Download Problem Set 6 and Solutions

Econ 100, Fall 2013
Dr Sarpça and Dr. Tütüncü
Problem Set 6: Money and Overall Review
A. Multiple Choice
Reference: Mankiw and Taylor, Chapter 29 (On Money)
1. Roberto won a lottery prize of €1 million. He put the money in the bank to save it for his
daughter's university education. For Roberto, money was functioning primarily as a
a. unit of account.
b. store of value.
c. means of payment.
d. type of short-term loan.
2. Which one of the following is not included in the M1 money stock?
a. Deposits with maturity up to two years.
b. Overnight deposits.
c. Currency in circulation.
d. None of the above - they are all included in M1.
3. Given an initial deposit of €5,000 and a reserve ratio of 25%, the amount of money potentially
created by a fractional reserve banking system is
a. €15,000.
b. €20,000.
c. €25,000.
d. €10,000.
4. .A bank run is said to have occurred when
a. depositors realise that a particular bank is paying higher interest than its
competitors and a substantial number of them rush to deposit their money in it.
b. a substantial number of depositors suspect that a bank may go bankrupt and
withdraw their deposits.
c. a bank experiences a series of defaults on its loans.
d. a bank converts its loans into deposits.
5. Barter exchange tends to be inefficient because
a. gold is difficult to transport.
b. it limits the time and effort required for trade.
c. it can be very time consuming to find a double coincidence of wants.
d. a standardized unit of value can be difficult to find in a primitive economy.
B. Short Answer
These questions cover the entire course and are indicative of the kind of short
answer questions you can expect on the exam.
Problem 1:
Victoria and David share a flat. They spend most of their week studying but spend the
weekend (48 hours) making pizza and making home-brewed beer. Victoria takes 4 hours to
produce a barrel of beer and 2 hours to make a pizza. David spends 6 hours to brew a barrel of
beer and 4 hours to make a pizza.
a) Draw each persons production possibilities frontier.
b) What is each persons opportunity cost of making a pizza? Who has absolute advantage
in making pizza? Who has comparative advantage?
c) Should Victoria and David trade foods? If so, who will trade pizza for beer, and who
will trade beer for pizza?
d) The price of pizza can be expressed in terms of barrels of beer. If trading beer and
pizza can make them both better off, what is the highest price at which they are both
better off and what is the lowest price at which they are both better off?
Problem 2:
There is a market with 8 buyers and 8 sellers. Each buyer can buy at most 1 unit, each seller
can produce at most 1 unit.
Buyer Willingness
to Pay
1
100
2
90
3
80
4
50
5
40
6
35
7
25
8
20
Seller
Cost
1
2
3
4
5
6
7
8
20
20
25
25
30
35
40
45
a) What is the quantity demanded when price is 50? What is the quantity supplied when
price is 50? There is an excess _____________ of _________ units when price is 50.
b) Compute the equilibrium price and quantity.
c) Compute the consumers surplus and producer surplus at the equilibrium price.
d) The government puts a tax of 20 on each unit sold, to be recovered from the seller.
How many units of the good will be bought and sold with the tax in place? Compute
the dead weight loss of the tax.
Problem 3
Below are some data from the land of milk and honey
Year
Price of
Milk
Quantity
of Milk
Price of
Honey
Quantity
of Honey
2001
2002
2003
1
1
2
100
200
200
2
2
4
50
100
100
a)
b)
c)
d)
Compute nominal GDP for each year
Compute Real GDP for earch year, using 2005 as the base year.
Caclulate the GDP Deflator for each year.
Compute the percentage change in nominal GDP, real GDP and the GDP deflator in
2002 and 2003 from the preceding year. For each year, identify the variable that does
not change. Explain in words why your answer makes sense.
e) Did economic well-being rise more in 2002 or 2003? Explain.
Problem Set 6: Suggested Solutions
(Reference: Mankiw and Taylor, Chapter 29)
Multiple Choice
1b
2a
3a
4b
5c
Short Answer
Problem 1: b) Pizza
Victoria
David
Absolute Cost
(Hours)
2
4
Opportunity Cost
(Beer)
1/2
2/3
Absolute Cost
(Hours)
4
6
Beers
Opportunity Cost
(Pizza)
2
1.5
Victoria has absolute advantage in both goods and comparative advantage in pizza. David has comparative advantage in beer. c) David should give Victoria beer in return for pizza. d) The price of a pizza must be between 1/2 and 2/3 of a barrel of beer. Problem 2: e) When price is 50, 8 are supplied, 4 are demanded, and there is an excess supply of 4 units. f) The equilibrium price is 35 and the equilibrium quantity is 6. g) CS = (`100-­‐35) + (90-­‐35) + (80-­‐35) +(50-­‐35) +(40-­‐35) +(35-­‐35) = 185 PS = (35-­‐35) + (35-­‐30) + (35-­‐25) +(35-­‐25) +(35-­‐20) +(35-­‐20) = 55 h) Willingness to pay must exceed cost by at least 20. Therefore, 4 units are bought and sold. The DWL is the difference between WTP and cost on the extra units that would be sold in the absence of a tax. DWL = (40-­‐30) +(35-­‐35) = 10 Problem 3
f) Compute nominal GDP for each year
Calculating nominal GDP: 2005: ($1 per qt. of milk × 100 qts. milk) + ($2 per qt. of honey × 50 qts. honey) = $200 2006: ($1 per qt. of milk × 200 qts. milk) + ($2 per qt. of honey × 100 qts. honey) = $400 2007: ($2 per qt. of milk × 200 qts. milk) + ($4 per qt. of honey × 100 qts. honey) = $800 g) Compute Real GDP for earch year, using 2005 as the base year. Calculating real GDP (base year 2005): 2005: ($1 per qt. of milk × 100 qts. milk) + ($2 per qt. of honey × 50 qts. honey) = $200 2006: ($1 per qt. of milk × 200 qts. milk) + ($2 per qt. of honey × 100 qts. honey) = $400 2007: ($1 per qt. of milk × 200 qts. milk) + ($2 per qt. of honey × 100 qts. honey) = $400 h) Caclulate the GDP Deflator for each year. Calculating the GDP deflator: 2005: ($200/$200) × 100 = 100 2006: ($400/$400) × 100 = 100 2007: ($800/$400) × 100 = 200 i) Compute the percentage change in nominal GDP, real GDP and the GDP deflator in
2002 and 2003 from the preceding year. For each year, identify the variable that does
not change. Explain in words why your answer makes sense.
e. Did economic well-­‐being rise more in 2002 or 2003? Explain. Calculating the percentage change in nominal GDP: Percentage change in nominal GDP in 2006 = [($400 − $200)/$200] × 100 = 100%. Percentage change in nominal GDP in 2007 = [($800 − $400)/$400] × 100 = 100%. Calculating the percentage change in real GDP: Percentage change in real GDP in 2006 = [($400 − $200)/$200] × 100 = 100%. Percentage change in real GDP in 2007 = [($400 − $400)/$400] × 100 = 0%. Calculating the percentage change in GDP deflator: Percentage change in the GDP deflator in 2006 = [(100 − 100)/100] × 100 = 0%. Percentage change in the GDP deflator in 2007 = [(200 − 100)/100] × 100 = 100%. Prices did not change from 2005 to 2006. Thus, the percentage change in the GDP deflator is zero. Likewise, output levels did not change from 2006 to 2007. This means that the percentage change in real GDP is zero. e). Did economic well-­‐being rise more in 2002 or 2003? Explain. Economic well-­‐being rose more in 2006 than in 2007, since real GDP rose in 2006 but not in 2007. In 2006, real GDP rose but prices did not. In 2007, real GDP did not rise but prices did.