Ikt1102_problem_set_1 (2).pdf

YILDIZ TECHNICAL UNIVERSITY DEPARTMENT OF ECONOMICS IKT1102 – Introduction to Economics II Assoc. Prof. Dr. Senem Çakmak Şahin

Problem Set 1 The questions are compiled from Michael Parkin’s book “ECONOMICS (TENTH EDITION)” Chapter 21 1) Use the following diagram for answering the questions below:

a) During 2008, in the economy: Flow B was $ 9 trillion. Flow C was $ 2 trillion. Flow D was $ 3 trillion. Flow E was $ -0.7 trillion. Name the flows A, B, C, D, E and calculate the 2008 values of aggregate income and GDP using the information given above. b) During 2009, flow A was $13.0 trillion, flow B was $9.1 trillion, flow D was $3.3 trillion, and flow E was –$0.8 trillion. Calculate the 2009 values of GDP and government expenditure.

YILDIZ TECHNICAL UNIVERSITY DEPARTMENT OF ECONOMICS IKT1102 – Introduction to Economics II Assoc. Prof. Dr. Senem Çakmak Şahin

2) Some macroeconomic data are given for the U.S. economy in 2008 below: Wages paid to labor : 8000 Consumption expenditure : 10000 Net operating surplus : 3200 Investment : 2000 Government expenditure : 2800 Net exports : -700 Depreciation : 1800 Calculate U.S. GDP in 2008. Explain the approach (expenditure or income) that you used to calculate GDP.

3) A fire destroys the statistics office. The accounts are now incomplete, but there remain the following data: GDP (income approach) : 2900 Consumption expenditure : 2000 Indirect taxes less subsidies : 100 Net operating surplus : 500 Investment : 800 Government expenditure : 400 Wages : 2000 Net exports : -200 i) Calculate GDP (expenditure approach) and depreciation. ii) Calculate net domestic income at factor cost and the statistical discrepancy.

4) Tropical Republic produces only bananas and coconuts. The base year is 2008, and the tables give the quantities produced and the prices. Quantities Bananas Coconuts

2008 800 kg’s 400 kg’s

2009 900 kg’s 500 kg’s

Prices Bananas Coconuts

2008 $2 / kg $10 / kg

2009 $4 / kg $5 / kg

Calculate nominal GDP in 2008 and 2009. Calculate real GDP in 2009 expressed in base year prices.

YILDIZ TECHNICAL UNIVERSITY DEPARTMENT OF ECONOMICS IKT1102 – Introduction to Economics II Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 22 5) 1. The Bureau of Labor Statistics reported the following data for 2008: Labor force : 30000 Employment : 25500 Working-age population: 45000 Calculate the unemployment rate, labor force participation rate, and employment-topopulation ratio.

6) In July 2009, in the economy of Sandy Island, 10000 people were employed, 1000 were unemployed, and 5,000 were not in the labor force. During August 2009, 80 people lost their jobs and didn’t look for new ones, 20 people quit their jobs and retired, 150 unemployed people were hired, 50 people quit the labor force, and 40 people entered the labor force to look for work. a. Calculate the unemployment rate and the employment-to-population ratio for July 2009 b. Calculate the number of people unemployed the number of people employed the unemployment rate for the end of August 2009.

7) Define structural unemployment, frictional unemployment and cyclical unemployment. Suppose that Ahmet has just graduated from university and looking for a job. However, as a first-time job seeker he lacks the sufficient knowledge for finding the company that has the job that is available and suitable for him. Thus, he is currently unemployed. What kind of unemployment is described in the above scenario?

8) The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought in 2009. The average household spent $60 on juice and $30 on cloth in 2009 when the price of juice was $2 a bottle and the price of cloth was $5 a yard. In the current year, 2010, juice is $4 a bottle and cloth is $6 a yard. Calculate the CPI basket and the percentage of the household’s budget spent on juice in 2009. Calculate the CPI and the inflation rate in 2010.

9) The BLS reported the following CPI data: June 2006 201.9 June 2007 207.2 June 2008 217.4 Calculate the inflation rates for the years ended June 2007 and June 2008. How did the inflation rate change in 2008? Why might these CPI numbers be biased? How do alternative price indexes help to avoid the bias in the CPI numbers?

YILDIZ TECHNICAL UNIVERSITY DEPARTMENT OF ECONOMICS IKT1102 – Introduction to Economics II Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 23 10) Brazil’s real GDP was 1,360 trillion reais in 2009 and 1,434 trillion reais in 2010. Brazil’s population was 191.5 million in 2009 and 193.3 million in 2010. Calculate the economic growth rate, the growth rate of real GDP per person, and the approximate number of years it takes for real GDP per person in Brazil to double if the 2010 economic growth rate and population growth rate are maintained.

11) Suppose that the United States cracks down on illegal immigrants and returns millions of workers to their home countries. Explain what will happen to U.S. potential GDP, employment, and the real wage rate. Explain what will happen in the countries to which the immigrants return to potential GDP, employment, and the real wage rate.

12) The tables describe an economy’s labor market and its production function in 2010. Real wage rate (dollars per hour) 80 70 60 50 40 30 20

Labor hours supplied 45 40 35 30 25 20 15

Labor (hours)

i. ii. iii.

Labor hours demanded 5 10 15 20 25 30 35

Real GDP (2005 dollars) 5 425 10 800 15 1125 20 1400 25 1625 30 1800 35 1925 40 2000 What are the equilibrium real wage rate, the quantity of labor employed in 2010, labor productivity, and potential GDP in 2010? In 2011, the population increases, and labor hours supplied increase by 10 at each real wage rate. What are the equilibrium real wage rate, labor productivity, and potential GDP in 2011? In 2011, the population increases, and labor hours supplied increase by 10 at each real wage rate. Does the standard of living in this economy increase in 2011? Explain why or why not.

YILDIZ TECHNICAL UNIVERSITY DEPARTMENT OF ECONOMICS IKT1102 – Introduction to Economics II Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 24 13) First Call, Inc., is a cellular phone company. It plans to build an assembly plant that costs $10 million if the real interest rate is 6 percent a year. If the real interest rate is 5 percent a year, First Call will build a larger plant that costs $12 million. And if the real interest rate is 7 percent a year, First Call will build a smaller plant that costs $8 million. i. Draw a graph of First Call’s demand for loanable funds curve. ii. First Call expects its profit from the sale of cellular phones to double next year. If other things remain the same, explain how this increase in expected profit influences First Call’s demand for loanable funds.

14) Draw a graph to illustrate how an increase in the supply of loanable funds and a decrease in the demand for loanable funds can lower the real interest rate and leave the equilibrium quantity of loanable funds unchanged.

15) The table shows an economy’s demand for loanable funds and the supply of loanable funds schedules, when the government’s budget is balanced. Real interest rate (percent per year) 4 5 6 7 8 9 10 i.

ii.

iii.

Loanable funds demanded (trillions) 8,5 8,0 7,5 7,0 6,5 6,0 5,5

Loanable funds supplied (trillions) 5,5 6,0 6,5 7,0 7,5 8,0 8,5

Suppose that the government has a budget surplus of $1 trillion. What are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation? Suppose that the government has a budget deficit of $1 trillion. What are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation? Suppose that the government has a budget deficit of $1 trillion and the Ricardo-Barro effect occurs. What are the real interest rate and the quantity of investment?

YILDIZ TECHNICAL UNIVERSITY DEPARTMENT OF ECONOMICS IKT1102 – Introduction to Economics II Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 25 16) In June 2009, currency held by individuals and businesses was 853 billion dollars; traveller's checks were 5 billion dollars; checkable deposits owned by individuals and businesses were 792 billion dollars; saving deposits were 4,472 billion dollars; time deposits were 1,281 billion dollars; and money market funds and other deposits were 968 billion dollars. Calculate M1 and M2 in June 2009.

17) The spreadsheet provides information about the demand for money in Minland. Column A is the nominal interest rate, r. Columns B and C show the quantity of money demanded at two values of real GDP: Y0 is $10 billion and Y1 is $20 billion. The quantity of money supplied is $3 billion. Initially, real GDP is $20 billion. What happens in Minland if the interest rate i. exceeds 4 percent a year and ii. is less than 4 percent a year?

1 2 3 4 5 6 7 8

A r 7 6 5 4 3 2 1

B Y0 1 1,5 2 2,5 3 3,5 4

C Y1 1,5 2 2,5 3 3,5 4 4,5

18) Quantecon is a country in which the quantity theory of money operates. In year 1, the economy is at full employment and real GDP is $400 million, the price level is 200, and the velocity of circulation is 20. In year 2, the quantity of money increases by 20 percent. Calculate the quantity of money, the price level, real GDP, and the velocity of circulation in year 2.