1. There are a number of statistics computed to measure the price level, such as the GDP deflator and the CPI. The choice of which of these measures to use depends in many cases on the specific question in which you are interested. For each of the following situations, state whether the CPI or GDP deflator is a more appropriate measure to use and explain why the statistic is preferred.
a) You are interested in looking at the impact of higher prices of imported oil in the overall cost of living.
b) The government is interested in whether increases in defense spending are affecting the price level.
c) An economic consulting firm is investigating the impact on the aggregate price level of more computers and electronic technology used in production.
2. Based on the data in the table below, explain what happened to output and prices in the economy between 2009 and 2010.
2009 2010
Nominal GDP ($ billions) $14,700 $15,200
Real GDP ($ billions 2000) $12,100 $11,900
3. Explain which expenditure category of GDP changes and the direction of the change (increase, decrease) that results for each transaction described.
a) A domestic business purchases a domestically produced computer to use in a business office.
b) A domestic business produces a computer that is sold to a foreign company.
c) The federal government purchases a domestically produced computer to use in a courthouse.
d) A domestic household purchases a domestically produced computer to use in a home.
e) A domestic household purchases a computer produced in a foreign country to use in a home.
4. Into which of the three categories-employed, unemployed, out of the labor force-would an interviewer for the Current Population Survey (CPS) place each of the following people? Explain.
a) Jamuna Temple is working as a second-grade schoolteacher.
b) Frank Peng is attending college full-time to earn a degree in elementary education.
c) Martin Cespedes is working as a high school social science teacher but is at home sick with the flu.
d) Kyle Brown does not currently have a job. He wants to be an elementary-school teacher. He has the appropriate degree. He has not looked for a position in the last month because he doesn't believe schools are currently hiring.
e) Belinda Dewey does not currently have a job. She has sent her resume to several school districts in the past week in hope of finding a teaching position.
5. In an economy with flexible prices, competitive factor markets, and fixed supplies of the factors of production (capital and labor), graphically illustrate the impact of an advance in technology that greatly improves the productivity of capital, ceteris paribus. Be sure to label:
i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. Explain in words how the equilibrium values change.
6. In an economy with flexible prices, competitive factor markets, and fixed supplies of the factors of production (capital and labor), graphically illustrate the impact of a deadly virus that kills a large part of the labor force, but leaves the other factors of production untouched, ceteris paribus. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values;
iv. the direction the curves shift; and v. the terminal equilibrium values. Explain in words how the equilibrium values change.