ProblemSet4-solutions-1.pdf - Problem Set#4 ECON 101 Fall...

This preview shows page 1 out of 4 pages.

Unformatted text preview: Problem Set #4 ECON 101 Fall 2016 You may work on the problem set in groups. Students from the same recitation may submit one assignment. All submitted assignments must be written clearly and stapled with the problems included consecutively (we will not fish for your answers). The names and PIDs of all students must be written at the top as well as the Recitation Section and TA name. The assignment should be titled ECON101-­‐ Staub-­‐Problem Set #4. The problem set must be turned in separately from the Essay Question. For example, the top of your assignment should look like: John Doe (PID) Jane Smith (PID) Recitation ECON101.701 (TA name) Econ101-­‐Staub-­‐Problem Set #4 1. In one sentence or less, what happens to GDP and its components (use the expenditure method) in the following situation: Bill gets his pension check from the federal government and buys a watch made in China for $100? Consumption increases by $100, but imports also increases by $100, so US GDP does not change. 2. ______ (True/False/Uncertain) “Full employment” occurs when every working aged individual in the economy is employed. False, full employment occurs when there is no cyclical employment and only frictional and structural employment exist. 3. The Consumer Expenditure Survey finds that a typical consumer in the U.S. buys 50 litres of soda and 80 small pizzas each year. In 2011 a litre of soda cost $1 and a small pizza cost $5. In 2016 a litre of soda cost $1.20 and a small pizza cost $6. A) Using 2011 as the base year, what is the CPI in 2011? (50 ∗ 1 + 80 ∗ 5) $450 !"## = ∗ 100 = ∗ 100 = 100 (50 ∗ 1 + 80 ∗ 5) $450 B) Using 2011 as the base year, What is the CPI in 2016? (50 ∗ 1.2 + 80 ∗ 6) $540 !"#$ = ∗ 100 = ∗ 100 = 120 (50 ∗ 1 + 80 ∗ 5) $450 C) Calculate inflation between 2011 and 2016. !"#$ − !"## 120 − 100 = ∗ 100 = ∗ 100 = 20% !"## 100 D) If you were making $10/hr in 2011, how much would you have to make in 2016 for your purchasing power to remain constant? !"#$ = !"## ∗ !"#$ 120 = 10 ∗ = $12/ℎ !"## 100 4. _________ (True/False; Explain) If workers at a customer service call center in Durham get laid-­‐off because their company has moved the call center to India; this is an example of cyclical unemployment. False, this is structural unemployment since these jobs no longer exist in Durham. 5. _______ (True/False; Explain) If Jane buys a brand new 2015 car today, 2016 GDP does not change. True, consumption increases, but inventories decrease, so GDP does not change. This makes sense because the car was produced in 2015. 6. _______ (True/False; Explain) The CPI is a better indicator of the price level than the GDP deflator. False, they are both measures of the price level, but just measure the price level of different things. The GDP deflator measures the price level of the production in an economy while the CPI measures the price level of a basket of typical consumption goods. 7. Canadia, a small country between the US and Canada, produces only maple syrup and hot cocoa. A typical household consumes is 10 liters of maple syrup and 20 gallons of hot cocoa per year, and the table below shows Canadia’s production of maple syrup and hot cocoa from 2010 through 2012: Maple Syrup Hot Cocoa Quantity Price Quantity Price (liters) (gallons) 2010 100 $20 200 $5 2011 120 $25 400 $8 2012 130 $35 600 $10 A) Use 2011 as the base year and calculate inflation between 2010 and 2012 using the CPIs for this nation. (10 ∗ 35 + 20 ∗ 10) $550 !"#! = ∗ 100 = ∗ 100 = 134.1 (10 ∗ 25 + 20 ∗ 8) $410 (10 ∗ 20 + 20 ∗ 5) $300 !"#" = ∗ 100 = ∗ 100 = 73.2 (10 ∗ 25 + 20 ∗ 8) $410 !"#! − !"#" 134.1 − 73.2 = ∗ 100 = ∗ 100 = 83.2% !"#" 73.2 B) Using 2011 as the base year, calculate inflation between 2010 and 2012 using the GDP deflators for this nation. !"#! = !"#" 130 ∗ 35 + 600 ∗ 10 $10550 ∗ 100 = ∗ 100 = 131.1 130 ∗ 25 + 600 ∗ 8 $8050 (100 ∗ 20 + 200 ∗ 5) $3000 = ∗ 100 = ∗ 100 = 73.2 (100 ∗ 25 + 200 ∗ 8) $4100 = !"#! − !"#" 131.1 − 73.2 ∗ 100 = ∗ 100 = 79.1% _2010 73.2 C) In one sentence or less, explain why these measures of inflation are not necessarily equal. Because CPI measures the price level of a basket of typical consumption goods whereas the GDP deflator measures the prices level of what is being produced in a country. The more similar production and consumptions are, the more similar the CPI and GDP deflators will be. D) The federal government adjusts transfer payments to reflect the cost of living. Which of the measures should the government use to index transfer payments? Why? If we think these transfer payments will be spent on consumption, then it makes more sense to adjust them using the CPI to make sure that the purchasing power of the payments does not erode over time. E) If the federal government was paying the average Social Security recipient in Canadia $500/month in 2010, how much would the government have to pay Social Security recipients in 2012 so that they can afford the same lifestyle as in 2010? !"#! = !"#" ∗ !"#! 134.1 = 500 ∗ = $915.98/ℎ !"#" 73.2 8. The table below lists the real GDP/capita (in 2005$) for Australia, Cameroon, and Mexico from 1960-­‐2000. Use this information to calculate the following: Australia Cameroon Mexico 1960 $12,003 $1,900 $4,421 1970 $16,646 $1,874 $6,169 1980 $20,014 $2,798 $9,263 1990 $23,130 $2,710 $8,551 2000 $30,124 $2,446 $10,360 A) Calculate the growth rates in real GDP/capita from 1960-­‐1970, 1970-­‐1980, 1980-­‐1990, and 1990-­‐2000 for each country. B) For each country and decade, use the rule of 70 to figure out how long it would take for real GDP/capita to double at that growth rate. Australia Growth Rate Time to double 1960 $12,003 1970 $16,646 37.17% 1.88 decades 1980 $20,014 20.23% 3.46 decades 1990 $23,130 15.57% 4.5 decades 2000 $30,124 30.24% 2.31 decades 1960 1970 1980 1990 2000 Cameroon $1,900 $1,874 $2,798 $2,710 $2,446 Growth Rate -­‐1.37% 49.3% -­‐3.15% -­‐9.74% Time to double 51.15 decades to halve 1.42 decades 22.26 decades to halve 7.29 decades to halve 1960 1970 1980 1990 2000 Mexico $4,421 $6,169 $9,263 $8,551 $10,360 Growth Rate 39.54% 50.15% -­‐7.69% 21.16% Time to double 1.77 decades 1.4 decades 9.11 decades to halve 3.31 decades C) Assume the growth rates between 1990 and 2000 were to persist into the future. In what year would real GDP/capita be twice the level it was in 2000 for each country? Australia – 2023 Cameroon – never Mexico -­‐ 2033 ...
View Full Document

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture