HOMEWORK ASSIGNMENT FOR CHAPTER 1 1) Label each of the following as normative or positive statement:

a) The poor pay too much for housing b) The number of farms has decreased over the past 50 years c) The population in rural areas has remained constant over the past decade. d) The state of Ohio has the highest average pay in the country.

2) Label each of the following items as involving microeconomic or a macroeconomic issue:

a) An increase in the tax on cigarettes will decrease teenage smoking b) It would be better if the United States spent more on health care and less on space

exploration. c) An increase in the number of police on inner-city streets will reduce the crime rate. d) The Congress will consider raising the minimum wage.

3) Go to the http://www.nobelprizes.com and look for Nobel Prize in economic science. Review the descriptions of the awards and choose two of them. Try to determine whether each of those awards was primarily for work in microeconomics or macroeconomics. Write down the description of the two awards you chose and their category (micro/macro).

HOMEWORK ASSIGNMENT FOR CHAPTER 2

1) !Two students Bart and Homer are studying for the final exam of French 110. Bart is

a lazy student but a fast learner whereas Homer is a hard working student but kind of slow at learning.

Before they start studying for the final, since Homer is a hard working student, he managed to learn 300 words throughout the quarter and Bart learned 150 words. Bart can learn 20 words in one hour, whereas Homer can learn only 10 words in one hour. a) Based on the information given above, please complete the table provided in your graph handout and graph the relationship between the # of hours spent working for the final vs. # of words memorized by each student on the graph paper provided. b) Using your graph answer the following questions: i. If both of them worked for 5 hours, who would know more words? ii. Considering both will be studying hard, how much time does Bart need to beat

Homer in the final? c) Derive the equation that represents the relationship between the number of hours spent working for the final and the number of words memorized by Bart.

Derive the equation that represents the relationship between the number of hours spent working for the final and the number of words memorized by Homer. d) Compare the slopes and the intercepts of the equations you derived in part (c). 2) !In the graphs we have examined in class, adding a unit to the variable on the horizontal axis always has the same effect on the dependent variable on the vertical axis. These relationships were linear. Many relationships in economics are nonlinear. The following table shows a nonlinear relationship between Mr.Baker’s firm’s daily output of bread and the number of bakers he employs. Number of

bakers per day Loaves of bread produced per day

0 0 1 400 2 700 3 900 4 1,000 5 1,050 6 1,075 a) Graph the relationship between number of bakers Mr. Baker employs and the loves of bread produced per day. b) Does your graph suggest a positive or a negative relationship? c) Suppose Mr. Baker buys new bread ovens for his firm. The new bread ovens are operated using a special technology which substantially reduces the time required to bake a loaf of bread. Using the new ovens with the same number of employees Br. Baker can produce 1.5 times more bread. Based on the new information complete the table given in your graph handout and then draw a graph that represents the relationship between number of bakers Mr. Baker employs and the loves of bread produced per day on the same graph paper as part (a). 3) !In this question you will analyze the impact of the cancellation of games by NBA during 1998-1999 labor dispute on the earnings of one player: Shaquille O’Neal. During 1998-99 season, O’Neal headed the NBA Players Association and was the center for LA Lakers. O’Neal’s salary with the Lakers in 1998-99 was $210,000 per game so his income would have been about $17,220,000 had the 82 scheduled games of the regular season been played. But a contract dispute between owners and players resulted in the cancellation of a number of games. a) Graph the relationship between the number of games cancelled and O’Neal’s 1998-

1999 basketball earnings graphically.

b) Actually 32 games were cancelled. How much were O’Neal’s losses due to the dispute? 4) !Suppose OWU has a ski club that organizes day-long bus trips to a ski area in Marysville. The club leases the bus and charges $10 per passenger for a round trip to the ski area. In addition to the revenues the club collects from the passengers, it also receives a grant of $200 from the school’s student government for each day the bus trip is available. Therefore the club would receive $200 even if no passengers wanted to ride on a particular day. a) Draw the graph that represents the relationship between the number of students who take the trip and the revenue of the club. b) Write down the equation that represents the same relationship between the number of passengers and the revenue of the club. c) Suppose OWU’s student government increases the payment it makes to the club to $400 for each day the trip is available. Graph the new relationship between the number of passengers and the revenue of the club on the same graph you used for part (a)

HOMEWORK ASSIGNMENT FOR CHAPTER 3 1. a) Bill makes $30 an hour as a cable man. He must take two hours off from work (unpaid) to go to the dentist specialized in endodontics to have a root canal therapy. The dentist charges $240 for this service. In terms of dollars, what is the opportunity cost of Bill’s visit to the dentist? b) You are considering opening your own restaurant. To do so, you will have to quit your current job, which pays $46 thousand per year. You will also have to cash in your life savings of $20 thousand, which have been in a certificate of deposit paying 6% per year. You will need this $20 thousand to pay the annual lease on the equipment for your restaurant operations. Fortunately, you own a building suitable for the restaurant. You currently rent out this building on a month by month basis for $2,500 per month. You anticipate that you will spend $50 thousand for food, $40 thousand for extra help, and $14 thousand for utilities and supplies during the first year of operations. There are no other costs involved in this business. What is the opportunity cost of operating the restaurant during the first year? 2. ! Suppose the United States can produce the following efficient combinations of cars and tanks.

POSSIBLE COMBINATIONS

A B C D E Cars (in millions) 0 10 20 30 40 Tanks (in thousands) 60 55 45 30 0 a. Draw the production possibility frontier for US based on the data in the table using the vertical axis for tanks and the horizontal axis for cars.

b. If U.S. allocates all of its resources to the production of cars, how many cars can it produce? What if it allocates all of its resources to the tank production? c. Give an example of an economically inefficient point of production for this economy on your diagram. Can you find another point where the economy can produce more of both goods? (If your answer is “yes”, mark that point on your PPF diagram) d. Suppose the country was producing at point B. What is the opportunity cost of producing 10 million more cars? e. If the country was producing at point D, what is the opportunity cost of producing 10 million more cars?

f. Is the opportunity cost of producing cars constant or increasing as the economy produces more cars? What do you think is the reason for this observation that you made about the opportunity cost of producing cars? g. Suppose a change in technology allows US to produce more tanks with the same resources, but does not allow it to produce more cars with the same resources. Draw and label the new PPF in relation to the old PPF. 3. ! Assume that US and Japan produce Calculators and Radios. Each country’s PPF is displayed in the following table. For simplicity, PPF between radios and calculators is assumed to be of constant cost. United States Production Possibilities Japan’s Production Possibilities Combination Calculators Radios Combination Calculators Radios

A 120 0 D 80 0 B 60 30 E 40 80 C 0 60 F 0 160

a. Draw US’ PPF. (Put calculators on the vertical axis and radios on the horizontal axis) b. Draw Japan’s PPF. (Put calculators on the vertical axis and radios on the horizontal

axis) c. How much would each country consume if they both operated at the midpoint of their

respective PPF’s? (No trade). What would be the US+Japan total production in that case?

d. Assume that each country completely specializes in the production of the good that it has a comparative advantage in. What would be the US+Japan total production in that case?

e. Draw the PPF for the US+Japan association. f. Find a point on the joint PPF (US+Japan) so that a division of the total production at

that point makes both countries better off than part (c)?

4.!ThisquestionisbasedonthedataoftheJapan-SouthKoreaexampledoneinclass.Supposetherearetwocountries:JapanandSouthKoreawhichproducetwogoods:TVsetsandcomputers.

In1day(basedona14-hourworkperiod),aworkerinJapancanproduce40TVsetsor14computersandaworkerinSouthKoreacanproduceonly30TVsetsor12computersassummarizedinthetablebelow:

TV PC

Japan 40 14SouthKorea 30 12

Ifyourecallwehavealreadyfiguredoutinclasswhichcountryhasacomparativeadvantageinwhichgood.Ifyouwanttorecallthose,pleasegooveryourlecturenotes.Nowassumebothcountrieshave1millionworkers.(Alltablesyouareaskedtofillareavailableingraphhandout)

CASE1:NOTRADEConsiderthenotradecasewhereeachcountryallocateshalfofitsworkersintoTVindustryandhalfofitsworkerstoPCindustry.(i)CalculatehowmanyPCsandTVseachcountrywouldproduceandconsume,ifthecountriesdonotengageintrade.

PRODUCTIONANDCONSUMPTION

TV PCJapan

SouthKorea CASE2:SPECIALIZATIONANDTRADESupposeSouthKoreaallocatesallofitsworkerstoPCproductionandJapanallocates100,000workerstoPCproductionand900,000workerstoTVproduction.(ii)CalculatethenumberofPCsandTVseachcountrywouldproduceafterspecialization

PRODUCTION TV PC

Japan SouthKorea

ContinuetoconsiderCase2.SupposeJapanandSouthKoreamakeatradeagreementwhereJapanexports15,370,000TVsatanexchangerateof1PCper2.65TVs.(iii)Aftertradecalculateeachcountry'sconsumptionofPCsandTVs.Thencomparethesewithyouranswerinpart(i)andcommentonit.

CONSUMPTION TV PC

Japan SouthKorea

HOMEWORK ASSIGNMENT FOR CHAPTER 4 1. !The demand and supply schedules for gum are as follows:

Price (cents per pack)

Quantity demanded Quantity supplied (millions of packs a week)

Excess demand Excess Supply (millions of packs a week)

10 200 0 20 180 30 30 160 60 40 140 90 50 120 120 60 100 140 70 80 160 80 60 180 90 40 200

(a) The above table is provided to you in your graph handout. Calculate the excess demand

and excess supply for gums and fill in the table. (b) What is the equilibrium price of a pack of gum? What is the equilibrium quantity of gum that will be traded in the market? 2. Suppose that a huge fire destroys one half of the gum-producing factories. At each price level, the quantity supplied of gums decreases to one half of the amount shown in the above supply schedule. (For example, at P = $0.20 the new quantity supplied of gums = 15) (a) Construct the new supply schedule. (b) What is the new equilibrium price of gum? What is the new equilibrium quantity of gum traded in the market? (c) As the gum factories destroyed by fire are rebuilt and gradually resume gum production, what do you expect will happen to the price of gum and quantity traded of gum in the market? 3. The market demand and supply functions for beer by the pack are given by the following equations.

Q PQ PD

S

= −

= +

1000 50500 50

(a) Calculate the equilibrium price and equilibrium quantity of beer. (b) A recent increase in the prices of barley and wheat (major inputs in beer production) caused a decrease in the supply of beer. The new supply function is given as:

Q PS = +400 50 Calculate the effect of the changes in grain prices to the equilibrium price and quantity of beer. 4. Using supply and demand analysis determine how each of the following will affect the equilibrium price and quantity in the market for personal computers: (a) a rise in incomes (assuming computers are a normal good) (b) a lower expected future price for computers (c) cheaper software (d) a rise in wage rates of computer assembly line workers. (e) an increase in the numbers of sellers of computers (f) a tax placed on the production of computers (Hint: For each case your analysis should include the following steps: • Draw the initial market equilibrium and clearly mark the price and quantity. • Determine the effect of the events on the PC market by identifying the shift in the

relevant curves. • Find the new equilibrium price and quantity and report the change in them. (i.e. Final

Price: higher or lower? Final Quantity: higher or lower?) ) HOMEWORK ASSIGNMENT FOR CHAPTER 6 1. (a) When the Blockbuster Video in Delaware decreased the price of movie rentals from $2.5 to $1.5 per night, they observed that the weekly rentals increased from 200 cassettes to 400 cassettes. Calculate the price elasticity of demand for Blockbuster Video rentals. (b) Joe’s Pizza charges $2 for a slice of pizza and faces the demand curve given below. Calculate the price elasticity of pizza for Joe’s Pizza at their current price. Is the demand elastic or inelastic at the current price? (Hint: Pick another price on the graph and proceed with percentage changes…)

0 200 400 600 800 1000 12000

1

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P($)

HOMEWORK ASSIGNMENT FOR CHAPTER 7 1) ! It is a very hot day, and Austin is very thirsty. Here is the value he places on a can of coke: Value of the first can $7 Value of the second can 5 Value of the third can 3 Value of the fourth can 1 a) From this information, derive Austin’s demand schedule for canned coke and draw his

demand curve. (Hint: To derive Austin’s demand schedule you need to ask him how many cans would he be willing to buy at various prices, such as $1, $2, …etc.) b) If the price of a can of coke is $4, how many cans does Austin buy? How much consumer surplus does Austin get from his purchase? c) If the price falls to $2, how does quantity demanded change? How does Austin’s consumer surplus change? 2) !Disneyland has experimented with several different pricing schemes since opening its gates almost half a century ago. At one stage consumers paid a small admission fee and could purchase ride or exhibit tickets one by one. In recent years, Disneyland have forgone the pricing of individual rides and exhibits for a larger admission fee. Once in the amusement park, consumers pay an admission fee which enables them to go on any rides or in any exhibits as many times as desired. Disneyland estimated the average individual’s demand schedule for rides which is given below. They hired you as their chief economic advisor and asked you to determine the maximum fee that they can charge an average consumer as the admission fee. To do this you need to:

i. Draw the average individual’s staircase demand curve ii. Using the demand curve you draw calculate the total value the average consumer

places on 7 rides and shade the area that represents this total on your graph. Price per ride

Quantity demanded

$7 0 $6 1 $5 2 $4 3 $3 4 $2 5 $1 6 $0 7

3) !A representative consumer’s demand for ski rentals is given in the figure below.

0 1 2 3 4 5 6 7 8 9 10 11 120

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Q ( # of hours)

P($)hourlyrentalfee

(a) What is the total value the consumer places on 8 hours of ski rental? Shade the area that represents this total on your graph. (b) Suppose the local ski resort charges $2 per hour of ski rental. How many hours will the consumer rent skis? Shade the area that represents the consumer surplus on your graph. Calculate the consumer’s consumer surplus.

D

4) !The demand and supply for doughnuts in Delaware is given in the figure below. (a) Calculate the consumer surplus, producer surplus and total surplus generated in this

market. (b) Suppose City of Delaware imposed a maximum price ceiling of $2 on the price of

doughnuts. Calculate the consumer surplus, producer surplus and total surplus after the maximum price law.

(c) Compare your answers for (a) and (b). Who is better off? Who is worse off?

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Q

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Market for Wheat in United States

5) !In the figure above S represents the supply of wheat of US producers, D represents the demand for wheat by US consumers. a) Calculate the consumer surplus, producer surplus and the total surplus if the market for wheat is in equilibrium. b) Now assume that US government allows imports of wheat at a world price of $40. Calculate the consumer surplus, producer surplus and the total surplus under free trade.

HOMEWORK ASSIGNMENT FOR CHAPTER 8 1. ! Suppose you own a small sandwich shop. All the sandwiches made in the shop are grilled, and the shop owns only one grill. The following table shows the total number of sandwiches that can be produced in a day. Each day's produce is then sold to the public.

PRODUCTION OF SANDWICHES AT THE GRILL HOUSE QUANTITY OF LABOR

(EMPLOYEES) (L)

TOTAL OUTPUT (Sandwiches

per day) (Q)

MARGINAL PRODUCT OF

LABOR (MP)

AVERAGE PRODUCT OF

LABOR (AP)

0 0 1 10 2 25 3 35 4 40 5 42 6 42

a) The table is provided to you in your graph handout. Please complete it by finding the marginal product and average product of labor. b) What happens to the marginal product of labor as more labor is hired? Why? 2. !The following cost data represents your firm's various costs of production in the Short Run. As the chief economist of the firm, you are interested in knowing the various costs. Q TC FC VC ATC AFC AVC MC 0 100 1 120 2 135 3 145 4 157 5 173 6 196 7 226 8 266 9 316 10 376 a) Calculate Fixed Costs (FC), Variable Costs (VC), Average Fixed Cost (AFC), Average

Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC) of producing various output levels.

b) Graph AFC, AVC, ATC and MC on the same graph. (Use the X-axis for output and Y-axis for the values of AFC, AVC, ATC and MC)

c) What is the relationship between the MC curve and ATC? How about the relationship between MC and AVC?

3. Suppose you opened up a small bicycle factory. Below are the ATC of producing different quantities of bicycles. Specifically, ATC1 is the average total cost curve of your firm, if 1 machine is used in production, ATC2 is the average total cost curve if 2 machines are used in production, and etc.

ATC3

ATC2

ATC1

ATC ($)

Output (no. of bicyles)

4 10 16 22

a) What is the highest level of production where using one machine is least costly? b) What is the range of output for which using three machines is the least costly way of production? c) What is the level of output at which LRAC is smallest? d) What is the range of output for which your firm experiences increasing returns to scale

(economies of scale)? e) What is the range of output for which your firm experiences decreasing returns to scale (diseconomies of scale)?

4. !The total revenue (TR) and the marginal revenue (MR) curves for your company are given in your graph paper handout. a) Your total cost is given by TC(Q) = 5 Q. Verify that MC = 5 for all output levels.

Draw the total cost on the first graph (top graph) and the marginal cost on the second graph (bottom graph).

b) Suppose your firm produces Q=75 units. What is the relation between MC and MR at that output level? Should you increase or decrease production to increase your profits?

c) Suppose your firm produces Q=150 units. What is the relation between MC and MR at that output level? Should you increase or decrease production to increase your profits?

d) Find the profit maximizing output level Q*. Calculate the profits of the firm at Q*.

HOMEWORK ASSIGNMENT FOR CHAPTER 9 1) For a perfectly competitive firm operating in the short run, various levels of output and the Total Cost of producing these outputs are given in the below table. Moreover, the firm’s fixed costs (FC) are given as $60.

Output (Q)

Total Cost (TC)

1 80 2 90 3 98 4 108 5 123 6 146 7 178

(a) If the price of the product that this firm produces is determined in the industry as $15,

how much will the firm produce in the short run? (Use MR, MC approach) (Don’t forget to check for shut down if necessary)

What is the total profit of this firm? (b) If the market price of the product is $8, how much would the firm produce to maximize

profits? (Don’t forget to check for shut down if necessary)

What would be its profit?

2) !Short run cost curves for a firm in perfectly competitive market is given below. The market price is $36. a) What quantity would the firm produce in the short run? (Would the firm shut-down?

Explain.) b) Calculate the profit of the firm c) Find the range of price levels at which the firm would choose to shut down.

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 400

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MC

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$

3) !Coffee beans are produced all over the world, in countries ranging from Columbia to the Brazil. Because so many coffee producers compete in the world market and because each one is small in comparison to the scale of that market, it is reasonable to view them as price taking firms. In the figure below, the short run cost curves for a coffee producer in Brazil is given.

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Q ( 100lb-bags)

P($ per 100lb-bag)

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ATC

AVC

a) Suppose coffee price in the world market is given by P=$300 per bag. How many bags

of coffee would this farmer produce? What would be its profits?

b) Suppose coffee price in the world market is given by P=$400 per bag. How many bags of coffee would this farmer produce? What would be its profits?

c) For which range of prices would this farmer shut-down? d) At which price would this farmer make zero economic profit? At that price how many

bags would he produce?

HOMEWORK ASSIGNMENT FOR CHAPTER 10 (1) !Insight Communications is the only cable company in Delaware. The market demand curve, marginal revenue, marginal cost and average total cost data of Insight is given in the below figure.

0 5 10 15 20 25 30 35 40 45 500

5

10

15

20

25

30

35

40

Q (in thousands)

$

(a) How many cable services does Insight produce to maximize its profits? How much does the company charge for each cable service? (b) Calculate Insight's profit. (c) Is there a deadweight loss due to the output and pricing choice of Insight? If yes, what is the magnitude of the deadweight loss? (d) Suppose the government decides to regulate Insight using marginal cost pricing. After regulation how many cable services will be offered and what will be the price? Under marginal cost pricing regulation, what is Insight's profit level? (e) Suppose the government decides to regulate Insight using average cost pricing. After regulation how many cable services will be offered and what will be the price? Under average cost pricing regulation, what is Insight's profit level?

MC

ATC

D MR

2) !As a monopolist of a spreadsheet software you want to price discriminate between business and student consumers. The research department of your firm estimated the demand (D) and marginal revenue (MR) for each market. The graph on the left represents the business firms market and the graph on the rig BUSINESS FIRMS STUDENTS

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ht represents the students market. The production and packaging of the software is done at your factory in California. Your marginal cost of producing and packaging each spreadsheet software is constant and is equal to $50. (ATC=MC=$50) a) How much should you charge to Business users? How many will you sell them? b) How much should you charge to Students? How many will you sell them?

HOMEWORK ASSIGNMENT FOR CHAPTER 11 1) !In the table below, the number of workers and the total output that they can produce is given for a pizza shop operating in a perfectly competitive market. The market price of a pizza is $10 (P=$10). Workers are hired from a competitive labor market.

Quantity of Labor

Total Output

Value of Marginal Product (VMP)

1 40 2 70 3 90 4 100 5 105 6 108

a) Calculate the value of marginal product for each unit of labor and fill in the table provided in your graph handout. b) Consider the wage rates $100, $200, $300 and 400. For each wage rate, calculate how many workers would the firm hire. Show how you found your answer. c)Assume that there are 50 pizza-shops in the market. Each of these 50 pizza-shops is identical to the firm discussed in Question 3. Construct and draw the market demand curve for labor (pizza-workers) on the graph paper provided.

HOMEWORK ASSIGNMENT FOR CHAPTER 12

1) Suppose you are the purchasing manager of Kinkos and you are considering to buy a new photocopy machine. The machine will cost $4,000 and last 2 years with no scrap value. (i.e. after 2 years you throw away the machine). At the end of each year, it produces $2,400 income. The interest rate is 10%. (a) What is the present value of your costs? (b) What is the present value of your revenues? (c) Should you invest in the machine? 2) Bob transferred to OWU in the beginning of his junior year and he needs a car for two years. He has 2 options: Option I: Buying the car for $20,000 and selling it for $14,420 at the end of two years. Option II: Leasing the car for 2 years, paying $5,000 today and $5,000 in one year. In both cases, he has to pay all maintenance costs himself. If the interest rate is 10% which is the better option?

HOMEWORK ASSIGNMENT FOR CHAPTER 13 1) Consider the economy of a tropical island which produces only three goods: Coconut, Banana and Pineapple. The quantities and prices of the three goods are given in the following table for 1999 and 2000. Years (t) Q1 (tons of

Coconut) Q2 (tons of Banana)

Q3 (tons of Pineapple)

P1 (Price of Coconut)

P2 (Price of Banana)

P3 (Price of Pineapple)

1999 10 6 4 10,000 4,000 6,000 2000 11 8 5 12,000 5,000 7,500

a) Calculate the Nominal GDP for both years. b) Calculate the Real GDP for both years, by taking 1999 as the base year. c) Calculate the GDP deflator for 2000. d) What is the percentage increase in the average price level based on the GDP deflator?

HOMEWORK ASSIGNMENT FOR CHAPTER 14 1) Consider a student consumption basket with two goods: Movie and Popcorn where the quantities in the basket are given below. Quantity of movies = 10 and Quantity of popcorn = 5

Years t

Price of Movie P1

Price of Popcorn P2

1998 $2.5 $3 1999 $4 $3.5 2000 $4.5 $4

a) Calculate the CPI in 1998, 1999 and 2000 using 1998 as the base year. b) Calculate the inflation in 1999 and 2000 based on CPI c) Suppose the student received a weekly allowance of $10 in 1998 and $12 in 1999 and $15 in 2000. Using the CPI’s you have computed in part (a), convert all allowance figures to 2000 $’s and make a comparison. HOMEWORK ASSIGNMNET FOR CHAPTER 15 1) Consider the following statistics, for the adult population over 16. Total Population over 16 220 million Institutionalized 5 million Students, homemakers and retirees 45 million Armed Forces 20 million Employed 140 million a) Compute the size of the Labor Force b) Compute the Labor force participation rate c) Compute the unemployment rate 2) There are 100,000 inhabitants in Macronesia. Among those 100,000 inhabitants, 25,000

are too old to work and 15,000 are too young to work. Among the remaining 60,000 inhabitants, 10,000 are not working and have given up looking for work, 45,000 are currently employed and the remaining 5,000 are looking for work but do not currently have a job.

a) What is the number of people in the labor force in Macronesia? b) What is the unemployment rate in Macronesia?

HOMEWORK ASSIGNMNET FOR CHAPTER 17 (1) Suppose we are asked to analyze the economy of Freedonia. Assume that initially the Freedonia’s economy is in long run equilibrium. a) Draw the relevant curves (AD, SRAS, LRAS) that depict the above situation and label

the equilibrium output and the average price level as Q* and P* respectively.

Is this economy at full employment? b) Suppose that suddenly consumer confidence in Freedonia’s economy and its financial

system drops. Analyze the effect of this shock on Freedonia’s economy.

What happened to RGDP, CPI and employment in Freedonia as a result? c) Suppose that you are the president of Freedonia who is in charge of helping Freedonia

get out of recession. Further assume that you are a Classical Economist. What do you do? Explain your answer.

HOMEWORK ASSIGNMNET FOR CHAPTER 18

1) !The estimated short run aggregate supply curve of the U.S. economy in late 60's is given in the attached sheet.

Assume that the natural rate (full employment) output level of the economy is given by $3200 billion.

In 1967 the economy's GDP was $3150 billion and the price level was 26.5.

The Aggregate Demand curve for 1967 that is consistent with the data is given on the figure. The Vietnam War was raging in the late 1960's. Government expenditures kept rising during the war. This increased expenditure needed to fight the war caused the aggregate demand curve to shift to the right. In 1969 the GDP rose to $3400 billion and the price level reached to 29. a) Draw the aggregate demand for the year 1969 consistent with the data given above. b) On your graph mark the GDP gap.

How would you characterize the state of the economy in 1969?

Calculate the amount of shift in AD between 1967 and 1969.

c) Assume that for a U.S. consumer, the MPC is 0.85 and the autonomous consumption is $2000. Construct and draw the consumption function for this representative consumer. (C= a + b Y ). What is the value of MPS (marginal propensity to save)? Calculate the value of the Government spending multiplier. d) What are the fiscal policy options available to the government to fight the inflation? e) Calculate the necessary change in government spending to return the economy back to the natural rate of output level of $3200 billion.

AD67

2) a) !Assume that Fed decides to decrease the reserve requirement ratio. Using the graphs given below and also copied on the last page explain the effects of this policy change on money supply, equilibrium interest rate and investment spending. What would be the effect of Fed’s policy change on AD?

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b) Assume that Fed decides to decrease the discount rate. Using the graphs below explain the effects of this policy change on money supply, equilibrium interest rate and investment spending. What would be the effect of Fed’s policy change on AD?

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Investment (billions)

Quantity of Money (billions)

Interest Rate

Interest Rate Interest Rate

Investment (billions)

Quantity of Money (billions)

Interest Rate

Interest Rate Interest Rate

c) Assume that Fed decides to buy government bonds from public in an open market operation. Using the graphs below explain the effects of this policy change on money supply, equilibrium interest rate and investment spending.

What would be the effect of Fed’s policy change on AD?

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10

0 0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 30

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Investment (billions)

Quantity of Money (billions)

Interest Rate

Interest Rate Interest Rate