9 macroecon

1. Suppose that the market for ice cream cones starts out in an initial equilibrium in which the quantities of ice cream cones demanded and supplied both equal 6 and the price of an ice cream cone is $1.50. a. Suppose next that a hotter than normal summer causes more people to want to eat ice cream cones. In a standard microeconomic supply and demand diagram, will this event work to shift the demand curve or the supply curve? b. Will the curve you mentioned above - demand or supply - shift to the left or to the right? c. Suppose for a moment that the price of an ice cream cone remains unchanged at $1.50 after the curve you mentioned above shifts. At this old price, will there be a shortage or a surplus of ice cream cones? d. Now suppose instead that the price of an ice cream cone changes to bring the demand for and supply of ice cream cones back into balance after the curve shifts. Will this new equilibrium price be higher or lower than $1.50? e. In the new equilibrium with the new price, will the quantities of ice cream cones demanded and supplied be larger or smaller than 6? 2. Please indicate whether each statement is true or false (you don't need to explain why). a. If firms in an economy produce luxury automobiles that sell for $50,000 each and apples that sell for $1 each, then each automobile contributes the same amount as 50,000 apples to nominal GDP. b. It is possible for real GDP to rise more rapidly than nominal GDP; this happens if an economy is experiencing deflation. c. It is possible for the CPI to fall over time; this happens if an economy is experiencing deflation. d. US GDP includes the value of goods purchased by the federal government, but not by state and local governments. e. If a US citizen works temporarily in Canada, the market value of the goods he or she produces while in Canada still count as part of US GDP. 2 3. Please indicate by how much, in dollar terms, each of the follow transactions or set of transactions contributes to US nominal GDP. If GDP does not change, just write down $0. For simplicity, assume that all goods are sold during the same period in which they are produced. a. A farmer in the US sells a bag of oranges to a juice company for $5; the juice company uses the oranges to make bottles of juice in the US that then get purchased by an individual consumer in the US for $10. b. The same farmer in the US sells a bag of oranges to an individual consumer in the US for $5. c. A retired person in the US cashes his or her social security check and spends $50 on groceries, all of which were produced in the US. d. A US consumer takes $100 that he or she has saved and deposits it in the bank. e. A small business in the US manufactures and sells $1,000 worth of goods to a foreign customer; the business owner uses $500 to pay his or her rent, $250 to pay his or her workers, and keeps the remaining $250 as profit. 4. In 1960, about 40 percent of all US women of ages 16 years and over had paying jobs outside their homes; by 2010 this number had risen to almost 60 percent. a. How has this increase in women's "labor force participation" affected US GDP - specifically, is GDP today higher, lower, or the same as it would be if this trend towards higher labor force participation had not occurred? (Here, all you need to do is to say higher, lower, or the same as, you don't need to explain why.) b. Suppose that all of the women who joined the labor force between 1960 and 2010 report being happier working at their jobs than they would have been staying at home. Would the actual growth in GDP during this period overstate or understate the true increase in the quality of life that reflects the extra psychological benefits that women gain from working and earning income? (Again, all you need to say is overstate or understate, you don't need to explain why.) 5. Consider a simple economy in which only two goods are produced and sold: pizza and beer. The prices and quantities produced of these two goods over a three-year period are shown in the table below. Year Price of Pizza Quantity of Pizza Price of Beer Quantity of Beer 2009 $2 1 $1 2 2010 $4 1 $2 2 2011 $4 2 $2 4 a. Calculate nominal GDP in 2009, 2010, and 2011. b. Next, using 2009 as your base year, calculate real GDP in 2009, 2010, and 2011. c. Finally, calculate the GDP deflator for 2009, 2010, and 2011. 3 6. Go back to the same example from question 5, just above. Consumers in the economy like two goods: pizza and beer. Prices and quantities consumed are the same as before: Year Price of Pizza Quantity of Pizza Price of Beer Quantity of Beer 2009 $2 1 $1 2 2010 $4 1 $2 2 2011 $4 2 $2 4 As a first step in computing the consumer price index (CPI), the Bureau of Labor Statistics surveys consumers to determine the "basket of goods" purchased by a typical consumer. Suppose that the BLS chooses 2009 as its base year and, consistent with the data shown in the table, decides that the basket of goods in this economy should consist of one pizza and two beers. a. What is the cost of the basket in each year: 2009, 2010, and 2011? b. Still using 2009 as the base year, what is the CPI in each year: 2009, 2010, and 2011? c. What is the inflation rate in 2010 and 2011? 7. In the mid-1920s, the American author F. Scott Fitzgerald wrote a somewhat comical article for the Saturday Evening Post magazine titled, "How to Live on $36,000 a Year," in which he explained how he and his wife managed to spend their entire annual income of $36,000 without saving anything. a. In the mid-1920s, the consumer price index was around 18; in 2010, the CPI was around 225. Using these figures, calculate how much Fitzgerald's income would be worth in 2010's dollars. b. More recently, Forbes magazine published a list of the highest-paid authors, showing that J.K. Rowling, author of the Harry Potter books, earned $10 million in 2010. After adjusting for the effects of inflation, who earned more: Fitzgerald or Rowling? 8. In each case, please indicate whether the statement is true of false (you don't need to explain why). a. In an economy experiencing inflation, the nominal interest rate will be higher than the real interest rate. b. When the price of imported oil rises, that affects the CPI but not the GDP deflator. c. When the price of an aircraft carrier purchased by the US government rises, that affects the GDP deflator but not the CPI. d. Because new goods sometimes get invented that help American consumers enjoy a higher living standard at a lower cost, increases in the CPI tend to understate increases in the true cost of living. e. When calculating the CPI, analysts at the US Department of Labor try to account for the fact that the newest generation of iPods can do a lot more, and are therefore of a higher quality, than older models of iPods, even though the price of those iPods has remained about the same over the years.

Consider the following static game of incomplete information. Nature selects the type (c) of player 1, where c = 2 with probability 2/3 and c = 0 with probability 1/3. Player 1 observes c (he knows his own type), but player 2 does not observe c. Then players make symultaneous and independent choices and receive payoffs as described by the following matrix. Player 1 Player 2 X Y A 0, 1 1, 0 B 1, 0 c, 1 a. Draw the Bayesian normal form matrix of the game b. Compute the Bayesian Nash equilibrium Exercise 4 (Watson, 2008, p.346) Consider an extensive-form game in which player 1 is one of two types: A and B. Suppose that types A and B have exactly the same preferences; the difference between these types has something to do with the payoff of another player. Is it possible for such a game to have a separating PBE, where A and B behave differently?