Summer 2018 Homework 1 ECON 121
Submit your work at the beginning of class on Monday (July 2nd, 2018). You may work with other students but the write-ups must be unique. For calculation questions you must show your work in order to get partial credits. The write-ups MUST be handwritten.


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Economics 121 Homework: Which contributes more when measuring GDP, a new diamond necklace purchased by a wealthy person or a soda purchased by a thirsty person? Why?
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1. What is an opportunity cost? Which of the following decisions would entail the greater opportunity cost: allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? (7 points)

2. Which of the following are positive economic statements and which are normative? (1 point each)

(a) The national economy grew at a 6.2 percentage rate in the last quarter as the economy continues to recover from the past recession.

(b) The unemployment rate fell to 5.7 percent this month, and is expected to fall to 5.5 percent next month.

(c) The rate of inflation should be reduced to zero to maintain the value of the U.S. dollar.

(d) The government should take action to reduce the prices of prescription drugs charged by drug companies.

3. Which contributes more when measuring GDP, a new diamond necklace purchased by a wealthy person or a soda purchased by a thirsty person? Why? (7 points)

4. Do these transactions affect this period’s GDP or not? If they do, which component do they affect?

(2 points each) For the No’s the answer is worth 2 points. For the Yes’s, give one point on yes and 1 point on the component

(a) A monthly scholarship check received by an economics student

(b) The purchase of a new truck by a trucking company

(c) Government purchase of missiles from a private business

(d) The purchase of a used tractor by a farmer

(e) The value of the purchase of shares of Microsoft by an individual

5. Explain the difference between GDP and GNP (7 points)

6. Describe whether the following factors affect the AD, SRAS or LRAS; and whether they cause a shift or a movement along the curve. Hint: some factors can impact multiple curves (2 points each)

1 point on whether there is a movement or a shift and one point on the direction

a. Imports increase

b. Price level increases

c. Discovery of oil

d. Strong earthquake

e. Government purchases increase



Year Nominal GDP Real GDP GDP Deflator
1 $100 100
2 $120 120
3 $150 125

a. Complete the table. (3 points)

b. From year 1 to year 2, did real output rise or did prices rise? Explain. (4 points)

c. From year 2 to year 3, did real output rise or did price rise? Explain. (4 points)

Prices stayed the same and real output rose 25%.53

2. Use the following information about Employment Country to answer questions. Numbers are in millions.

2007 2008
Population 223.6 226.5
Adult population 168.2 169.5
Number of unemployed 7.4 8.1
Number of employed 105.2 104.2

a. What is the labor force in 2007 and 2008? (4 points)

b. What is the labor-force participation rate in 2007 and 2008? (4 points)

c. What is the unemployment rate in 2007 and 2008? (4 points)

d. From 2007 to 2008, the adult population went up while the labor force went down. Provide a number of explanations why this might have occurred. (5 points)

e. If the natural rate of unemployment in Employment Country is 6.6 percent, how much is cyclical unemployment in 2007 and 2008? Is Employment Country likely to be experiencing a recession in either of these years? (5 points)

3. The following table shows the prices and the quantities consumed in the country known as the Unit States. Suppose the base year is year (1). Also suppose that in year (1), the typical consumption basket was determined, so the quantities consumed during year (1) are the only quantities needed to calculate the CPI in every year.

Year Price of Books Quantity of Books Price of Pencils Quantity of Pencils Price of Pens Quantity of Pens
1 $50 10 $1 100 $5 100
2 $50 12 $1 200 $10 50
3 $60 12 $1.50 250 $20 20

a. What is the value of the CPI in each of the three years? (6 points),100) x 100 = 250

b. What is the inflation rate in years 2 and 3? (4 points)

4. The nominal salary paid to the president of the US along with data on the CPI is given below:

Year Salary CPI (2000 = 100) Real Salary
1920 75,000 11.6
1940 75,000 8.1
1960 100,000 17.2
1980 200,000 47.9
2000 400,000 100

a. Compute the real salary of the president as measured in purchasing power of the dollar in 2000

(5 points).

b. In which year was the real presidential salary the highest? (2 points)

c. The president’s nominal salary was constant between 1920 and 1940. What happened to the real salary? Can you explain why? (5 points)


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