Step by step5 explanations.
Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run. For example, an Increase In the money supply, a variable, will cause the price level, a variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as In the short run, however, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. The following graph shows an incomplete short-run aggregate demand (AD) and aggregate supply (AS) diagram-it needs appropriate labels for the axes and curves. You will identify some of the missing labels in the questions that follow. AS VERTICAL AXISQ1 There are three major concerns of macroeconomics which are output growth, unemployment and inflation. Government policy makers would like to have high output growth, low unemployment rate, and low inflation rate. These goals may conflict to one another and that an important point in understanding macroeconomics is understanding these conflicts. Instead of growing at an even rate at all times, economies tend to experience short-term ups and downs in their performance. The technical name for these ups and downs is the business cycle. The main measure of how an economy is doing is aggregate output, the total quantity of goods and services produced in the economy in a given period, indicated by gross domestic product (GDP). Figure Q1 shows upsloping trend line captures output growth over time. However there are deviations from this trend line. These deviations are called economic fluctuations, or ups and downs in the economy. In this business cycle, the economy is in expansion as it moves through the trend line from the trough to the peak. When the economy moves from a peak down to a trough, the economy is in recession. Level of Real Buipd Deviation line The Figure Q1: a typical business cycle (Karl E. Case, Ray C. Fair, and Sharon M. Oster (2014). Principles of Economics. p442) (b) Explain the uses of real GDP and its limitations as a measure of the standard of living and welfare of a country. (12 marks)Graph an indifference curve that shows the bun- e. Connect the dots to create Jose's budget con- dles of X and Y for which U = 6 and U = 8. Is straint. What is the slope of the budget constraint? the "more is better" assumption satisfied for X f. Divide the price of fireworks by the price of and Y? music. Have you seen this number before while 7. Kelly's utility function is given by U= 5X + 2F, working on this problem, and if so, where? where MUx - 5 and MU, = 2. R. Suppose that a holiday bonus raises Jose's in- a What is MRS,.? come temporarily to $360. Draw Jose's new b. What is MRS. when X = | and Y - 57 When budget constraint. X = 2 and Y = 257 h. Indicate the new bundles of music and fireworks c. Draw a sample indifference curve. that are feasible, given Jose's new income. 8. Andrea loves to cat burritos with hot sauce. In fact, 1 1. Suppose that only one person in the world sells ice she cannot enjoy a burrito (8) unless it has three cream. She employs a strange pricing policy: You can servings of hot sauce (H ). She gets no additional en- buy I ice cream cone for $1, but if you buy 2 cones, joyment from more than three servings per burrito. you have to pay $2 each. If you buy 3, you have to Thus, her utility function is U= min [ R,-H ]. Graph pay $3 each, etc., so that if you buy 10, you have Andrea's indifference curves for U= 1 and U= 2. to pay $10 cach. You have $100 dollars to spend on ice 9. Suppose John's utility function is 4XY, where X is cream comes and chocolate milk, and chocolate milk consumption of beer and Y is consumption of pizza. costs $1 per unit Draw your budget constraint. This For this utility function, the marginal utility of X' is strange ice cream pricing, where buying more costs given by MU, = 41, the marginal utility of F is given you more, is called a quantity surchingc. by MU, = 4X. 12. John enjoys ordering out for pizza and renting move I Suppose Y= 3. Calculate John's utility for * = 2. ies online. He makes $30 each week at a part-time 3, 10, and 11. For a given level of Y, does good X job. If movies cost $2 per rental and pizza costs display diminishing marginal utility? $7.50 per slice. graph John's budget constraint. Then illustrate the effects of each of the following b. Suppose X - 3. Calculate John's utility for Y - 2. 3, 10, and 1.1. For a given level of X, does good Y display diminishing marginal utility? a. John's mother finds a coupon good for one free pizza and gives it to John. Find three different bundles containing X and Y' that give John 48 utils of satisfaction. Plot the The company John rents movies from sponsor a thece bundles and connect them with an indiffer. holiday wock promotion: Rent the first five mov- ance curve. What happens to the marginal rate tea at their regular price, and all movies after the of substitution between X and Y as consumption of fifth are half off X increases? C. John's favorite pizza place increases the price of 4. Does the principle of diminishing MAS depend pizza from $7 50 to $10. on the diminishing marginal utility of X and IT 13. Good X sells for $4, and good F sells for $2. At your 10. Jood gets satisfaction from bach music and fireworks. current level of consumption, the marginal rate of Joad's income is $340 per week. Music costs $12 per substitution between X and Fis4. CD, and fireworks cost $8 per bag. Draw an indifference curve and budget constraint it Graph the budget comuralet Jose faces, with that reflects the facts given above. (Mar: You music on the vertical axis and fireworks on the will have to choose an inhial income level and horizontal suit an initial bundle of X and F.) b. IT Just spends all his income on music, how b. Are you maximizing your utility? much music can be afford? Plot s point that c. If you are not maximizing your utility, are you illustrates thin scenario, buying too much X or too much IT Explain. c.If hand spends all his incoat on fireworks, hue Id. Andre gets utility from playing lower tag and read many bags of fireworks can be afford? Plot a ing books. Each week, Andre spends his entire $100 point that Whoirates this scenario paycheck on both pooda. One hour of lover bop coun If Joad spends half his income on fingworks anal 130: a book costs $10. bull his income un mails, how much of each a. Graph Andre's budget constraint. Pat books on can be allland? Plot a point that illustrates this the honvontal anis and hours of laser tag on the146 Part 2 Consumption and Production probably look like? Explain your reasoning by ence curve that reflects Cheryl's situation. What drawing a graph that includes her indifference curves must her indifference curves look like? and a hypothetical budget constraint. C. Suppose Cheryl receives a gift of one ugly 21. Economist Joel Waldfogel may be America's biggest sweater from a coworker. Show the effect of the Grinch, He bemoans what he calls the "deadweight gift on Cheryl's budget constraint. Where on the loss of Christmas" created when people give gifts constraint is Cheryl likely to maximize her utility? (such as ugly sweaters) the recipients would rarely. d. Waldfogel suggests that the world might be a if ever, buy for themselves. happier place if instead of giving ugly sweat- a. Draw a graph with a budget constraint showing ers, people simply gave an equivalent amount of affordable bundles of a composite good costing cash. Draw the budget constraint Cheryl would $1 and ugly sweaters. (You may assume some face were this the case. Add an indifference curve level of income and a price for ugly sweaters.) or two to show what happens when Cheryl maxi- h. Cheryl might get some utility from an ugly mizes her utility. Does the cash gift make her sweater, but is currently spending all of her in- happier than the sweater? come on the composite good. Add an indiffer-1. a. Solve the following system of (2) equations for numerical values of x and y: 4x + 2y =16 Y = 2 X b. Solve the following for x and y as (algebraic) functions of a, b, c and d: ax + by = c _ = d X
