# PROBLEM SET

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```					                                 HOMEWORK 1

HOMEWORK ASSIGNMENTS FOR CHAPTER 2

PROBLEM #1 IS DUE FOR HOMEWORK ON TUESDAY, AUGUST 24
PROBLEMS #2 AND #3 ARE DUE FOR HOMEWORK ON THURSDAY,
SEPTEMBER 2
blank notebook paper

Suppose you are provided with the following information about an economy
comprised of just two firms, a dairy farm that produces milk and an ice cream
shop that produces ice cream. The information in the chart shows “the books” for
the firms in 2010.

DAIRY FARM                           ICE CREAM SHOP
Revenues (milk)                         Revenues (ice cream)
From Sales to Households \$10,000        From Sales to Households \$80,000
From Sales to Government \$ 5,000
From Sales to Ice Cream
Shop              \$25,000
Expenses (wages)             \$30,000    Expenses
Wages                    \$40,000
Milk                     \$25,000
Profits                      \$10,000    Profits                   \$15,000

a.     Which goods above are FINAL goods? How can you tell? Calculate
GDP for 2010 using the FINAL GOODS APPROACH. Show each step of your
calculations. Why do we only count final goods when compiling GDP? (10 points)

b. Explain what information you need to estimate GDP for 2010 using the
INCOME APPROACH. Calculate GDP for the economy above using the income
approach. Show the steps and calculations clearly.                  (10 points)
2

2.    Consider an imaginary economy that produces only two goods – computers
and bicycles. The quantities and prices of each good sold for two years (2009 and
2010) are given below.

PRODUCTS                  2009                              2010
PRICE     QUANTITY              PRICE        QUANTITY
Computers          \$1,200       5                  \$600            10
Bicycles           \$ 200       200                 \$240           250

For this hypothetical economy, calculate the following. BE SURE TO SHOW ALL
WORK.

a.    Nominal GDP for both years.                                (8 points)
b.    Real GDP in constant 2010 dollars (i.e. 2010 is the base year for
both years).                                               (5 points)
c.    The GDP deflator for both years.                           (6 points)
d.    The GDP growth rate (%) between 2009 and 2010.             (3 points)
e.    The rate of inflation (%) between 2009 and 2010.           (3 points)
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3.    This problem requires that you collect some data for the U.S. economy.
a. What would you expect to happen to real GDP during a recovery? What
would you expect to happen to the unemployment rate during a recovery?
Explain your reasoning briefly.                          (6 points)

b. GRAPH the relationship you expect between real GDP and the
unemployment rate during a recovery on a diagram with the
unemployment rate on the vertical axis and real GDP on the horizontal axis
as shown below.

Unemployment Rate

Real GDP
(3 points)
The National Bureau of Economic Research (NBER), which dates the business
cycle for the U.S., identified a recovery beginning after November 2001 and
continuing until December 2007.
COLLECT DATA FOR THE ANNUAL US UNEMPLOYMENT RATE AND THE ANNUAL
LEVEL OF REAL GDP FROM 2002 THROUGH 2007 WHEN THE ECONOMY WAS IN
RECOVERY.
To find the unemployment rate, go to the web.
      Type in: www.bls.gov/cps/cpsaat1.pdf
      You will see a table. Find the column labeled “Unemployed – Percent of labor force”
To find the annual level of real GDP, use the handout from class or< if you don’t have the
handout, go to the web and:
      Type in: www.bea.gov
      Click on “Gross Domestic Product” and then click on “Current-dollar and “real” GDP”

c. LIST the level of real GDP and the unemployment rate for each year from
2002 through 2007. Also, GRAPH the data you collected on real GDP and
the unemployment rate for each year from 2002 through 2007 on a
diagram with the unemployment rate on the vertical axis and real GDP on
the horizontal axis as below.                               (7 points)

Unemployment Rate

Real GDP

d. Is the relationship between the actual data you collected for the
unemployment rate and real GDP consistent with your expectations?
Explain.                                             (4 points)

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