Question

1) In years 1 and 2, there are 2 goods produced in a given economy, hamburgers, and pens. In year 1,

10,000 hamburgers are produced and sold at $2 each, and in year 2, 40,000 hamburgers are produced

and sold at $2.10 each. In year 1, 15,000 pencils are sold for 2 dollars each, and in year 2, 38,000

pencils are sold for $3 each.

a)Calculate nominal GDP in years 1 and 2.

b)Calculate real GDP in years 1 and 2 using year 1 as the base year. Next, calculate the percentage

increase in real GDP from year 1 to year 2.

c)Calculate the GDP deflator and the percentage inflation rate from year 1 to year 2 using year 1

as the base year.

d)What is the CPI inflation rate using year 1 as the base year? Is this equal to the GDP deflator

inflation rate?

2. Now, in the above economy, also suppose that 8,000 notebooks were imported and sold for $1 each

in year 1, and 20,000 notebooks imported and sold for $5 each in year 2

a)Calculate nominal GDP in years 1 and 2.

b)What is the CPI inflation rate using year 1 as the base year?

c)What is the GDP deflator inflation rate using year 1 as the base year?

d)Are the two measures equal? Yes or No? And explain.

e)If the price of imported notebooks increases to $10 in year 3, how would this affect the CPI

inflation rate? How about the GDP inflation rate? Explain, but no need to show work.

3. Consider an economy that initially has a labor force of 2000 workers. Of these workers, 1500 are

employed. The economy enters a recession. Employment falls by 5%, and also, 0.4% of the

labor force becomes discouraged at the prospect of finding a job and leaves the labor force.

a)Can you calculate the employment rate given the information above? Explain.

b)Calculate the unemployment rate before and after the recession.

c)What is the unemployment rate taking discouraged workers into account?

d)Using Okun's law, calculate the expected percentage change in real GDP.