Spring 2024 Principles of Macroeconomics (OP). Assignment 3. Answer Key

Principles of Macroeconomics, Spring 2024 Assignment #3 (Chapters 6, 7, & Production and Growth) (60 points) Name ___ Answer Key _______________________________________________________ GENERAL INSTRUCTION: Your assignment must be submitted as a Word document by 11:59 pm Friday, Mar. 29 (so that I can provide you with the answer key on Saturday, Mar. 30 before the deadline for exam 3). No late assignments are accepted. PART I. SHORT ANSWER QUESTIONS INSTRUCTION: Read each question carefully and answer in the space provided. Please highlight your answers (or use a different color or font) and show all work where necessary. You will lose points if you do not show work where necessary. 1. What does a consumer price index (CPI) measure? How is CPI constructed? [2.5x2=5 pts] Answer: The consumer price index measures the overall cost of the goods and services bought by a typical consumer. It is constructed by surveying consumers to determine a basket of goods and services that the typical consumer buys. Prices of these goods and services are used to compute the cost of the basket at different times, and a base year is chosen. To compute the index, we divide the cost of the market basket in the current year by the cost of the market basket in the base year and multiply by 100. 2. The market basket of goods for a typical consumer includes 200 gallons of gas, 50 gallons of milk, and 40 loaves of bread. The base year is 2017. Table 6.1 [4+2=6 pts] Year Price of Gas Price of Milk Price of Bread 2016 $2.75 $2.50 $1.50 2017 $3.00 $2.50 $1.65 2018 $3.15 $2.75 $1.75 a). Calculate the CPI for 2017 and 2018. [2x2=4 pts] Answer : CPI 2017 = [(cost of the basket in 2017)/ (cost of the basket in base year)] x 100 = [[($3.00 x 200) + ($2.50 x 50) + ($1.65 x 40)] / [($3.00 x 200) + ($2.50 x 50) + ($1.65 x 40)]]. 100 = [(600 + 125 + 66) / (600 + 125 + 66)]. 100 = (791/ 791). 100 = 100 CPI 2018 = [(cost of the basket in 2018)/ (cost of the basket in base year)] x 100 = [[($3.15 x 200) + ($2.75 x 50) + ($1.75 x 40)]/ [791]]. 100 = [(630 + 137.5 + 70)/ 791]. 100 = (837.5/791). 100 =105.88 b). Calculate the inflation rate from 2017 to 2018. [2 pts] Answer: Inflation rate 2017-2018 = [(CPI 2018 – CPI 2017 )/ CPI 2017 ]. 100 = [(105.88 – 100)/ 100]. 100 = 5.88% 1

3. In 1948, the average price of a movie ticket was $0.36. The CPI in 1948 was 24.1, and the CPI today is 301.836. How does the price of a movie ticket in 1948 compare to the price of a movie ticket today? Explain and show your answer mathematically. [4+1=5 pts] Answer: Current dollar value of = $0.36 x (301.836/ 24.1) = $ 4.509 1948 movie ticket $0.36 in 1948 is equivalent to 4.509 today. The current average price of a movie ticket is about $12. Hence, comparing $ 4.509 to $12, we can conclude that movie tickets are more expensive today than in 1948. 4. Describe how the BLS determines whether an individual is “employed,” “unemployed,” or “not in the labor force.” [1.5x3=4.5 pts] Answer : The BLS takes the total population of the United States and subtracts all persons who are under 16 years of age, on active military duty, or institutionalized, and what is left is called the civilian noninstitutional population. The civilian noninstitutional population is divided into two groups: persons not in the labor force and persons in the labor force. Persons in the civilian labor force are either employed or unemployed. A person is counted as employed if he/she did any work for pay or profit during the survey reference week, or if he/she did at least 15 hours of unpaid work in a family-operated enterprise, or if he/she were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various other personal reasons. A person is counted as unemployed if he/she did not have jobs during the survey reference week but made specific active efforts to find a job during the prior 4 weeks and was available for work, or if he/she was not working, but was waiting to be called back to a job from which he/she had been temporarily laid off. A person is considered as not in the labor force if he/she is neither employed nor unemployed. 2

7. First, define Gross Domestic Product (GDP). Then, briefly explain the three approaches to measuring it. [1.5x4=6 pts] Answer: GDP is the total market value of all final goods and services produced annually within a country’s borders. Three ways to compute GDP: 1. Expenditure approach: -add the amount of money spent by buyers of final goods and services; - Y = C + I + G + NX 2. Income approach: - add the sum of all incomes earned (wages, interest, rents, and profits) in producing goods and services 3. Value-added approach: - add the value added at each stage of production of all goods and services. 8. What is a business cycle? List the phases of the business cycle. When do we say one business cycle is complete? [1.5x3=4.5 pts] Answer : A Business cycle refers to the recurrent swings (up and down) in real GDP. The phases of the business cycle include peaks, contractions, troughs, recoveries, and expansions. A complete business cycle is the period from one peak to another peak, or from one trough to another trough. Table 7.1 Year Price of Ice Cream Quantity of Ice Cream Produced Price of Strawberrie s Quantity of Strawberries Produced Price of Sunglasses Quantity of Sunglasses Produced 2016 $4.68 135 $1.508 115 $20.00 50 2017 $4.76 150 $1.347 125 $25.00 75 2018 $4.81 160 $1.347 135 $25.00 80 9. A small economy produces the goods shown in Table 7.1. Use the information shown in the table to calculate the following. (2016 is the base year.) [(3x2) + 2= 8 pts] a). Nominal GDP for all 3 years [1x3=3 pts] Answer: Nominal GDP 2016 = ($4.68 x 135) + ($1.508 x 115) + ($20 x 50) = 631.8 + 173.42 + 1000 = $1,805.22. Nominal GDP 2017 = ($4.76 x 150) + ($1.347 x 125) + ($25 x 75) = 714 + 168.375 + 1875 = $2,757.375. Nominal GDP 2018 = ($4.81 x 160) + ($1.347 x 135) + ($25 x 80) = 769.6 + 181.845 + 2000 = $2,951.445. 4

b). Real GDP for all 3 years [1x3=3 pts] Real GDP 2016 = ($4.68 x 135) + ($1.508 x 115) + ($20 x 50) = 631.8 + 173.42 + 1000 = $1,805.22. Real GDP 2017 = ($4.68 x 150) + ($1.508 x 125) + ($20 x 75) = 702 + 188.5 + 1500 = $2,390.5. Real GDP 2018 = ($4.68 x 160) + ($1.508 x 135) + ($20 x 80) = 748.8 + 203.58 + 1600 = $2,552.38. c). Economic growth rates from 2016 to 2017 and from 2017 to 2018. [1x2=2 pts] Econ growth 2016-2017 = [(Real GDP 2017 – Real GDP 2016 )/Real GDP 2016 ].100 = [$2,390.5 - $1,805.22)/$1,805.22]. 100 = (585.28/ 1,805.22). 100 = 32.42% Econ growth 2017-2018 = [(Real GDP 2018 – Real GDP 2017 )/Real GDP 2017 ].100 = [$2,552.38 - $2,390.5)/$2,390.5]. 100 = (161.88/ 2,390.5). 100 = 6.77% 10. First, discuss what productivity and standard of living mean. Then, explain why productivity is related to the standard of living. Finally, make a list of things that determine labor productivity. [(1.5x2) + 1 + (0.25x4)=5 pts] Answer: Productivity measures how much people can produce in an hour. The standard of living is a measure of how well people live. As productivity increases, people can produce more (and use less to produce the same amount) and so their standard of living increases. Income per person is an important dimension of the standard of living and is positively correlated with other things such as nutrition and life expectancy that make people better off. The factors that determine labor productivity include the amounts of physical capital (equipment and structures), human capital (knowledge and skills), and natural resources available to workers, as well as the state of technological knowledge in society. PART II. MULTIPLE CHOICE QUESTIONS INSTRUCTION: Identify the choice that best completes or answers the question and place your answers in the table below. (1 x 6= 6 pts) 1 2 3 4 5 6 B C C D D B 1. In year 1 the CPI is 140, and in year 2 the CPI is 160. From year 1 to year 2, Chiang's salary rises from $42,000 to $49,000, and Marta's salary rises from $55,000 to $60,000. Who is "more than keeping up with inflation"? A. Marta B. Chiang C. both Marta and Chiang 5