1. Define exogenous and endogenous variables. Give an example of each within
a model of your choice. 2. Write down the national income accounting (NIA) identity. Why is it called an
identity? Now identify and quantify the impacts (if any) of the following events on GDP (Y) and other components of NIA identity:
a. You buy a watch worth $2000 from an antique shop. b. In 2014, Riverside Motors imports a Jaguar car from UK worth $50,000
and fails to sell it in the current year. c. You pay a rent of $1200 per month for a house built in 2008. d. You have decided to buy the house you were renting (refer to question c)
and have paid $250,000. Now you are the owner of this house. Hint: Use both c and d to answer.
3. Assume that an economy produces only two goods. Show how GDP deflator calculated based on these two goods can be interpreted as a sum of weighted prices.
4. Suppose that an economy produces only three goods: 1, 2 and 3. Use the following table to find the inflation rates from year 1 to 2. Assume Year 1 is the base year.
P1 ($) Q1 P2 ($) Q2 P3 ($) Q3 Year 1 5 20 10 20 15 30 Year 2 15 25 20 30 20 30
5. What type of goods is typically included in GDP deflator but not in CPI? Also, what type of goods is typically included in CPI but not in GDP deflator?
6. Why does CPI overstate inflation? What is the approximate estimation of this upward bias?
Topic 3: Chapter 5 (M)
7. Why is the theory of inflation that we have learnt in the class called classical
theory? 8. During the recent recession, the Fed wanted to spur the economic growth by
pumping money into the economy. What action do you think the Fed took to pump money? Explain.
9. Give an example of a transaction whose value does not qualify as a part of nominal GDP. Also give an example where it does.
10. Suppose that the velocity of money is constant. Now, real GDP grows by 5% per year, the money stock grows by 14% per year and the nominal interest rate is 11%. Calculate the real interest rate.
11. Suppose a country has a money demand function (M/P)d= kY, where k is a constant parameter. The money supply grows by 12% per year and the real income grows by 4% per year.
a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. What is the interpretation of k? How is it related to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of
money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.
12. In each of the scenarios, explain and categorize the cost of inflation. a. Because inflation has risen, the L.L Bean Company decides to issue a new
catalog quarterly rather than monthly. b. Grandma buys an annuity for $100,000 from an insurance company,
which promises to pay her $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years.
c. Maria lives in an economy with hyperinflation. Each day after being paid, she runs to store as quickly as possible so she can spend her money before it loses value.
d. Your father tells you that when he was your age, he worked for only $3 an hour. He suggests that you are lucky to have a job that pays $7 an hour.
13. Define seigniorage. Suppose Fed prints one thousand $10 bills incurring a cost of $0.5/bill. What is the seigniorage here?
14. Define inflation tax. 15. What is the relationship between money demand and nominal interest rate? 16. We know that in equilibrium the following holds:
Explain what happens to current inflation (i.e. P) if Fed announces now to decrease money supply next year.
( , )π= +M L r Y P
17. What is hyperinflation? What causes hyperinflation? 18. Define classical dichotomy. 19. Using the graph for labor market, show how moderate inflation can be a good
thing? 20. Read the case study “Hyperinflation in Zimbabwe”. Now explain briefly in
your own words what caused the hyperinflation in Zimbabwe and how did they finally manage to get out of it.
Topic 4: Chapter 7 (M) 21. Write down the steady-‐state condition for labor market and interpret it in
words. 22. Define natural rate of unemployment. Derive a relationship between natural
rate of unemployment, job separation rate and job finding rate. What value of job finding rate would render a zero rate of unemployment?
23. If job separation rate goes up by 3% and job finding rate goes up by 2%, what happens to steady-‐state unemployment rate?
24. Explain the pros and cons of unemployment benefit. What is its impact on European countries’ unemployment?
25. Some economists argue that minimum wage fails to target the appropriate working poor. Explain graphically how minimum wage is non-‐binding for middle-‐aged workers but binding for teenage workers. What alternative policy do the economists suggest?
26. Explain briefly what efficiency wage is and why firms pay efficiency wage. 27. Suppose there are only two sectors in the economy: manufacturing and
services. 40% of the manufacturing employees are union members whereas the number is 15% for services. Which sector do you think has higher wage ratio (100x union wage/nonunion wage)? Why? Also explain which sector you think might have higher unemployment.
28. Read the case-‐study “The Increase in US Long-‐Term Unemployment and the Debate Over Unemployment Insurance”. What are the two opposing views of Economists Robert Barro and Paul Krugman about the reason behind the unprecedented spike in the median duration of US unemployment during the recent financial crisis?
Topic #5 (A Model of Production-‐ Jones)
29. How would you describe returns to scale in the following production function, where R is natural resources, L is Labor and K is Capital? f(R, L,K)=AL^(1/2)K^(1/4)R^(1/4)
30. How would you describe returns to L and K separately in the following production function? f(L,K)=AL^(1/2)K^(1/4)
31. How would you describe returns to scale in the following production function, where L is Labor and K is Capital? f(L,K)=AL^(1/2)K^(1/4)
32. Write out the main equation that we use to explain differences in wealth
between countries. In general, how well does this equation explain the differences we see across countries GDP in the world?
33. Please answer the following questions about the effect of changes in the variables in the Cobb-‐Douglas model of output.
a. What is the effect of doubling K/L on Y/L?
b. What is the effect of doubling A on Y/L?
c. Suppose that there are two countries with equal Y/L. Country I has K/L that is 20% larger than Country II. What does this tell you about A in country I versus country II.
d. Explain how well our model predicts GDP per capita across the world (if we hold A constant)
e. Explain two reasons that A might very across countries
34. Derive the labor share of income using our standard Cobb-‐Douglas production function.
35. Derive the marginal product of capital (K) and labor (K) for the following functions:
(a) Z = AKL (b) Z = (AK)/L (c) Z = AK1/3L2/3 (d) Z = (AKL)1/2 (e) Z = (AK/L)2/3
Topic #6 (Solow Growth Model-‐Jones)
36. What is the basic difference between our simple model of production introduced in topic 5 and the Solow growth model?
37. Write down the five key equations which constitute the Solow growth model.
38. Solve the Solow growth model. In other words, show that: ∆𝐾!!! = 𝑠𝐴𝐾!
!/!𝐿!/! − 𝑑𝐾! 39. Write down the condition which characterizes the steady-‐state of the Solow
growth model. What happens when capital is above the steady-‐state level? 40. Drawing Solow diagram, identify the steady-‐state level of capital and output.