Class Period: Section 3 Mod 10-15 Practice Essay 1 (Module 10) Consider the following transactions involving the nation of Foxystan For each of the following, determine which transaction would be added to the current GDP of Foxystan Explain why or why not a A consumer in Foxystan pays the rent to the owner of his apartment complex b A firm in Foxystan pays wages to a consultant located in the neighboring country of Franklandia c The government of Foxystan has built a new national museum d A consumer in Foxystan sells his used car to a consumer who lives in neighboring Franklandia e A firm in Foxystan pays interest on repayment of a loan from the First Bank of Foxystan (5 points) a Would it add to GDP? Why or Why wouldn t it add to GDPEXPLAIN b c d e 1
2 (Module 11) The nation of Muffet produces only two goods, curds and whey The table below shows the prices and outputs of these two products for three recent years Year 1 is the base year Year Quantity of Curds Price per unit Quantity of Whey Price per unit Produced of Curds Produced of Whey Population 1 100 $100 50 $200 5 2 150 $200 75 $300 6 3 200 $200 100 $400 8 a Compute nominal GDP and nominal GDP per capita in Year 1 b Compute real GDP and real GDP per capita in Year 2 c Is the average citizen in Muffet more prosperous in year 3 than they were in year 1? Show your work (6 points) a)nominal GDP Nominal GDP per capita b)real GDP Real GDP per capita c) Is the average citizen more prosperous in year 3 than in year 1? EXPLAIN 2
3 (Module 12) The population of Franklandia can be described by the data in the table below Civilian population age 16 and older 500,000 Number employed full time 220,000 Number employed part time 80,000 Number unemployed and looking for a job 150,000 Number unemployed and not looking for a job 25,000 Number in the military 20,000 Number in prison 5,000 a Use the data above to calculate the size of the labor force and the labor force participation rate b Use the data above to calculate the unemployment rate c Suppose that half of those officially counted as unemployed become discouraged and drop out of the labor force Will this increase, decrease, or have no impact on the nation s unemployment rate? Explain (5 points) a) size of the labor force (show your work) labor force participation rate (show your work) b) unemployment rate (show your work below) c) EXPLAIN how the effect of half of those counted as unemployed becoming discouraged and dropping out of the labor force would affect the unemployment rate (show your work) 3
4 (Module 13) For each of the following statements, first declare whether the statement is true or false Then explain your answer a When the economy is in a recession, cyclical unemployment is rising and the natural rate of unemployment is falling b When the economy is operating at full employment, the natural rate of unemployment is equal to zero c Internet job placement websites can lower frictional unemployment and also lower the natural rate of unemployment (6 points) a True or False EXPLAIN b c 4
5 (Module 14) You have borrowed $2000 for one year to purchase furniture for your first apartment The bank is offering you an interest rate of 55% and the expected rate of inflation is 25% for the next year a At the beginning of the year, what is the nominal rate of interest and what is the real rate of interest? b Suppose the actual inflation rate is 2% over the next year Once the loan has been repaid, what is the nominal rate of interest and the real rate of interest? c In a borrowing agreement, who wins and loses when inflation is unexpectedly low? Explain how unexpectedly low inflation creates a transfer of purchasing power when money is borrowed and lent (4 points) a) nominal interest rate real interest rate b) nominal interest rate real interest rate c) 5
6 (Module 15) The table below shows the consumer price index for the Theodorean economy Consumer Price Year Index 1 98 2 100 3 110 4 115 a What year is being used as the base year? b What is the inflation rate between year 2 and year 3? c Suppose your nominal wage in year 2 was $10 per hour What nominal wage must you receive in year 4 to keep your real wage from falling? d Were there any years in which deflation occurred? Explain (4 points) a) year b) inflation rate between year 2 and year 3 (show your work below) c) nominal wage in year 4 to keep your real wage from falling EXPLAIN 6