I need an explanation and solution.

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Economics 102-Principles of Macroeconomics Homework 1-Professor Wallace, Spring 2016

Put the name of each member of your group on each sheet of your homework. Homework is due in class on Wednesday, 17 February. Late homework will not be accepted.

1. The consumer price index is a fixed weight index. It compares the cost of a fixed bundle of goods in one period with the cost of the identical bundle of goods in a base period. Calculate the cost of a bundle with 100 units of good A, 150 units of good B, and 25 units of good Z for 2013, 2014, and 2015 using the prices shown in the table below. Then convert the results into an index for each year using 2012 as the base year.

G o o d Q u a n t i t y 2 0 1 3 p r i c e s 2 0 1 4 p r i c e s 2 0 1 5 p r i c e s

A 100 1 . 0 0 0 K D 1 . 5 0 0 K D 1 . 7 5 0 K D

B 150 1 . 5 0 0 K D 2 . 0 0 0 K D 2 . 0 0 0 K D

Z 25 4 . 0 0 0 K D 3 . 5 0 0 K D 3 . 0 0 0 K D

• Total spending in 2013 _____________ Price index for 2013 _____________

• Total spending in 2014 _____________ Price index for 2014 _____________

• Total spending in 2015 _____________ Price index for 2015 _____________

a. What is the percentage rate of change of the price level from 2014 to 2015? _____

b. What is the percentage rate of change of the price level from 2013 to 2014? _____

c. Now suppose that the base year is 2015. Recalculate the price index for each year.

• Price index for 2013 _____________

• Price index for 2014 _____________

• Price index for 2015 _____________

d. Using the index with the 2015 base year what is the percentage rate of change of the price level

from 2014 to 2015? _____

e. Using the index with the 2015 base year what is the percentage rate of change of the price level

from 2013 to 2014? _____

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2. Go to the website for the Kuwait Central Statistical Bureau for data on current and constant Kuwait GDP by expenditure category for 2012 and 2013 in order to complete the following table.

Expenditure Category 2012 2013 Current Constant Current Constant

Government final consumption expenditures

Private final consumption expenditures

Gross capital formation Exports of Goods and

Services

Less: Imports of Goods and Services

Gross Domestic Product 3. In each of the following cases, classify the person as cyclically, frictionally, or structurally unemployed or not in the labor force.

• Duke lost his assembly line job at Toyota because a machine that does Duke’s old job

faster and with fewer errors replaced him. ____________________

• Brutus quit his job as an advertising executive in Rome to look for a more prestigious job

in Paris. He is still searching. __________________

• Ginger got laid off from her job as a financial analyst in Athens a year ago due to the

Greek recession. She is still actively looking for another job. ______________________

• Paco lost his job as a COBOL programmer because no one uses COBOL to program

computers anymore. Although an idiot savant with COBOL he hasn’t been able to learn

modern programming languages. He is actively looking for work. ___________________

• Dr. Chispa quit her job as dean of a prestigious college of business in Kuwait and moved

to Thailand to train as a Muay Thai fighter. She is not working nor is she looking for

work in Thailand ______________________

4. Keynesian Cross Model-The following equations show the components of aggregate expenditures. Consumption Function ! = 250 + .75 ! − ! Planned Investment !! = 200 Government Spending ! = 200 Taxes ! = 100 Net Exports ! − ! = −50

a. Derive an expression for aggregate expenditure (AE) in terms of output (Y) then use the expression to calculate aggregate expenditure for each value of Y and fill in column 2 of the table. Compare aggregate expenditure and output to find the value of unplanned investment at each level of Y. Draw the aggregate expenditure function in the graph below the table. In the graph mark the value of AE on the horizontal axis when Y = 0.

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Actual Output (Y) Aggregate Expenditure Unplanned Investment

0

1000

2000

2400

3000

b. Calculate the equilibrium level of output. What is the value of the autonomous spending multiplier? c. Suppose that T rises to 200, determine the change in equilibrium income? In the graph show the effects of the increase in T.

Aggregate'Planned'Expenditure'

0' '''''''''''''''''''''''''''''''''''''Aggregate'Output3Y'

AE=Y'

45º'