Homework 10 - GDP, Prices, Inflation, Unemployment

ECNS 251

Homework 10 - GDP, Prices, Inflation, Unemployment

1. What components of GDP (if any) would each of the following transactions affect? Explain. Recall GDP= C+I+G+(X-M)

1. A family buys a new refrigerator.
2. Aunt Jane buys a new house (built this year).
3. Ford sells a Mustang from its inventory.
4. You buy a pizza.
5. California repaves Highway 101.
6. Your parents buy a bottle of French wine.
7. Honda expands its factory in Marysville, Ohio.

2. Below are some data from the land of milk and honey.

1. Assume that the market basket consists of 2 units of milk and 3 units of honey. Compute the CPI for each year, using 2010 as the base year.

1. Compute the inflation rate between 2010 and 2011 and between 2011 and 2012.

3. TheNew York Timescost $0.15 in 1970 and $2.00 in 2009. The average wage in manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.

1. By what percentage did the price of a newspaper rise?

1. By what percentage did the wage rise?

1. In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?

1. Did workers’ purchasing power in terms of newspapers rise or fall?

4. The movie Gone with the Wind grossed $92.2 million when it was released in 1939 and the CPI was 13.9. Star Wars grossed $347.8 million when it was released in 1977 and the CPI was 60.6. Which movie grossed more in real terms? Show your work.

5. Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by 5 percent. Briefly explain whether this unexpectedly high inflation rate would help or hurt the following:

a.)the government

b.)a homeowner with a fixed-rate mortgage

c.)a union worker in the second year of a labor contract

d.)a college that has invested some of its endowment in government bonds

6. If it could be shown that a rising GDP is associated with a rising level of anxiety, tension, and conflict in the population, would you favor deducting these psychological costs to obtain the true value of gross domestic product? How would you do so? How would you place a dollar value on increased anxiety?

7. You have a friend who is interested in European history. In her reading, she comes across a statistic showing that the German inflation rate after World War I was 29,500%. Explain what this rapid rate of inflation meant for prices in Germany and the value of German currency.

8. Consider the following hypothetical data from the nation of Econtown, where there is no military and no one is institutionalized for any reason.

1. What is the unemployment rate in Econtown?

1. What is the labor force participation rate in Econtown?

1. Suppose that 15 million stay-at-home parents start seeking jobs and that 10 million of them find jobs. What is the new unemployment rate in Econtown?

1. Is the economy better off after the stay-at-home parents enter the labor force? Is GDP per captia higher or lower? Explain.

9. Read, “U.S. Layoffs Hold Steady as 2017 Winds Down,” (Wall Street Journal 12/28/2017) and answer the following.

1. Why can steady initial jobless claims indicate a healthy economy? How does the impact of the hurricanes impact jobless claims?
2. What does it mean that the unemployment rate was 4.5% in November?
3. What are the factors cited in the article that are contributing to the 2.4% growth rate in GDP for the fourth quarter of 2017?