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YILDIZ TECHNICAL UNIVERSITY

DEPARTMENT OF ECONOMICS
IKT1102 – Introduction to Economics II
Assoc. Prof. Dr. Senem Çakmak Şahin

Problem Set 1
The questions are compiled from Michael Parkin’s book “ECONOMICS (TENTH EDITION)”

Chapter 21
1) Use the following diagram for answering the questions below:

a) During 2008, in the economy:


Flow B was $ 9 trillion.
Flow C was $ 2 trillion.
Flow D was $ 3 trillion.
Flow E was $ -0.7 trillion.
Name the flows A, B, C, D, E and calculate the 2008 values of aggregate income and GDP
using the information given above.

b) During 2009, flow A was $13.0 trillion, flow B was $9.1 trillion, flow D was $3.3 trillion, and
flow E was –$0.8 trillion. Calculate the 2009 values of GDP and government expenditure.
YILDIZ TECHNICAL UNIVERSITY
DEPARTMENT OF ECONOMICS
IKT1102 – Introduction to Economics II
Assoc. Prof. Dr. Senem Çakmak Şahin

2) Some macroeconomic data are given for the U.S. economy in 2008 below:
Wages paid to labor : 8000
Consumption expenditure : 10000
Net operating surplus : 3200
Investment : 2000
Government expenditure : 2800
Net exports : -700
Depreciation : 1800
Calculate U.S. GDP in 2008. Explain the approach (expenditure or income) that you used to
calculate GDP.

3) A fire destroys the statistics office. The accounts are now incomplete, but there remain the
following data:
GDP (income approach) : 2900
Consumption expenditure : 2000
Indirect taxes less subsidies : 100
Net operating surplus : 500
Investment : 800
Government expenditure : 400
Wages : 2000
Net exports : -200
i) Calculate GDP (expenditure approach) and depreciation.
ii) Calculate net domestic income at factor cost and the statistical discrepancy.

4) Tropical Republic produces only bananas and coconuts. The base year is 2008, and the tables give
the quantities produced and the prices.

Quantities 2008 2009


Bananas 800 kg’s 900 kg’s
Coconuts 400 kg’s 500 kg’s

Prices 2008 2009


Bananas $2 / kg $4 / kg
Coconuts $10 / kg $5 / kg

Calculate nominal GDP in 2008 and 2009. Calculate real GDP in 2009 expressed in base year
prices.
YILDIZ TECHNICAL UNIVERSITY
DEPARTMENT OF ECONOMICS
IKT1102 – Introduction to Economics II
Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 22
5) 1. The Bureau of Labor Statistics reported the following data for 2008:
Labor force : 30000
Employment : 25500
Working-age population: 45000
Calculate the unemployment rate, labor force participation rate, and employment-to-
population ratio.

6) In July 2009, in the economy of Sandy Island, 10000 people were employed, 1000 were
unemployed, and 5,000 were not in the labor force. During August 2009, 80 people lost their jobs
and didn’t look for new ones, 20 people quit their jobs and retired, 150 unemployed people were
hired, 50 people quit the labor force, and 40 people entered the labor force to look for
work.
a. Calculate the unemployment rate and the employment-to-population ratio for July 2009
b. Calculate the number of people unemployed the number of people employed the
unemployment rate for the end of August 2009.

7) Define structural unemployment, frictional unemployment and cyclical unemployment.


Suppose that Ahmet has just graduated from university and looking for a job. However, as a
first-time job seeker he lacks the sufficient knowledge for finding the company that has the
job that is available and suitable for him. Thus, he is currently unemployed.
What kind of unemployment is described in the above scenario?

8) The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought
in 2009. The average household spent $60 on juice and $30 on cloth in 2009 when the price of juice
was $2 a bottle and the price of cloth was $5 a yard. In the current year, 2010, juice is $4 a bottle and
cloth is $6 a yard. Calculate the CPI basket and the percentage of the household’s budget spent on
juice in 2009. Calculate the CPI and the inflation rate in 2010.

9) The BLS reported the following CPI data:


June 2006 201.9
June 2007 207.2
June 2008 217.4
Calculate the inflation rates for the years ended June 2007 and June 2008. How did the inflation rate
change in 2008? Why might these CPI numbers be biased? How do alternative price indexes help to
avoid the bias in the CPI numbers?
YILDIZ TECHNICAL UNIVERSITY
DEPARTMENT OF ECONOMICS
IKT1102 – Introduction to Economics II
Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 23
10) Brazil’s real GDP was 1,360 trillion reais in 2009 and 1,434 trillion reais in 2010. Brazil’s
population was 191.5 million in 2009 and 193.3 million in 2010. Calculate the economic growth rate,
the growth rate of real GDP per person, and the approximate number of years it takes for real GDP
per person in Brazil to double if the 2010 economic growth rate and population growth rate are
maintained.

11) Suppose that the United States cracks down on illegal immigrants and returns millions of workers
to their home countries. Explain what will happen to U.S. potential GDP, employment, and the real
wage rate. Explain what will happen in the countries to which the immigrants return to potential
GDP, employment, and the real wage rate.

12) The tables describe an economy’s labor market and its production function in 2010.

Real wage rate Labor hours Labor hours


(dollars per hour) supplied demanded
80 45 5
70 40 10
60 35 15
50 30 20
40 25 25
30 20 30
20 15 35

Labor (hours) Real GDP


(2005 dollars)
5 425
10 800
15 1125
20 1400
25 1625
30 1800
35 1925
40 2000
i. What are the equilibrium real wage rate, the quantity of labor employed in 2010, labor
productivity, and potential GDP in 2010?
ii. In 2011, the population increases, and labor hours supplied increase by 10 at each real wage
rate. What are the equilibrium real wage rate, labor productivity, and potential GDP in 2011?
iii. In 2011, the population increases, and labor hours supplied increase by 10 at each real wage
rate. Does the standard of living in this economy increase in 2011? Explain why or why not.
YILDIZ TECHNICAL UNIVERSITY
DEPARTMENT OF ECONOMICS
IKT1102 – Introduction to Economics II
Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 24
13) First Call, Inc., is a cellular phone company. It plans to build an assembly plant that costs $10
million if the real interest rate is 6 percent a year. If the real interest rate is 5 percent a year, First Call
will build a larger plant that costs $12 million. And if the real interest rate is 7 percent a year, First
Call will build a smaller plant that costs $8 million.
i. Draw a graph of First Call’s demand for loanable funds curve.
ii. First Call expects its profit from the sale of cellular phones to double next year. If other things
remain the same, explain how this increase in expected profit influences First Call’s demand
for loanable funds.

14) Draw a graph to illustrate how an increase in the supply of loanable funds and a decrease in the
demand for loanable funds can lower the real interest rate and leave the equilibrium quantity of
loanable funds unchanged.

15) The table shows an economy’s demand for loanable funds and the supply of loanable funds
schedules, when the government’s budget is balanced.

Real interest rate Loanable funds Loanable funds


(percent per demanded supplied
year) (trillions) (trillions)
4 8,5 5,5
5 8,0 6,0
6 7,5 6,5
7 7,0 7,0
8 6,5 7,5
9 6,0 8,0
10 5,5 8,5

i. Suppose that the government has a budget surplus of $1 trillion. What are the real interest
rate, the quantity of investment, and the quantity of private saving? Is there any crowding
out in this situation?
ii. Suppose that the government has a budget deficit of $1 trillion. What are the real interest
rate, the quantity of investment, and the quantity of private saving? Is there any crowding
out in this situation?
iii. Suppose that the government has a budget deficit of $1 trillion and the Ricardo-Barro effect
occurs. What are the real interest rate and the quantity of investment?
YILDIZ TECHNICAL UNIVERSITY
DEPARTMENT OF ECONOMICS
IKT1102 – Introduction to Economics II
Assoc. Prof. Dr. Senem Çakmak Şahin

Chapter 25

16) In June 2009, currency held by individuals and businesses was 853 billion dollars; traveller's
checks were 5 billion dollars; checkable deposits owned by individuals and businesses were 792
billion dollars; saving deposits were 4,472 billion dollars; time deposits were 1,281 billion dollars; and
money market funds and other deposits were 968 billion dollars. Calculate M1 and M2 in June 2009.

17) The spreadsheet provides information about the demand for money in Minland. Column A is the
nominal interest rate, r. Columns B and C show the quantity of money demanded at two values of
real GDP: Y0 is $10 billion and Y1 is $20 billion. The quantity of money supplied is $3 billion. Initially,
real GDP is $20 billion. What happens in Minland if the interest rate
i. exceeds 4 percent a year and
ii. is less than 4 percent a year?

A B C
1 r Y0 Y1
2 7 1 1,5
3 6 1,5 2
4 5 2 2,5
5 4 2,5 3
6 3 3 3,5
7 2 3,5 4
8 1 4 4,5

18) Quantecon is a country in which the quantity theory of money operates. In year 1, the economy
is at full employment and real GDP is $400 million, the price level is 200, and the velocity of
circulation is 20. In year 2, the quantity of money increases by 20 percent. Calculate the quantity of
money, the price level, real GDP, and the velocity of circulation in year 2.