07 Jun Question 1. a. List the three major problems in using
Question
1. a. List the three major problems in using the CPI as a measure of the cost of living. b. Explain the adjustment process that creates a change in the price level when the money supply increase.
2. a. Explain how unemployment insurance acts as an automatic stabilizer. b. Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists?
3. A flour mill produces $1000 worth of flour, of which $700 goes to a bakery and $300 to consumers. A water supplier produces $300 worth of water, of which $200 goes to the bakery and $100 to consumers. The bakery produces $1500 worth of bread and sells all of it to consumers. The three companies pay wages as follows: mill pays $400, water supplier and bakery pays $200. There are no other costs of production.
a. Calculate GDP based on the value of production. b. Calculate GDP based on income.
4. With respect to the impact on the equilibrium quantity of loanable funds, what difference do you obderve between an increase in investment tax credit and an increase in budget deficit? Drew diagrams to illustrate and explain the two scenarios in your answer.
5. Assume that theUnited States economy is in a severe recessionwith no inflation.
a.Using a correctly labeled aggregate demand and aggregate supply graph, show each of the following for the economy. (i) Full-employment output (ii) Current output level (iii) Current price level
b. The federal government announces a major decrease in spending. Using your graph in part (a), show how the decrease in spending will affect each of the following. (i) Level of output (ii) Price level
c. Explain the mechanism by which the decrease ingovernment spending will affect the unemployment rate.
d. The Federal Reserve purchases bonds through its open-market operations. (i) Using a correctly labeled graph, show the effect of this purchase on theinterest rate. (ii) Explain how the change in the interest rate will affect output and the price level.
e. Explainhow the change in the interest rate you identified in part (d) will affect each of the following. (i) International value of the dollar relative to other currencies (ii) United States exports (iii) United States imports
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