Problem Set 2: Due Wednesday, October 16 (by the end of class) Econ 202: Principles of Macroeconomics 1) Explain whether the following transactions are counted in the GDP. If so, denote whether the expenditure approach would categorize the spending as C (household consumption), G (government spending), I (gross private investment), EX (exports) or I (imports). A. A housing developer sells 25 homes in a new subdivision in Central California to 25 dif- ferent households. B. A comic book store sells a vintage 1998 Amazing Spiderman comic to an avid collector. C. General Motors sells a eet of trucks to the US Postal Service. D. Subway buys 2 tons of avocados from California. E. Subway buys 2 tons of avocados from Mexico. 2) The market basket for an imaginary consumer is given below, as are the prices over the course of three years. Q P1 P2 P3 Good A 1 0.50 0.40 0.50 Good B 6 0.30 1.00 2.00 Good C 4 0.70 0.90 1.00 A. Create a Consumer Price Index with Year 2 as the base year. B. What is the level of ination from Year 1 to Year 2? How about from Year 2 to Year 3? 1
C. Why might the ination rate be overstated by the CPI? 3. Suppose Small Country has 15 residents aged at least 16. 3 are retired, 3 are students, 2 work as clerks the two country stores, 2 work at the country bank, 3 are currently looking for work but have not worked in the last month, 1 owns and operates all of the country’s businesses, and 1 is in jail. A. What is the unemployment rate? B. What is the labor force participation rate? C. Suppose 2 of the currently unemployed workers become discouraged and stop looking for work. What would be the new unemployment and labor force participation rates? 4. Suppose Small Country has 4 households and 3 businesses. Each of the 4 households purchased $20,000 in food and gasoline consumption and $3,000 in movie tickets this year. Two households purchased a new $10,000 car produced in Small Country and one household purchased the used 2-year old car being replaced by…