Download Unit Two Problem Set

Economics Study Guide #2
Unit 2: Macroeconomics
1. ( ____/15 Points) Gross Domestic Product
a. Define GDP, identify what is not included, define the four components, and give an example of
each (_____/5)
b. Explain the difference between nominal GDP and real GDP. Use a simplified numerical example
with two different years to show your understanding. (_____/5)
c. If someone told you that the nominal GDP increased by 4% in 2004 explain why you would need
two additional pieces of information to conclude that the standard of living for the typical
person also increased by 4%. ( ____/5)
2. (_____/20 points) Gross Domestic Product Practice (See attached)
3. (_____/15 Points) Unemployment
a. Define and give examples of the three types of unemployment discussed in class. (_____/5)
b. How is the unemployment rate calculated? What is the Natural Rate of Unemployment? Do we
want zero unemployment? (_____/5)
4. (_____/15 points) Unemployment Practice (See attached)
5. (_____/15 Points) Inflation
a. Define and identify how to calculate the Consumer Price Index (CPI)? Explain the meaning of the
following CPIs relative to a base year. Year 1=90, Year 2=100, Year 3=125, Year 4=150. Lastly
explain why the percent change in prices from year 3 to year 4 is NOT 25%. (_____/5)
b. Identify how to calculate nominal interest rates and real interest rates. Assume that you put
$100 in the bank. Use numeric examples to explain three different scenarios in which your REAL
income falls, stays the same, and increases. (_____/5)
c. If the actual inflation is greater than the anticipated inflation, fully explain who would benefit
and who would be hurt and explain WHY? (_____/5)
6. (_____/20 Points) Inflation Practice (See attached)
7. ( ____/15) Aggregate Demand and Aggregate Supply
a. Define and give examples of the determinants of aggregate demand. ( ____/5)
b. Define and give examples of the determinants of aggregate supply. ( ____/5)
c. Graph the following curves (on the same graph): AD, AS. Make sure to correctly
label the axies. ( ____/5)
8. ( _____/8) Macroeconomic Equilibrium
What causes (Shifters) each of the following?
a. An increase in AD? ( ____/ 2)
b. A decrease in AD? ( ____/ 2)
c. An increase in AS? ( ____/ 2)
d. A decrease in AS? ( ____/ 2)
9. ( ____/20) Fiscal Policy
a. Explain the difference between expansionary and contractionary fiscal policies. Explain
their goals and give specific examples. ( ____/ 15)
b. What are the problems with Fiscal Policy working correctly? ( ____/ 5)
10. ( ____/10) Key Concepts
Define and explain each concept and give specific examples not found in the power point.
a. Crowding Out ( ____/ 5)
b. A Built-in Stabilizer ( ____/ 5)
11. ( ____/20) Money, Banking and Financial Markets
Define and give specific examples of each of the following:
a. Definition of financial assets: money, stock and bonds ( ____/5)
b. Time Value of Money (present and future value). ( ____/5)
c. Measures of Money Supply. ( ____/5)
d. Money Demand. ( ____/5)
12. ( ____/20) Central Bank and Control of the Money Supply
Define and give specific examples of each of the following:
a. Tools of Central Bank Policy (All Three!) ( ____ / 5)
b. How banks create money. ( ____/10)
c. Quantity Theory of Money ( ____/ 5)
GDP Practice
For each of the following items write one of the following in the space provided:
C if the item is counted as consumption spending
I if the item is counted as investment spending
G if the item is counted as government spending
NX if the item is counted as net exports
NC if the item is NOT counted in GDP
_____ 1. You spend $7.00 to attend a movie.
_____ 2. A family pays a contractor $100,000 for a house he built for them this year.
_____ 3. A family pays $75,000 for a house built three years ago.
_____ 4. An accountant pays a tailor $175 to sew a suit for her.
_____ 5. The government increases its defense expenditures by $1,000,000,0000.
_____ 6. The government makes a $300 Social Security payment to a retired person.
_____ 7. You buy General Motors Corp. stock for $1,000 in the stock market.
_____ 8. At the end of the year, a flour-milling firm finds that its inventories of grain are
$10,000 above the amounts of its inventories at the beginning of the year.
_____ 9. A homemaker works hard caring for her spouse and two children.
_____ 10. Ford Motor Co buys new auto-making robots.
_____ 11. You pay $300 a month to rent an apartment.
_____ 12. Apple Computer Co. builds a new factory in Ohio.
_____ 13. RJ Reynolds Co. buys control of Nabisco.
_____ 14. You buy a new Toyota that was made in Japan.
_____ 15. You pay tuition to attend college
Unemployment Practice
At full employment, we have frictional and structural unemployment but cyclical
unemployment would be at zero. At full employment, the level of unemployment is called the
natural rate of unemployment.
For each of the following situations, put the appropriate letter before the examples.
F if it is an example of frictional unemployment
C if it is an example of cyclical unemployment
S if it is an example of structural unemployment
_____ 1. A computer programmer is laid off because of a recession.
_____ 2. A literary editor leaves her job in New York to look for a new job in San Francisco.
_____ 3. An unemployed college graduate is looking for his first job.
_____ 4. Advances in technology make the assembly-line worker’s job obsolete.
_____ 5. Slumping sales lead to the cashier being laid off.
_____ 6. An individual refuses to work for minimum wage.
_____ 7. A high school graduate lacks the skills necessary for a particular job.
_____ 8. Workers are laid off when the local manufacturing plant closes because the product
made there isn’t selling.
_____ 9. A skilled glass blower becomes unemployed when a new machine does her job faster.
Inflation Worksheet
Using the following chart figure out the price differences in the items as well as the
percentage change in price over the time span stated.
Item
Past Price (1993)
Movie Tickets
Soft Drink
Gasoline (Gallon)
Album (CD or DL)
4.14
1.00
1.07
13.14
Price Today (2011)
Price Difference
Percentage
Change
7.89
1.50
3.63
12.19
Using the following chart calculate the rate of inflation each year.
Year
CPI
1
2
3
4
5
Percentage Change
(Inflation Rate)
100
115
140
175
190
Now fill out the following chart and calculate the Indexes for each product and the overall
index.
Product
Video Games
Blue Ray Player
MP3 Player
Monitor
Total
Overall Index
Price Year 1
40
200
100
50
Index Year 1
100
100
100
100
400/4
100
Price Year 2
60
220
75
60
Index Year 2
150
Who is hurt or helped by inflation?
Describe groups that are hurt by inflation and groups that benefit from inflation. For the
following scenarios write “Hurts” if they person is hurt by inflation or “Gains” if the person
gains by inflation. Include a brief explanation why.
1. Banks extend many fixed-rate loans.
2. A farmer buys machinery with a fixed-rate loan to be repaid over a 10-year period.
3. Your savings from your summer job are in a savings account paying a fixed rate of interest.
4. A widow lives entirely on income derived from fixed-rate corporate bonds.
5. A retired couple lives entirely on income from a pension the woman receives from her former
employer.
6. A retired man lives entirely on income from Social Security.
7. The federal government has a $5,000,000,000 debt.
8. A firm signs a contract to provide maintenance services at a fixed rate for the next five years.
9. A local government receives revenue from fixed-rate license fees charged to businesses.
10. Parents are putting savings for their child’s college education in a bank savings account.