Economic Questions

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I’m working on a economics multi-part question and need an explanation and answer to help me learn.

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Question 2 (5 points) Take an economy where wheat and bread are the only goods being traded in the
marketplace. The quantity and price of trade over two years are summarized in the following table.
Assume that in every year, half of the wheat is purchased by producers of bread and the other half is
purchased by the households for domestic use. All of the bread is purchased by the households. Finally,
assume that 2011 is the base year.
Find the nominal GDP in 2011.
Find the real GDP in 2012.
Find the inflation rate in 2012, implied by the GDP deflator.
Assume that the economy exports all its bread and there is no import. Compute the inflation rate in
2012 implied by the CPI.
Question 3 (4 points) Based on what is defined by a macroeconomist, do the following situations represent
saving or investment? Explain.
Your family takes out a mortgage and buys a new house.
You use your $200 paycheck to buy Singtel shares.
Your roommate earns $100 and deposits it in her account at a bank.
You borrow $1,000 from a bank to buy a car to use in your pizza delivery business.
Question 4 (8 points) Economists in an open economy have collected the following information about the
economy in 2021:
Y = 10000, C = 6000, T = 1500, G = 1700, NX = -500
The economists also estimate that the investment function is:
I = 3300 – 100 r,
where r is the country’s interest rate, expressed as a percentage.
(a) Calculate national saving, investment, public saving, private saving, and the equilibrium interest rate.
Does the government have budget deficit or surplus? Trade deficit or surplus?
(b) Ceteris Paribus, the government reduces the size of its deficit, what will happen to national saving,
investment, and the interest rate?
(c) Ceteris Paribus, business become very optimistic about the future profitability of building new
factories, what will happen to national saving, investment, and the interest rate?
Question 5 (5 points) The economy of Winterfell is given as
AD: Y = 2000 – 5P
Short-run AS: Y = a + 10P
with Y denoting the quantity of output, and P the price level. Winterfell’s natural rate of output is 1500.
(a) Suppose Winterfell is currently at natural rate of output, find a.
(b) Suppose now that the short-run AS changes to Y = 800 + 10P. What shock could it be? Calculate the
new equilibrium output and price level.
(c) Following the shock in (b), Winterfell’s central bank can change the aggregate demand to respond.
Use calculations to show that the central bank faces a trade-off between price stabilization and output
stabilization in responding to this shock. (Hint: central bank will parallel shift the AD curve.)
Question 6 (8 points) An economy is in macroeconomic equilibrium when each of the following shocks
occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what
type of fiscal policies would help move the economy back to its natural rate of output? How would your
recommended fiscal policy shift the aggregate demand curve?
A stock market boom increases the value of stocks held by households.
Domestic currency appreciates relative to foreign currencies.
Anticipating the possibility of war, the government increases its purchases of military equipment.
The quantity of money in the economy declines and interest rates increase.
Question 7 (4 points) Suppose the Central bank expands the money supply, but because the public (people
and firms) expects this action, it simultaneously raises its expectation of the price level. What will happen
to output and the price level in the short run? Compare this result to the outcome if the Central Bank
expanded the money supply but the public didn’t change its expectation of the price level.
Question 8 (5 points) Consider the following labor market.
(a) Find the equilibrium wage and employment. Explain why this is an equilibrium specific to this
(b) What is unemployment rate in the equilibrium you found in (a)?
(c) Assume that the government sets a minimum wage at 5 dollars higher than the equilibrium wage.
What is the unemployment rate in this case?
(d) Assume that the government sets a minimum wage at 5 dollars lower than the equilibrium wage.
What is the unemployment rate in this case?

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