1. Remember the supply and demand for pizza?

Qd  = 60 -10P + 2Y Qs  = 100 + 5P -15Pc

P = Price of pizza

Y = Aggregate income

Pc = Price of fresh mozzarella

a.  Identify the exogenous and endogenous variables:

b.  Solve for P in terms of the exogenous variable.

c.  Let Y = 10 and Pc = 2. Solve for the equilibrium P and Q.

2. Suppose you are a senator writing a bill to index Social Security and federal pensions. That is, your bill will adjust these benefits to offset changes in the cost of living. Will you use the GDP deflator or the CPI? Why?

3. Consider an economy composed of just two firms: Orange Inc. and Juice Inc. Orange Inc. grows and sells oranges while Juice Inc. produces and sells orange juice.

From the following information determine GDP using three approaches: expenditure, income and value added. The only factor incomes are wages and profits.

Orange Inc.                                                                                                      Juice Inc.

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Sales to public                             $10,000            Sales to public    $40,000 Sales to Juice Inc.                                               $25,000

Expenses                                                                     Expenses

Wages                       $10,000                                     Wages                      $15,000 Orange purchases $25,000

Profit                                           $25,000                    Profit                                                 $0

4. An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2005 and 2006 are as follows:

a. What is nominal GDP in 2005 and in 2006? By what percentage does nominal GDP change from 2005 to 2006?

b. Using 2005 as the base year, what is real GDP in 2005 and in 2006? By what percentage does real GDP change from 2005 to 2006?

c. Compute the GDP deflator for 2005 and for 2006 and compute the rate of inflation from 2005 to 2006.

2. Fred Data Exercise - You must do the data exercise in order to receive credit for questions 1 through 4 above.

Actual and Potential GDP

1. Go to the Federal Reserve Economic Data (FRED) web site: http://research.stlouisfed.org/fred2/ In the search box, type in Potential Real GDP. In the search results click on "Real Potential Gross Domestic Product" (should be the first item). This data is quarterly. Set the time frame to start at 1978-01-01. You can also use the slider at the bottom of the graph. Scroll down to "ADD DATA SERIES". Type in "Real GDP". Click on the first item "Real Gross Domestic Product" (quarterly). Click on "ADD SERIES." You will now have a graph with actual and potential Real GDP.

Right click and print the graph. If you wish, you can also go to the "Export" tab, export the graph as PNG and copy paste into a word document.

A. Define Potential Real GDP.

B. The difference between potential real GDP and actual real GDP is called the "output gap". In your own words, what's been happening to the output gap in the 2010 - 2015 time frame?

Here's a link to a Business Week article to help answer these questions: http://www.businessweek.com/articles/2014-03-06/u-dot-s-dot-potential-gdp-revised-downward-as- recession-damage-lingers

C.  The shaded areas on the graph are recessions. How has the 2008-09 recession differed from the 1981-82 and 1990 recessions?