mead C. What is the opportunity cost of producing Meatballs in Slippery Rock? D. What is the opportunity cost of producing Clams in Slippery Rock? E....
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Question

Given that the utility function for two goods, X and Y, has theCobb-Douglas utility form:U(X; Y ) = pXY

a. Graph the U = 10 indi¤erence curve associated with this

utility function.

b. If X = 5; what must Y equal to be on the U = 10 indi¤erence

curve? What is the MRSX;Y at this point?

c. In general, develop an expression for the MRSX;Y for this

utility function. Show how this can be interpreted as the ratio of

the marginal utilities for X and Y .

d. Consider a logarithmic transformation of this utility function:

U0 = log U

where log is the logarithmic function to base 10. Show that for this

transformation the U0 = 1 indi¤erence curve has the same proper-

ties as the U = 10 curve calculated in parts (a) and (b). What is

the general expression for the MRSX;Y of this transformed utility

function?.


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1. Use the following data to answer the questions below. (All figures are in billions of dollars) Consumption Expenditures $220 Social Security payments $20 Government Expenditures $50 Imports $30 Taxes $30 Exports $10 Business Investment $40 a. How much is GDP 240 re Net Exports ? B - do c. The government has a surplus / deficit. (circle one choice) d. How much? 8 20 e. Should Social Security payments be included in GDP? Nope 2. The following table represents the labor force statistics for the island nation of Rolling Rock. USE THIS TABLE TO ANSWER QUESTIONS 3 AND 4. YEAR EMPLOYED UNEMPLOYED LABOR FORCE UNEMPLOYMENT WORKERS WORKERS (Millions) RATE [Millions) (Millions) 1998 18 0 200 10.0% 1999 1 2 240 5.0% 2000 276 24 300 2001 266 14 280 3. Complete the blank spaces in the table above. If the natural rate of unemployment is 5%, then in 1998, Rolling Rock probably a. experienced inflation / recession / economic growth. (Circle one choice) b. There would / would not be seasonal unemployment in 1999.

6. Consider the data below to answer the following questions, (Parts A, B and C) INDICATOR YEAR AGO MONTH AGO NOW Real GDP 3100 3140 3160 Consumer Price Index 210 223 235 Unemployment Rate 5.6% 4.8% 3.4 % Gross Private 602 570 576 Domestic Investment A. Where is the economy on the business cycle? Explain. B. What fiscal policy and fiscal policy tools could be taken by the government? C. Taken separately from question B, what policy and tool(s) could the Federal Reserve use? 7. A. Calculate the Yield on a $10,000 government bond that matures in 2 years, pays 3% interest and has a current market price of $8.256.28. Use the space below, show the work and circle your answer. 3

e. How will this affect the prices of US Imports from Europe? BONUS: 10 pts. Use this Balance Sheet for the nation of Slippery Rock to answer the following questions. Being the only bank, it constitutes the entire banking system. Figures are in millions of dollars. ASSETS LIABILITIES Total Reserves $30 Demand Deposits $100 Securities $70 TOTAL $100 TOTAL $100 a. If the Reserve Requirement is 10 percent, how much must the bank keep in its required reserves? b. How much excess reserves may the bank have? C. What will be the total amount of new loans the bank can make in the FIRST STEP of the loan process? d. What is the value of the Money Multiplier? e. How much money can the BANKING SYSTEM create?

B. If the price of this bond decreased to $7,436.18, calculate the new yield. The interest rate (and the payment) stays the same. Use the space below, show the work and circle your answer. C. Describe the change in the price and the yield. What economic problem do investors expect to happen? Use the lines below for your answer. Price Yield 8. Consider the following table for the neighboring island nations of Rolling Rock and Slippery Rock. Each nation wants to specialize and trade. It will have to produce ONLY ONE good. It cannot produce both with its limited resources. The opportunity cost of producing each good is constant. [HINT: Opportunity Cost is what is given up divided by what is gained!] PRODUCT ROLLING ROCK. SLIPPERY ROCK. Meatballs 4,000 2,000 Clams 8,000 1,000 A. What is the opportunity cost of producing Meatballs in Rolling Rock? B. What is the opportunity cost of producing Clams in Rolling Rock?

mead C. What is the opportunity cost of producing Meatballs in Slippery Rock? D. What is the opportunity cost of producing Clams in Slippery Rock? E. Which nation has a comparative advantage in producing Meatballs? F. Which nation has a comparative advantage in producing Clams? G. Which nation should produce only Meatball and trade for Clams? H. Which nation should produce only Clams and trade for Meatballs? 9. There are only two nations in the world. The United States and Europe. Exchange rates between the two countries are flexible. in terms of Euro Price of a USD Quantity of USD There is an increase in the United States for European goods. In the diagram above, show this change in the supply of dollars on the international currency market. b. Describe the change in the international value of the dollar._ c. How will this affect the value of the Euro (European currency)? d. How will this affect the prices of US exports in terms of the Euro?

c. The main cause of unemployment in 2000 was probably frictional / cyclical. d. Why may Rolling Rock still experience structural unemployment in 2001? Structural unemployment will always exist e. If Rolling Rock were to experience inflation in 2002, then the unemployment rate will most likely be greater than / less than 5 percent. 4. In the space below, draw an Aggregate Demand and Aggregate Supply diagram, properly labeled, to show the change in Rolling Rock's economy from 1998 to 1999 and to 2000. 5. Consider the level of spending for the citizens of Rolling Rock. a. In 2002, Rolling Rockers had and MPC of 0.80. What was their MPS? b. What was the value of the multiplier in Rolling Rock in 2002? c. If Investment increased by $80 billion, how much would total income change in 2002? d. Due to a fear of inflation, Rockers increased their MPC to 0.90. Given an investment increase of $60 billion how will this affect total income? e. What was the likely result of this change in the MPC from 0.80 to 0.907

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