2. (TCO B) Suppose the governor of California has proposed decreasing toll rates on
California's toll roads and has presented two possible scenarios to implement these increases.
The following are projected data for the two scenarios for the California toll roads. (20 points)
Scenario 1: Toll rate in 2012: $10.00. Toll rate in 2016: $8.00.
For every 100 cars using the toll roads in 2012, 140 cars will use the toll roads in 2016.
Scenario 2:
Toll rate in 2012: $10.00. Toll rate in 2016: $9.00.
For every 100 cars using the toll roads in 2012, 120 cars will use the toll roads in 2016.
(Part A) Using the midpoint formula, calculate the price elasticity of demand for Scenario 1
and Scenario 2. (10 points)
Scene 1;
Elasticity= ( 140-100)/( 8-10) *( 8+10)/( 140+100) = -40/2* 18/240= -1.5
Scene 2:
Elasticity= ( 120-100)/( 9-10) *( 9+10)/( 120+100) = -20/1* 19/220= -1.72
(Part B) Assume 50,000 cars use California toll roads every day in 2012. What would be the
daily total revenue received for each scenario in 2012 and in 2016? (6 points)
Scene 1;
Revenue in 2012= 50000*10 = 500000
Revenue in 2016 = (140*50000/100) *8 = 70000*8= 560000
Scene 2;
Revenue in 2012= 50000*10 = 500000
Revenue in 2016 = (120*50000/100) *9 = 60000*9= 540000
(Part C) Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit
elastic? Briefly explain. (4 points) (Points : 40)
Demand is elastic as the elasticity value is more than 1. Also revenue rises when toll falls-
confirming elastic demand in both scenarios
4. (TCOs E and F) Discuss structural, cyclical, frictional, and natural unemployment. What fiscal
and monetary policies are appropriate to fight unemployment? What type of unemployment will be
affected most by these policies? Why? Which will be affected least? Why? (20 points) (Points : 20)
OPEN UNEMPLOYMENT—workers are willing to work at the market wage rate but are unable
to find jobs. This is basically due to no. of jobs being lesser than the no. of workers. In a sense
it’s the purest form of UNEMPLOYMENT. The government can’t do much except to raise GDP so
that new opportunities are created to absorb the unemployed
FRICTIONAL UNEMPLOYMENT—this involves workers who are between jobs. Some workers
remain unemployed while they look for better opportunities. It happens when the nature of job
responsibilities does not match the skill set /expectations of the prospective workers. In other
cases workers get laid off during off season—in agriculture. Harvest time sees new workers
getting jobs, but they are unemployed once the harvesting is over. Such unemployment is
sometimes called seasonal UNEMPLOYMENT. This is a part of growth of an economy, and no
particular policy is useful here, especially as this unemployment is often voluntary
STRUCTURAL UNEMPLOYMENT- this unemployment is due to underlying changes in the
economy’s structure. As a result there is a mismatch of job skills available and required. A shift
from industry led growth to services led growth can be a possible cause. The skill set for
services is different from industry skills set. As a result jobs may be available in service sector,
but the workers are unable to take up these jobs as they are pure engineers without any
experience in service sector. This type of unemployment can be reduced by the government
constructively by offering training programs, short courses to bridge the requirement-available
skill set gap. Private firms can be encouraged to on job training to new employees.
Unemployment benefits could be given for limited periods to help tide over the transition
period. Educational support can be given to allow workers to upgrade skills.
CYCLICAL UNEMPLOYMENT is the result of ups and downs in the business cycle. A recession
sees higher unemployment. According to most experts the unemployment in USA currently is
cyclical as it is the result of the financial crisis of 2008-09. This is corroborated by a recent IMF
study that concluded that, ‘the wave of joblessness in America is mostly due to cyclical factors,
not inherent structural weaknesses’. Take the case of an investment broker who reached great
heights in his career during 2007. His salary and bonuses were high until the financial
meltdown hit US in 2009. He was given the pink slip as financial giants like Lehman Bros and
AIG were bailed out by government/tax payer funds. His unemployment is purely cyclical.
Question 5.5. (TCO E) Answer Parts A and B completely. (30 points)
(Part A) (20 points) Suppose nominal GDP in 2012 was $100 billion and in 2014 it was $220 billion. The
general price index in 2012 was 100, and in 2014 it was 140. Between 2012 and 2014, the real GDP rose
by what percent?
real GDp in 2012 = 100/100 =1
Real GDP in 2014 = 220/140 = 1.55
So real GDP rose by 55%
(Part B) Use the following scenario to answer questions (Part B1) and (part B2).
In a given year in the United States, the total number of residents is 190 million, the number of residents
under the age of 16 is 38 million, the number of institutionalized adults is 15 million, the number of adults
who are not looking for work is 27 million, and the number of unemployed is 5 million.
(Part B1) (5 points) Refer to the data in the above scenario. What is the size of the labor force in the United
States for the given year?
labour force= 190-38-15= 137
(Part B2) (5 points) Refer to the data in the above scenario. What is the unemployment rate in the United
States for the given year? (Points : 30) = 5/137=3.64%
Question 6.6. (TCOs E and F) Answer Parts A, B, and C completely. (40 points)
(Part A) Suppose your local Congress representative suggests that the federal government should not
intervene in the baseball ticket market to stop runaway price increases. Would you say that this view
basically supports the Keynesian or the Monetarist school of thought? Why? What position would the
opposing school of thought take on this issue? (Be brief—you can answer this in two or three brief
paragraphs.) (15 points)
I will take the Keynes look at argue that govt must intervene by increasing supply so that prices can come
down. The opposite school will say that this is a short run solution. If supply is increased demand will rise
further so that the demand supply gap is high enough to cause higher prices.
(Part B) Any change in the economy’s total expenditures would be expected to translate into a change in
GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier
effect. Explain how the multiplier effect works. (10 points)
(Part C) You are told that 50 cents out of every extra dollar pumped into the economy goes toward
consumption (as opposed to saving). Estimate the GDP impact of a positive change in government
spending that equals $15 billion. (15 points) (Points : 40)
MPC=.5
Multiplier= 1/(1-MPC) = 2
So GDP will rise by 2*15 =30 billion with a positive change in government spending
Question 7.7. (TCO H) You are in charge of making recommendations based on economic forecasts to
uppermanagement of your firm, which produces widgets and employs 2,500 workers. Uppermanagement has
informed you that they are planning to build a new facility and hire 500 additional workers. They would like you to
research leading indicators and produce a detailed analysis of where the economy is heading in the next 6 months.
What would you look for in terms of leading indicators (discuss at least three indicators), and what
recommendations would you make to upper management based on your findings regarding leading indicators? Be
sure to consider the macroeconomic nature of leading indicators, and the microeconomic nature of your firms’
decisions. (30 points) (Points : 30)
let us consider 3 indicators;
Stock market index is a leading indicator, as it signals positivity about future earnings of companies. .
Consumer confidence is another indicator that tells us that demand may rise in future when this confidence is high
Applications for unemployment benefits tells us that higher is the number lower is future potential, so production
must be scaled down if the number of applications is rising.
Question 8.
8. ((TCO G) Let the exchange rate be defined as the number of dollars per Japanese yen. Assume that there is a
decrease in U.S. interest rates relative to that of Japan. (30 points)
(Part A) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the yen?
Why? (5 points)
As interest rates are lower in US now money will flow out of Us. The demand for dollar will fall.
(Part B) Has the dollar appreciated or depreciated in value relative to the yen? (5 points)
Dollar will depreciate as price of dollar/ Yen has risen.
(Part C) Does this change in the value of the dollar make imports cheaper or more expensive for Americans? Are
American exports cheaper or more expensive for importers of U.S. goods in Japan? Illustrate by showing the price of a
U.S. wind energy turbine in Japan before and after the change in the exchange rate. (10 points)
As the yen has appreciated, exports are now more expensive.
Assume that we have 100$= 1yen. Which changed to 150$= 1yen
S to buy a turbine from Japan with a cost of 100yen will now cost 150*100 = 15000 $, whereas earlier it was 100*100
=10000
(Part D) If you had a business exporting goods to Japan, and U.S. interest rates fell as they have in this example,
would you plan to expand production or cut back? Why? (10 points) (Points : 30)
I will be happy as the price of Japanese import sis lower. This will increase demand for japanese imports- translating
into more demand for my exports into Japan.
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