ECON 2

ECON 201 HOMEWORK II (20 points)

Fall 2021

Due October 14, 2021

Chapters 8, 9, 10, 11 & 13

1. Gross Domestic Product (Chapter 8)

2013 2017 2018

Product Quantity Price Quantity Price Quantity Price

MP3s 40 $150.00 45 $200.00 50 $250.00

Tacos 2,000 2.00 2,200 2.25 2,300 2.40

Coats 300 50.00 310 52.00 350 55.00

1.1 Consider the table above for a simple economy: a) Using 2013 as the base year, calculate nominal GDP, real GDP, and the GDP deflator for 2017 and 2018. b) Using GDP deflator found in part a,

calculate the rate of increase in the price level from 2017 to 2018. Show your work (2 points).

1.2 Give two reasons why GDP does not reflect total production in an economy (1 point).

1.3 Even though it is generally true that the more goods and services people have, the better off they are, GDP provides only a rough measure of well-being. Assuming language is not an issue, what other

factors besides GDP might you consider when deciding where to live and work? Explain (1 point).

2. Unemployment and Inflation (Chapter 9)

Working-age population 235,900

Employment

Unemployment

Unemployment rate 9.4%

Labor force

Labor force participation rate 65.5%

2.1 Fill in the missing values in the table of data collected in the household survey for December, 1996.

The working-age population, employment, unemployment, and labor force are measured in thousands.

Show your work (2 points).

2.2 Explain what economists mean by full employment and why this rate of unemployment is not

zero (0.5 point).

3. Consumer Price Index

3.1 Suppose Econ 201 is a country that only consumes textbooks, study guides, and calculators:

Base Year (2011) 2014 2015

Product Quantity Price Expenditure Price Expenditure Price

Expenditure

Textbook 120 $16 $20 $28

Study

guide

60 10 15 21

Calculator 80 3 5 6

Total

Fill all expenditures including total expenditures in the above table. Using the year 2011 as the

base year, calculate the Consumer Price Index in 2014 and 2015. What is inflation rate from 2014

to 2015? Show your works (2 points).

3.2 The table below lists the actual minimum wage and CPI in 1974 and in 2017. Using the table,

calculate the real minimum wage for 1974 and 2017. Are workers better off in terms of the

purchasing power of a dollar in 1974 or 2017? Explain why (2 points).

Year Nominal Minimum

Wage

CPI

(1982=100)

1974 2.00 49.3

2017 7.25 244.3

4 Long Run Economic Growth and Loanable Funds Market (Chapters 10 and 11)

4.1 If real GDP in a small country in 2017 is $8 billion and real GDP in the same country in 2018 is $8.3 billion, the growth rate of real GDP between 2017 and 2018. Show your work (0.5 points).

4.2 If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita? Show your work (0.5 points).

4.3 Explain and show graphically how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds (1 point).

4.4 Explain and show graphically how an increase in expected profits from firm investment projects affects the equilibrium interest rate and the equilibrium quantity of loanable funds (1 point).

4.5 Explain and show graphically how an increase in government spending (i.e. budget deficit) affects the equilibrium interest rate in the market for loanable funds (1 point).

5 Aggregate Demand and Aggregate Supply (AD-AS) Model (Chapter 13)

5.1 Why does the short-run aggregate supply curve slope upward? (0.5 point)

5.2 Explain why the long-run aggregate supply curve is vertical. Then, explain how each of the following events would affect the long-run aggregate supply curve. (1 point)

a. A lower price levels b. A decrease in the labor force c. A decrease in the quantity of capital goods d. Technological change

5.3. Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

Explain how the economy moves back to full employment. (1 point)

5.4. Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth.

Explain how the economy moves back to full employment. (1 point)

5.5. Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock. Explain

how the economy moves back to full employment. (1 point)

5.6. Use the dynamic model of aggregate demand and supply to illustrate a situation where the economy is growing but experiencing inflation in the long run. (1 point)