Q1. Consider a two good economy described by the table below:
|
|
Prices
|
Quantities
|
|
|
Cronuts ($)
|
Beer ($)
|
Cronutes (each)
|
Beer (kegs)
|
|
Year 1
|
4
|
20
|
15
|
4
|
|
Year 2
|
6
|
22
|
20
|
6
|
|
Year 3
|
5
|
24
|
12
|
6
|
a. Calculate nominal national income in each of the three years.
b. Calculate real national income in each of the three years. Assume that Year 1 is the base year.
Q2. Working with Employment, Unemployment, and Labor Force Statistics
a. If a countries labor force is 20 million people, and 18.60 million of those people are employed, what is the unemployment rate?
Q3. Consider an economy characterized by the following aggregate demand and aggregate supply functions (all dollar values are in billions):
P = 200 - 125YAD
P = 34 + 0.75YAS
a. Solve for the equilibrium price level and equilibrium level of real GDP.
b. In a diagram below, graph the specific aggregate demand curve and aggregate supply curve for this economy. Make sure to label your diagram properly and indicate the equilibrium price level and equilibrium level of real GDP you found in part (a).
c. Using the ADIAS diagram below, illustrate the following simultaneous shocks to the economy:
Firms change their desired investment expenditure in response to an increase in the real interest rate AND the price of electricity (a common input into the production of many goods) increases.
In your solution, make sure to explain:
i. Why the aggregate demand curve shifts to the right or left.
ii. Why the aggregate supply curve shifts to the right or left.
iii. What happens to the equilibrium price level and equilibrium level of real GDP?
Q4. Consider an economy at its long run equilibrium shown by the AID/AS diagram below:
a. Suppose that consumers become optimistic about the future state of the economy. Illustrate the immediate effect of this shock in the diagram above. Explain what happens to real GDP and the output gap.
b. Illustrate the effect of the adjustment process in the diagram above. Explain what happens to wages and the prioe level as the economy returns back to the equilibrium.
Q5. Consider the following Cobb-Douglas production function:
Y = 2(L0.5K2)
a. What is the level of output if 10 units of labor and 10 units of capital are employed?
b. Does this production function exhibit constant returns to scale, increasing returns to scale, or decreasing returns to scale? Briefly explain.