Intermediate Macroeconomics Assignment
1. Suppose that only potatoes and hotdogs are produced in the economy. Below you will find information on market prices and quantities produced for the years 2010 to 2015
|
Market Price ($ per unit)
|
|
Quantities Produced (unit)
|
|
|
Year
|
Potatoes
|
Hotdogs
|
Year
|
Potatoes
|
Hotdogs
|
|
2010
|
1.0
|
2.0
|
2010
|
100
|
250
|
|
2011
|
1.0
|
2.2
|
2011
|
130
|
250
|
|
2012
|
1.3
|
2.2
|
2012
|
130
|
250
|
|
2013
|
1.5
|
2.5
|
2013
|
160
|
300
|
|
2014
|
1.5
|
2.5
|
2014
|
180
|
330
|
|
2015
|
1.7
|
2.8
|
2015
|
200
|
350
|
Use this information to answer the following:
(a) Compute the nominal GDP for the years 2010, 2011, 2012, 2013, 2014, and 2015. Explain each step of the process. Make sure that you do not forget to state the units in which the nominal GDP is measured.
(b) Compute the real GDP for the years 2010, 2011, 2012, 2013, 2014, and 2015, using the year 2010 as the base year. Explain each step of the process. Make sure that you do not forget to state the units in which the nominal GDP is measured.
(c) Compute the growth rate (percentage change) of the nominal GDP that you computed in part (a) for the years 2011, 2012, 2013, 2014, and 2015 (in each case, against the previous year).
(d) Compute the growth rate (percentage change) of the real GDP that you computed in part (b) for the years 2011, 2012, 2013, 2014, and 2015 (in each case, against the previous year).
(e) Compute the GDP deflator for the years 2010, 2011, 2012, 2013, 2014, and 2015. Calculate the increases in prices for each year (in the GDP deflator).
2. Suppose that the typical consumer in the economy consumed only 50 apples and 100 hamburgers in the year 2010. Below you will find information on the market prices for these goods for the years 2010 to 2015:
|
Market Price ($ per unit)
|
|
Year
|
Apples
|
Hamburgers
|
|
2010
|
0.3
|
0.8
|
|
2011
|
0.4
|
0.8
|
|
2012
|
0.4
|
1.0
|
|
2013
|
0.6
|
1.1
|
|
2014
|
0.6
|
1.1
|
|
2015
|
0.7
|
1.5
|
Use this information to answer the following questions:
a) Compute the cost of living (cost of basket in $) of a typical consumer for the years 2010, 2011, 2012, 2013, 2014, and 2015, using the year 2010 as a base.
b) Using the results that you obtained in (a), compute the CPI (using 2010 as the base year).
c) Compute the rate of inflation for each year (against the previous year).
d) Now suppose that the typical consumer in the economy still consumed 50 apples and 100 hamburgers in the year 2015. Compute the CPI using 2015 as the base year and also compute the rate of inflation (again, using 2015 as the base year). Compare these results with the results you obtained in (c) and explain.
3. Using the National Income Account, and graphing the market for loanable funds, answer the following questions:
(a) Draw the Demand and Supply curve for loanable funds such that the equilibrium interest rate is 3% and the equilibrium quantity of loanable funds is $10 trillion. Describe the type of interest rate used in this model.
(b) Suppose now that the government is concerned with the way the economy is working - more specifically, the current high unemployment rates require higher growing rates in the near future - and decides to introduce a tax break in future investment-taxes equal to the 30% of the investment done in the next 6 months [use only the effect on investment and not on taxes]. Explain how this new policy would affect the equilibrium in (a).
(c) Now suppose that current government spending falls from $25 trillion to $18 trillion. How will this change affect the equilibrium in (a).
(d) Assume now that both changes in (b) and (c) occur at the same time. What will happen with the equilibrium interest rate and equilibrium quantity of loanable funds in (a).
4. Suppose that an economy's production function is Cobb-Douglas with parameter α=0.36, and is given by
Y = AKαL1-α
(a) Prove that this Cobb-Douglas function has constant returns to scale.
(b) What fraction of income do capital and labor receive?
(c) Suppose that immigration raises the labor force by 20 percent. What happens to total output (in percent)? The rental price of capital? The real wage?
(d) Suppose that a gift of capital from abroad raises the capital stock by 20 percent. What happens to total output (in percent)? The rental price of capital? The real wage?
5. Use the following information to answer the next 2 questions: GDP per capita can be shown to equal average labor productivity times the proportion of the population that is employed
[(GDP/Population) = (Y/L) * (L/Population)].
(a) The two factors that determine a nation's standard of living are: 1) the proportion of the population that works, and 2) its output per worker. The United States has an aging population and the proportion of the population that works is expected to decrease. Mexico has a relatively young population and, thus, the proportion of its population that works is expected to increase in the future. Given these circumstances, which of these two factors do you think is more relevant in each country for their standard of living? Explain your answer.
(b) Explain what happens with Econoland's total output (GDP) and its standard of living (as measured by GDP per-capita) between 2015 and 2016, if we know the following information? The population of Econoland remains constant at 1,000 persons during both years. The number of employed workers increases from 400 in 2015 to 440 in 2016, but labor productivity, as measured by output per employed worker, decreases from $2,000 to $1,900 during the same time period. Show your derivations.