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    Case Study: CPI and Deflation During the Depression

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    1. Between 1929 and 1933, GDP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price index fell from 100 to 75.
    a. What was the percentage decline in nominal GDP from 1929 to 1933?
    b. What was the percentage decline in real GDP from 1929 to1933? Show your work.

    2. Compute how much each of the following items is worth in terms of today's dollars using 177 as the price index for today.
    a. In 1929, the CPI was 17.7 and the price of a movie ticket was $0.25.
    b. In 1932, the CPI was 13.1 and a cook earned $15.00 a week.
    c. In 1943, the CPI was 17.4 and a gallon of gas cost $0.19.

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    Solution Preview

    See the attached file. To see how each number was calculated, select the cell that the number is in.

    Problem 1

    a) What was the percentage decline in nominal GDP from 1929 to 1933?
    Price2011 = ...

    Solution Summary

    This solution illustrates how the Consumer Price Index (CPI) is used to calculate changes in real GDP, and also to determine how much a product would cost in today's money.

    $2.19