Macro Economics

Instructions: Choose any 3 of these 6 problems. For each one, carefully consider all parts of the problem, answer each part completely, and show your work. Your responses should not exceed two pages total in length. Please use 1.5 or double spacing.

For each question, please write the question number and the question itself (e.g. copy and paste) above your response.

Option 1: Consider a suburban paper supply company – “Penn Stationary” – with a few dozen office workers and another 10 warehouse workers. Identify each of the following items as either a final consumption good, a capital investment good, or an intermediate good. Indicate whether each one will be counted toward U.S. GDP, and explain why (from an economist’s perspective) that is the best way to categorize that good.

i. A mechanical lift used in the warehouse to move large shipments
ii. The “Penn Stationary” company casing used for individual reams of paper.
iii. A ream of paper sold to a local school district.
iv. A computer used by the regional manager for in-office communication and for data analysis.
v. A purchase by a mutual fund of Penn Stationary stocks.

Option 2. Some nations – like Venezuela, Republic of Congo, etc. – have plentiful natural resources as well as a large working-age population, yet often do not experience economic growth. What are the primary reasons for this lack of growth among countries that seem to have so many economic advantages?

Option 3. Suppose the industry for lumber has the following characteristics: Wages are very sticky, prices for industrial chainsaws (an investment capital good) are not sticky at all, and prices for wholesale logs (an output good) are somewhat sticky. How would production in this industry respond to the following:
a. A rise in the demand for wood products.
b. A recession (decrease in aggregate demand).

Option 4. Suppose an economy has 600 (adult, non-institutionalized) people. Of them, 150 are not looking for work, 50 are currently unemployed, while the other 400 are workers, with 100 each in the following industries: auto, tech, service, and farming. The economy falls into a deep recession, causing the auto industry to collapse entirely, leaving all auto workers without their jobs. Additionally, half the workers in the tech industry are laid off.

a.What was the unemployment rate before the recession?
b.What was the unemployment rate after the recession hit?
c.Suppose 50 of the auto workers become discouraged, and stop looking for work. What would the unemployment rate be now?
d.What does your answer in part c say about the unemployment statistic?

Option 5. Suppose the market for loanable funds has an equilibrium real interest rate of 3%. The inflation rate is 4%
a.What will be the nominal interest rate charged by lenders in order to meet equilibrium?
b. If the economy experiences unanticipated inflation of 6% (instead of 4%), what will the new real interest rate be? How will that impact borrowers? How will it impact lenders?

Option 6. Use the table to answer the following questions:

Year
GDP ($billions)
Consumption
Savings
APC
APS
MPC
MPS
1
150
120
2
160
127
3
170
a.What happens to savings as GDP and consumption increase?

b.What happens to APC and APS as GDP rises?
c.What is the marginal propensity to consume in Year 1? In Year 3? What would you expect it to be in Year 30?