The economy of Googleland

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1. The economy of Googleland is producing the following three goods:

Output 2014

Price 2014

Output 2015

Price 2015

Output 2016

Price 2016

X

360

1.8

400

2

400

2.5

Y

40

170

50

180

60

190

Z

140

20

160

25

200

30

(a) Calculate the nominal GDP for 2016.

(b) Calculate real GDP for 2014, 2015 and 2016 using 2014 as the base year. What is the growth rate of real GDP from 2014 to 2015 and 2015 to 2016?

(c) Calculate real GDP for 2014, 2015 and 2016 using 2015 as the base year. What is the growth rate of real GDP from 2014 to 2015 and 2015 to 2016?

2. The following data represent the economy of Mayberry:

C=100+0.5Yd, T=2000, G=2000, I=200

(a) Calculate the equilibrium level of output. Graph your solution.

(b) If the government spending increases by 100 what is the new equilibrium level of output? Use the government spending multiplier.

(c) If the government increases taxes by 100 what is the new equilibrium level of output? Use the tax multiplier.

(d) If the government increases taxes and spending by 100 what is the new equilibrium level of output?

(e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-50+0.25Y.

3. In the country of Yahooland, the labor market is represented by the following equations:

QD = 300 – 20W

QS = -100 + 20W

where Q is the quantity of Labor in millions of workers and W is the wage rate.

(a) Currently the minimum wage Law in Yahooland is $12 per hour. Calculate, the number of labor supplied, the number of labor demanded, the number of unemployed and the unemployment rate.

(b) If Yahooland eliminates the minimum wage law, what would happen to total employment, wage rate and the unemployment rate?

(c) In a clearly labeled graph, show your results for (a) and (b).

4. Use AD and AS curves to explain the effects on the equilibrium price level and equilibrium level of output in the short run.

(a) A contractionary fiscal policy with the economy operating near full capacity.

(b) An expansionary monetary policy during a period of high unemployment and excess industrial capacity.

(c) A strong hurricane destroys energy plants which cause energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation.

(d) The federal government pursues a contractionary fiscal policy while the Fed acts to keep output from falling.

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