2. Using the table above and year 1 as the base. Compute and use the CPI to calculate the Inflation rate for year 3

4. Using the table above and year 1 as the base, compute and use the GDP deflator to calculate the Inflation rate for year 4

13. In 1988 the median salary of a Boston Red Sox player was $405,000 (CPI= 118.3) Today, median salary of a Boston Red Sox player is $2,875,000 (CPI=196.4). Are today’s players better paid? Why?

$405,000 of 1988 is equivalent to 405,000*(196.4/118.3). So today's players are better off.

14. In 1988 the median salary of a nurse was $25,000 (CPI= 118.3) Today, median salary of a nurse is $45,000 (CPI=196.4). Are today’s nurses paid better than in 1988? Why?

$25,000 of 1988 is equivalent to 25,000*(196.4/118.3). So today's nurses are better off.

15. In 1964 earnings per hour were $7.96 (CPI= 31). Today, earnings per hour are $8.20(CPI=196.4). Are per hour earnings today equivalent to those in 1964? WHY or why not?

$7.96 of 1964 is equivalent to 7.96*(196.4/31). So 1964's earnings were higher in real terms.

16. In 1964 earnings per hour were $7.96 (CPI= 40). Today, earnings per hour are $8.20(CPI=200). Are per hour earnings today equivalent to those in 1964?

$7.96 of 1964 is equivalent to 7.96*(200/40). So 1964's earnings were higher in real terms.

27. Suppose that the active population is 200 million, the labor force participation rate is 70%. The unemployment rate is 6%. If the number of discouraged workers decreases by 1 million, what does the unemployment rate become?

Labor force = 0.7*200=140m

Number Unemployed = 140*0.06 =8.4m

New number unemployer with 1m fewer discouraged workers = 8.4 +1 = 9.4m

New labor force with 1m fewer discouraged workers = 140 + 1 = 141m

New Unemployment rate with 1m fewer discouraged workers = (9.4/141)*100 = 6.67%

28. Suppose that GDP is 900 billion and current unemployment is 10.5%. What would GDP be if unemployment were only 7.5%? Hint: use Okun’s Law.

With 10.5 - 7.5 = 3 % lower unemployment, GDP would be higher:

each 1% extra unemployment costs 2.5% in GDP so:

3% extra unemployment costs 2.5*3=7.5% in GDP.

7.5% of GDP = 0.075*900 = 67.5b

So GDP would be 67.5b higher = 900+67.5 b

29. Suppose that GDP is 900 billion and current unemployment is 10.5%. What would GDP be if unemployment were 12.5%? Hint: use Okun’s Law.

With 12.5 - 10.5 = 2% higher unemployment, GDP would be lower:

each 1% extra unemployment costs 2.5% in GDP so:

2% extra unemployment costs 2.5*2=5% in GDP.

5% of GDP = 0.05*900 = 45b

So GDP would be 45b lower = 900-45 b

30. Suppose that GDP is 900 billion and current unemployment is 10.5%. What would GDP be if unemployment were to increase by 2%? Hint: use Okun’s Law.

35. Use the information in the table above to calculate:

1. GDP using the expenditures approach = C+I+G+(X-M) = 6,300+1,700+1,600+1,000-1,200
2. National Income=wages + proprietor's income+profits+interest+rent = 5,300+600+900+500+150
3. NNP= NDP + Receipts of factor income from the rest of the world - Payments of factor income to the rest of the world
4. NDP= GDP - depreciation = answer to 'a' above - 1,10

37. Use the information in the table above to answer the following:

Calculate the MPC=0.8
Calculate the Intercept =600
Write down the formula for the Consumption function=600+0.8Y
What is the value of Consumption when Income is 10,000 = 8,600
Calculate Savings=1,400
At what value of Y is Consumption equal to Income= 3,000

38. Use the table above to answer the following:

Calculate the MPC = 0.8 and the intercept =0
Write the consumption function: C =0+0.8Y
Calculate Aggregate Expenditures (add a Col. to the table for AE).

Find the equilibrium value of output.= 3,000
If output is 4000 calculate the change in inventories. Given your answer for the change in inventories, how would firms react to this change in inventories? = 4,000-3,800=200
If investment increase from 500 to 800 (a 300 increase in investment). Recalculate the entire table and find the new equilibrium value of output=4,500

If autonomous consumption increases from 0 to 400 (an increase of 400), use the multiplier formula to calculate the resulting change in equilibrium output.

DY = DI ( multiplier) = 400 * (5)=2,000
If investment decreases by 200, use the multiplier formula to calculate the resulting change in equilibrium output.

DY = DI ( multiplier) = 200 * (5)=1,000
We observed that when investment increased by 50, the equilibrium value of output increased by 250. Given that information, what is the value of the multiplier?

multiplier = DY / DI = 250/5 = 5
What is the value of the MPS?

multiplier = 1/mps

5 = 1/mps

1/5 = mps

What is the value of the MPC?

because mps + mpc = 1

1 - 1/5 = mpc

4/5 = mpc

39. For each figure below to answer the following questions:

What is the equilibrium output level.
At Y = 2,000 are inventories rising? falling? unchanged? Why?
At Y = 6,000 are are inventories rising? falling? unchanged? Why
We did these in class

40. Use the information in the figures below to aswer the following questions: If the economy is at equilibrium, is total spending greater, less than or equal to Output? Are inventories falling, rising or unchanged? Is the economy experiencing a recessionary gap or an inflationary gap? If an inflationary (recessionary) gap exists, how can the gap be closed?
Done in class

41. Draw an AE - 45 degree diagram, draw an Aggregate demand Diagram to show the effect of each of the following on AE, AD and equilibrium output.
Prices Increase (decrease)
NX Increase (decrease)
Exports Increase (decrease)
Imports Increase (decrease)
Wealth Increase (decrease)
Interest rates Increase (decrease)
Technological Improvement
Government spending Increase (decrease)
Taxes Increase (decrease)
Transfers Increase (decrease)

Done in class.

42. Consider the following equations for a simple economy without government or foreign sector:
C = 500 +0.75Y

I = 700

Calculate the equilibrium output level using Y = C+I as the condition for equilibrium.=4,800

Calculate the value of consumption at equilibrium.4,100

Calculate Aggregate Expenditures at equilibrium. 4,800

43. Consider the following equations for a simple economy without government or foreign sector:

C = 500 +0.75Y

I = 700

Calculate the new equilibrium value of income that results when Investment increases by 300.

DY = DI ( multiplier) = 300 * (4)=1,200

What is the size of the shift in the AE line? 300

What is the size of the shift in the AD line? 1,200

44. Consider the following equations for a simple economy without government or foreign sector:

C = 500 +0.75Y

I = 700

Calculate the new equilibrium value of income that results when autonomous consumption increases by 400.

DY = DI ( multiplier) = 400 * (4)=1,600

What is the size of the shift in the AE line? 400

What is the size of the shift in the AD line? 1,600

45. Consider the following equations for a simple economy without government or foreign sector:

C = 500 +0.75Y

I = 700

Suppose that output is NOT the equilibrium value but Y = 5,000.Calculate the change in inventories when Y=5,000.

C = 500 +0.75(5,000) =4,250

I = 700

AE = 4,950

DInventories = 5,000 - 4,950=50

If Y = 5,000 do firms have an incentive to produce more, less or the same output level? Why?

less because inventories rose.

46. Consider the following equations for a simple economy without government or foreign sector:

C = 500 +0.75Y

I = 700

Suppose that output is NOT the equilibrium value but Y = 4,000. Calculate the change in inventories when Y=4,000.

C = 500 +0.75(4,000) = 3,000

I = 700

AE = 3,700

DInventories = 3,000 - 3,700= -700

If Y = 4,000 do firms have an incentive to produce more, less or the same output level? Why?

more because inventories dropped.