macroeconomics

Question 1. Inflation

You gained access to the information on the composition of the consumer basket. Also, you know that the price index in 2016 was 240.

1. Find the cost of the 2016 basket in 2016 prices

1. Find the cost of the 2016 basket in 2017 prices

1. Use the proportion method to find the CPI of 2017

1. Calculate inflation as the growth rate of CPI.

1. Your results are biased because the composition of the basket changed. Use chained inflation method to account for the change. That is, repeat (a)-(d), but use the 2017 basket. Then take the average between the inflation you find and your result in (d).

1. If one compares your result to the core inflation indicator, which one do you think will be higher? Explain the reason concisely (notice how prices of food and energy change).

Question 2. Inflation and sticky contracts

The workers negotiate a 2% raise in their nominal wage. They anticipate inflation of 2%.

(a) The inflation amounts to 1%. Is the worker’s real wage lower or higher than they anticipated?

(b) Given your answer to (a), what can you say about the firms’ profitability?

(c) Do you expect firms to fire or hire workers? Would you expect the nominal wages to go up or down? Explain. (hint: think deflationary scenarios such as the Great Depression or Greece).

(d) Assume that the economy was at the natural level of unemployment at the moment the wages were set. What kind of output gap do you think is taking place after the events of (c)? Is the cyclical unemployment positive or negative?

Question 3. International finance

Only the following international transactions take place in the US during the year 2017:

· Canada exports $50 worth of electricity to Buffalo

· Delta carries 10 passengers across the Atlantic, of which 8 are foreigners. The ticket price is $5.

· Foreign workers send $12 to their families home

· J.K. Rowling collects $5 in royalties from selling her books around the US through an American publisher.

· BMW builds a $20 factory in Alabama

· Foreigners buy $5 worth of US Treasury bills.

(a) Compose the statement of international transactions

(b) Calculate the trade balance, current account, and the financial account (assume there is no statistical discrepancy)

(c) At the beginning of the year, the US owed $90 in foreign claims on the US-located assets. Calculate the percentage change in the US external debt.

Question 4. Economic growth and development

There are 150 workers with jobs and 200 units of capital in the country. The level of technology is 20. The output of the country follows the Cobb-Douglas production function: