Economics

Practice Problems:

1. Consider the market for computers. Suppose that there are the following changes: The price of

software rises (a complimentary good) and new technology is developed that improves the ability of

manufacturers to construct computers. Show in a supply and demand graph the effect of both changes

happening in this market, and state the effect on Price and Quantity.

2. Suppose Jotunheim and Muspelheim both make meat and swords.

Who has the absolute advantage in Meat? Who has the comparative advantage in Swords? What is the

opportunity cost of 1 meat in Jotunheim? What is the opportunity cost of 1 meat in Muspelheim? Put a

point A in Jotunheim that is possible but not efficient. Put a point B in Jotunheim that is possible and an

improvement from point A. Put a point C in Muspelheim that is possible and efficient. Finally, show the

effect of an increase in population in Muspelheim on the PPF (assuming labor is the resource needed to

produce Meat and Swords).

3. Suppose the Fed chooses to lower the discount rate. Show the effect on a money supply – money

demand graph, and state the impact on interest rates and on the quantity of money.

(You should also be able to do any other change from the Fed, or a change in P or Y)

4. Suppose that technology increases. Use the aggregate supply aggregate demand graph to show the

effect. State the short-run impact on the price level and on GDP. Then, state the long-run impact on

price level and on GDP.

(You should also be able to do a change in anything in C, I, G, NX, K, L, N or H).

5. With respect to GDP, what do the following letters stand for: C, I , G, NX, K, L, N, H, A, Y?

6. What are 3 types of unemployment, other than Seasonal?

7. What are 3 uses of money?

8. What are 5 tools the Fed can use to decrease the money supply? Be specific about things that will

DECREASE the supply.

9. Suppose you want to have $2,000,000 in 20 years and can obtain a 20% interest rate. How much

money would you need to save today?

Given the following:

Year Corn – P Corn – Q Beer – P Beer – Q

2010 1.50 200 4.00 1000

2011 1.75 210 4.25 1100

2012 1.80 220 4.50 900

What is real GDP each year (in 2010 dollars)? What is nominal GDP? What is the GDP deflator? What is

the GDP growth rate from the pervious year in 2011 and in 2012? What is the inflation rate using the

GDP deflator in each of 2011 and 2012?

10. Which of the following affect US gdp?

- A gardener grows $50 worth of tomatoes for his family.

- A farmer sells $100 worth of oranges to a European company ,who plan to turn it into orange juice

- A tourist from France buys a ticket to a Broadway show for $50

- A homeowner sells his house for $300,000 after buying it in 2010 for $250,000

- A taxpayer receives a $500 refund from the IRS