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?