Econ 601: Basic Economic Analysis
Assignment #7
Topic: Employment, Prices, and Production
Text Questions
1. Identify which of the following individuals would be classified as unemployed, and if they are,
the type of unemployment that each is experiencing.
a. A student who decides at mid-semester to devote the rest of the term to studying and quits her
part-time job.
b. A graphic artist who is out of work because a computer now does her job.
c. A waiter who quits his job and is applying for the same type of work in a restaurant where the
morale is better.
d. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for
a job at a nearby factory.
e. A travel agent who is laid off because the economy is in a slump and vacation travel is at a
minimum.
f. A plumber who works 5 hours per week for his church (on a paid basis) until her can get a fulltime job.
2. What is the difference between demand-pull inflation and cost-push inflation? Must the
economy experience only one type of inflation at a time, or can these types occur simultaneously?
How might inflation tend to spiral?
3. Calculate the price index number for the following table assuming that year 3 is the base year,
and put your results in the last column.
Year
Market Basket Dollar Outlay ($)
1
170
2
180
3
200
3
200
4
224
5
250
7
280
Price Index
4. In each of the following examples, identify whether the person or institution will be penalized
by inflation, and if so, why.
a. Nellie borrows $5,000 for her college expenses at an interest rate of 4% to be paid off over 5
years, during which time the inflation rate averages 6%.
b. Oscar invests $3000 in securities that pay 5.3% annually for 10 years, and the inflation rate
during that time averages 6.4%.
c. The Lilyton National Bank commits to $4million in 15-year mortgages at an average mortgage
rate of 7.75%. The inflation rate averages 8% over this 15-year period.
d. Barney bought a house in 1991 for $100,000 that he now plans to sell for $200,000. During
this time the inflation rate has averaged 5%.
Problems
1. The data listed below are for the year of 1999 in a hypothetical country. Assume that
business taxes, depreciation, and retained earnings are all zero.
Consumer Expenditure
Federal Expenses
Exports
Net Taxes
5500
1000
2500
1500
Investment
State/local expenditures
Imports
GDP (1995$)
2500
1500
3000
8000
Use this data to compute (show your calculations)
a. Nominal domestic product
b. Real consumption (1995$ base year)
2. Consider an economy characterized by the following data:
Good
A
B
C
D
Base Yr Price
(P0)
$10
$12
$8
$9
Qt
100
400
300
600
Pt
$12
$12
$7
$10
Qt+1
90
420
300
650
Assuming that goods A-D are final goods, complete the following table.
Year t
Year t+1
Level of Nominal Domestic Product
Level of Real Domestic Product
Value of the domestic product deflator
What is the inflation rate between year t and year t+1? _________________
Pt+1
$13
$13
$8
$11