Economics 104 HOMEWORK #3 (75 points total)

1.  (20 points) Consider an economy that produces only two goods: fresh apricots and dried apricots. In this economy, the technology of producing dried apricots is to place fresh apricots on special racks and allow them to dry in the sun. Fannie’s Farms is the only company that grows fresh apricots, while Darryl’s Dried Victuals is the only producer of dried apricots. Fannie’s sells some of its apricots directly to consumers for consumption. The relevant revenue and cost information for each of the two firms in the economy is given below:

                Darryl’s

                Revenue from selling dried apricots:                                     $2,300,000

                Cost of buying fresh apricots from Fannie’s:                         1,200,000

                Interest on funds borrowed to buy drying racks:                                  250,000

                Wages paid to employees                                                               600,000

                Taxes                                                                                                        100,000         

                Fannie’s

                Revenue from selling fresh apricots:                                     $2,000,000

                Rent on land (including apricot trees)                                         300,000         

                Wages to employees                                                                      1,200,000

                Taxes                                                                                                        200,000

Calculate nominal GDP using the expenditure approach and the income approach and show that they give the same answer.

2. (15 points) According to the cruise ship example:

a) what are the real and what are the nominal objectives (goals) of macroeconomic policymakers?

b) what are the three policy lags and how do they differ with regard to fiscal vs. monetary policy?

c) go to FRED and search for UNRATE and compare the most recent unemployment rate to the rate associated with full employment as defined by the series NROU on FRED. Note that NROU is quarterly data so match the quarter with the most recent unemployment statistic. Which is higher and in terms of policy, should policymakers try to stimulate the economy or should they try to slow it down?

3.   (20 points)Use the table below to answer the following questions (please show all work).

a) What is nominal GDP for 2011?

b) Assuming that 2011 is the base year, calculate real GDP in 2011 

c) Now calculate the GDP deflator for 2011 and 2012 (assuming that 2011 is the base year).

d) What is the rate of economic growth between the two years as defined byt he percent change real GDP.

e) What is the rate of inflation between the two years?

4. (10 points) Go to FRED and search for  GDP (nominal GDP) and GDPDEF (the GDP price deflator) and using the most recent data, use these two series to calculate real GDP.  Now search for GDPC1 (real GDP) and verify that your answer is correct.

5. (10 points) Go to the NBER website and using the official dates of the 1973 – 1975 recession (from peak to trough) calculate the percent change in real GDP (GDPCI from above) and the percent change in the GDP price deflator (GDPDEF from above) during the recession.  What is this combination of GDP growth and percent change in prices referred to and why?