end of 3 years. (C)$8 to be paid at the end of 1 year,$8 to be paid at the end of 2 years,and $80 to be paid at the end of 3 years.

Suppose,when you retire 40 years from now,you will want to live on what is $5,000 per month at today's prices.How much will this be 40 years from now if the average annual rate of inflation is the same as that between 1965 and 2010? In 1965 the CPI was 29.9,and in 2010 the CPI was 201.6.

How long will it take a $100 deposit to increase to $200 if the rate of interest is 4 percent?

The purpose of a ratio scale is

Suppose you deposit $100 in the bank and leave it there for 10 years.At the end of 10 years,how much will be in my account if the annual rate of interest is 5 percent?

Suppose the CPI in 2010 was 188.9.In 1980,it was 49.3.What was the average annual rate of inflation over this 30-year period?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors,price Ceilings,and Elasticity

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Interaction of People in Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, transfers, and Income Distribution

Public Goods, externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth and Globalization

International Trade

International Finance

Reading,understanding,and Creating Graphs

Consumer Theory With Indifference Curves

Producer Theory With Isoquants

Present Discounted Value

Deriving the Growth Accounting Formula

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

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