Economics Assignment 3 Questions 2015

| November 24, 2016

1. (Aggregate Demand and Supply) How do the aggregate demand and supply curves differ from the market curve?

2. (Supply-side Economics) One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve?

3. (Income Approach to GDP) How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value added and its importance in the income approach. Consider the following date for the selling price at eachstage in the production of a 5-pound bag of flour sold by your local grocer. Calculate the final market value of the flour.

Stage of Production Sale Price

Farmer $0.30

Miller $0.50

Wholesaler $1.00

Grocer $1.50

4. (Expenditure Approach to GDP) Given the following annual income information about a hypothetical country, answer the following questions:

Billions of Dollars

Personal consumption expenditures $200

Personal taxes 50

Exports 30

Depreciation 10

Government purchases 50

Gross private domestic investment 40

Imports 40

Government transfer payments 20

a. What is the value of GDP?

b. What is the value of net domestic product?

c. What is the value of net investment?

d. What is the value of net exports?

5. (Consumer Price Index) Calculate a new consumer price index for the data in the following exhibit. Assume that current year prices of Twinkies, fuel oil, and cable tv are $0.95/package, $1.25/gallon, and $15.00/month, respectively. Calculate the current year’s cost of the market basket and the value of the current year’s price index. What is this year’s percentage change in the price level compared to the base year?

(1) (2) (3) (4) (5)

Product Quantity in Prices in Cost of basket Prices in Cost of basket

market basket base year in base year current year in current year

(3) (1) (2) (5) (1) (4)

Twinkies 365 packages $0.89 package $324.85 $0.79 $288.35

Fuel oil 500 gallons 1.00 gallon 500.00 1.50 750.00

Cable tv 12 months 30.00/month 360.00 30.00 360.00

$1,184.85 $1, 398.35

6. (Consumer Price Index) Given the following data, what was the value of the consumer price index in the base year? Calculate the annual rate of consumer price inflation in 2013 in each of the following situations:

a. The CPI equals 200 in 2012 and 240 in 2013.

b. The CPI equals 150 in 2012 and 175 in 2013.

c. The CPI equals 325 in 2012 and 340 in 2013.

d. The CPI equals 325 in 2012 and 315 in 2013.

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