Reference no: EM131226934

1. The following data are from a recent federal budget:

                                                                               2000                           2010

Defense outlays                                                 294,363                      693,586 

Non-defense outlays                                          319.7                            658.2

 Composite outlay deflators (2005 =1.00)

Defense                                                                0.8147                      1.1327

Non-defense                                                       0.8900                        1.1256 

a. Compute the percentage change for federal defense and non-defense outlays in current-year dollars from 2000 to 2010. Divide that change into its real and price components.

b. For non-defense outlays, convert the deflator base to 2000 =1.0000, and re-calculate the absolute change in these real dollars. Convert the deflator base to 2010 = 1.000, and recalculate the absolute change in real dollars. Why might budget strategists try to use one or the other of these two numbers to argue for more or less spending? Is either of the two base years more correct? Explain. Compute and compare the real percentage increases using the two different base years.

2. In a period in which motor fuel prices have been increasing at an annual rate of 30 percent, the chief of police submits a budget request to the city council that shows no increase in the budget line for purchases of gasoline, a budget category that constitutes around 15 percent of the department total and is second only to costs associated with personnel in the department budget. Other city departments have increased their fuel budget requests by at least 20 percent and some by even more because, along with higher motor fuel prices, the city has been experiencing considerable population growth. The chief says that the department can hold the line on fuel costs because of smarter management of patrol resources.

Should the chief be applauded for his efficient management, or is he using a cynical budget strategy?

7. The data that follow report the damage caused by named hurricanes that caused damages of $500 million or more (nominal or current dollars) in the mainland United States. What is the ranking of the hurricanes in terms of real dollars? You can find various deflators (the implicit gross domestic product deflator would be one option) at the Bureau of Economic Analysis website (www.bea.gov). Hurricane categories gauge the intensity of the storm, with 5 being the highest. What do deflated values tell you that the nominal values do not? Do storms of the same category produce roughly the same damage? Why or why not? Is there a pattern over the years?

Hurricane	Year	Category	Nominal damage ($ Millions)	Hurricane	Year	Category	Nominal damage ($ Millions)
Allison	1989	0	500	Agnes	1972	1	2,100
Alberto	1994	0	500	Dennis	2005	3	2,230
Frances	1998	0	500	Frederic	1979	3	2,300
Ernesto	2006	0	500	Opal	1995	3	3,000
Erin	1998	2	700	Fran	1996	3	3,200
Bonnie	1998	2	720	Isabel	2003	2	3,370
Diane	1955	1	832	Floyd	1999	2	4,500
Lili	2002	1	860	Allison	2001	0	5,000
Gloria	1985	3	900	Jeanne	2004	3	6,900
Georges	1998	2	1,155	Hugo	1989	4	7,000
Elena	1985	3	1,250	Frances	2004	2	8,900
Betsy	1965	3	1,421	Rita	2005	3	11,300
Camille	1969	5	1,421	Charley	2004	4	15,000
Juan	1985	1	1,500	Ivan	2004	4	15,000
Bob	1991	2	1,500	Wilma	2005	3	20,600
Alicia	1983	3	2,000	Andrews	1992	5	26,500
				Katrina	2005	3	81,000