Posted: September 22nd, 2015

ECO 301 Problem Set 1

1. A stock or a ‡ow?
(a) private saving
(b) labor-force participation rate
2. Which component(s) if any of U.S. GDP would be a¤ected and how (in-
crease or decrease) if:
(a) a German national buys a new house in Miami Beach
(b) GM sells some cars that entered its inventory last year
(c) you rent an old house in Miami
(d) Miami-Dade County builds a new public school
(e) you clean your apartment
(f) the movie “Star Wars: Episode VII – The Force Awakens” is just released
(g) you go diving in the Bahamas
(h) you buy some Apple stock from a broker who charges you a $10 fee
(i) you buy an old computer for your business
(j) United Airlines buy a new Airbus airplane produced in Europe
3. An economy is producing just oranges and apples. The table below
contains information about the quantity and prices of both goods from 2011 to
2014.
Year Quantity of oranges Orange price Quantity of apples Apple price
2013 20,000 $2.00 10,000 $2.00
2014 10,000 $2.10 20,000 $2.00
2015 25,000 $2.00 5,000 $2.50
(a) Calculate the nominal GDP for each year.
(b) Assume 2014 is the base year and …nd the real GDP and the GDP
de‡ator for each year.
(c) Assume the typical consumer buys 2,000 oranges, 1,000 apples, and noth-
ing else.
(i) Let 2014 be the base year. Estimate the CPI for each year.
(ii) What was the in‡ation in 2015 (the percentage change in CPI from
2014 to 2015)? What is the percentage change in the GDP de‡ator in 2015
relative to 2014? Why may using the GDP de‡ator (in this case) understate
the increase in the cost of living, while using the CPI (in this case) may overstate
the increase in the cost of living?
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4. A country’s population (age 16 or older) is 200 million. Moreover, we
know that 120 million people are employed and 8 million are unemployed.
(a) Find the unemployment rate and the labor force participation rate.
(b) Imagine a recession hits the economy and 3 million people are …red.
2 million of them look for jobs for some time, but could not …nd any; they
get desperate and decide to wait for better economic conditions. The other 1
million people are still looking for a job, but are not successful yet. Find the
unemployment rate and the labor force participation rate.
5. The production function of an isolated island economy is F(K;L) =
4K1=4L3=4.
(a) Assume the supply of labor is 1,296
(i) How much is the supply of capital if the market clears at a real rental
rate of 8?
(ii) A hurricane hits the island in question. There are no casualties,
but some capital stock has been destroyed. Would the equilibrium rental rate
increase or decrease? Explain.
(b) Assume the supply of labor is 1,000. How much is the supply of capital
if the market for LABOR clears at a real wage of 6?
6. Consider a closed-economy market-clearing model with the following pro-
duction function:
F(K;L) = AK1=5L4=5;
where K denotes capital, L denotes labor, and A is a positive constant.
(a) Assume the supply of labor increases by 30%. Calculate the resulting
percentage change in the output, the real wage, and the real rental rate.
(b) Assume that the total factor productivity A increases by 30%. Calculate
the resulting percentage change in the output, the real wage, and the real rental
rate.
7. Consider a closed-economy market-clearing model where:
Y = F(K;L) = 2pKL
K = 100
L = 2; 500
G = 200
T = 100
C = 50 + 0:8(Y 􀀀 T)
I = 200 􀀀 10; 000r
(a) Find private saving, public saving, and national saving. Compute the
equilibrium real interest rate.
(b) Imagine the government achieves a balanced budget by raising taxes.
Find the resulting private saving, public saving, and national saving. Compute
the new equilibrium interest rate.
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8. Consider a closed-economy market-clearing model where the marginal
propensity to consume (MPC) equals 0.6, MPL = 20, and MPK = 10.
(a) Find the change in private saving, public saving, and national saving if:
(i)
G = 􀀀5 and
T = 􀀀5, i.e., both government spending and taxes
decrease by 5
(ii)
K = 1
(b) Use graphical analysis to demonstrate whether the equilibrium real in-
terest rate increases or decreases in (i) and (ii) respectively.
3.

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