SUNY ECO 305 Assignment 1 -Choose two macroeconomic
Subject: Economics   / General Economics
Question
ECO 305 — Spring 2017
——-Assignment 1——Please, note the following: You must walk us through your answers and give us the economic intuition behind your solution.
If you do not, you will not obtain any points, EVEN THOUGH your answer might be correct.
In your explanations, use whole sentences and a clear syntax, similarly to the textbook.
Whenever it is not explicitly required, it is up to you to use equations and/or graphs in your
answers.
If you use equations in your answers, remember to define each variable you use and what the
equation stands for.
If you use graphs in your answers, remember to label clearly the a. axes; b. curves; c. initial
equilibrium point(s); d. terminal or final equilibrium point(s); and e. the direction the curves
shift.
Note there might be more than one way to go about answering a question!
Regardless of how you organize/distribute the work, both members of the partnership must be
able to complete the whole assignment!!! ………………………………………………………………………………………………………………………………………………………………… 1. Choose two macroeconomic issues that have been in the news this past week. Explain them
briefly (about two paragraphs each) so we can all understand why they have been in the
news. I.e. tell us why we should want to know about them and how they will affect the
economy. Note you may be called to explain this during a later lecture!
2. Consider how each of the following events is likely to affect real GDP (increase, decrease, no
impact). Do you think the change in real GDP reflects a similar change in economic wellbeing? Explain briefly.
a) A snowstorm in the Northeast forces everyone to stay home for a week.
b) The discovery of a new easy-to-grow strain of wheat increases farm harvests.
c) Increased hostility between unions and management sparks a rash of strikes.
d) Firms throughout the economy experience falling demand, causing them to lay off
workers.
e) Congress passes new environmental laws that prohibit firms from using production
methods that emit large quantities of pollution.
f) More high-school students drop out of school to take jobs in the fast-food sector.
g) Fathers around the country reduce their work-weeks to spend more time with their
children.
3. Consider an economy that produces and consumes only three goods: apples, oranges and
bananas. In 2009 and 2010, the production/consumption and price data were as follows: a) Calculate Nominal GDP (NGDP) for each year. What is the year-on-year percentage
increase in NGDP?
b) Calculate Real GDP (RGDP) for each year. Take 2009 as the base year. What is the yearon-year percentage increase in RGDP?
c) Find the GDP deflator for each year. Use it to calculate annual inflation rates.
d) Would you say that the percentage increase in NGDP in this economy is due more to
increases in prices or increases in the physical volume of output?
e) Assuming that 2009 is the reference base year and 2010 is the expenditure base year,
calculate the CPI for each year. Use the CPI to calculate annual inflation rates.
f) Which price index rises faster, the GDP deflator (Paasche) or the CPI (Laspeyres)?
Venture an explanation as to why that might be.
4. Consider an economy consisting of only two companies: Oil Inc. and Electricity Inc.
Electricity Inc. buys $400 worth of oil from Oil Inc. and uses it to produce electricity. It is
owned by US nationals, its plant is based in the US and its workers are all US nationals. It
receives $1000 in revenue from the sale of electricity to the public (domestic) and has to pay
$500 in wages. Oil Inc. is owned by US nationals and it operates two different oil extraction
plants, one at home and the other in Saudi Arabia. The domestic plant pays $400 in wages to
domestic workers and produces $2000 worth of oil. Out of this production, $1600 is sold
directly to the public domestically and $400 is sold to Electricity Inc. The foreign plant
employs only foreigners. Its total wage bill is $300. It produces $1300 worth of oil out of
which $500 is sent back to the US and sold to the public and the remaining $800 is sold in
Saudi Arabia.
a) Compute US GDP using three different approaches (income, expenditure and
product). Clearly show and explain all steps used for each approach. In particular, for
each item that you add up, specify under which specific category it falls.
b) Redo question (a) assuming that all the workers in this economy are foreigners. Point
out what changes in each approach compared to question (a). How is the value of
GDP affected?
5. Senator X criticizes the government for making an inadequate effort to stimulate the
economy based on data from the BLS Establishment Survey that shows the number of jobs in
the economy has fallen. Senator Y counters that the number of employed workers in the
economy has increased over the same period, based on the BLS Household Survey. Explain
how both senators can be correct.
