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Principles of Economics - Problem Set 9 Conceptual Questions

1. This document contains conceptual questions and practice problems related to principles of economics. The conceptual questions address topics like why national savings equal investment in a closed economy, the slopes of the demand and supply of loanable funds curves, the difference between natural and recession unemployment rates, and factors that can cause price increases but not impact the CPI. 2. The practice problems calculate price indexes under different consumption baskets, examine the impact of changes in government spending and taxes on savings and investment, and calculate unemployment rates based on labor force statistics. 3. Additional questions test understanding of concepts like budget deficits, the relationship between inflation rates and the GDP deflator versus CPI, factors that reduce frictional unemployment,

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ADRIAN VAREZ GARCIA
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51 views4 pages

Principles of Economics - Problem Set 9 Conceptual Questions

1. This document contains conceptual questions and practice problems related to principles of economics. The conceptual questions address topics like why national savings equal investment in a closed economy, the slopes of the demand and supply of loanable funds curves, the difference between natural and recession unemployment rates, and factors that can cause price increases but not impact the CPI. 2. The practice problems calculate price indexes under different consumption baskets, examine the impact of changes in government spending and taxes on savings and investment, and calculate unemployment rates based on labor force statistics. 3. Additional questions test understanding of concepts like budget deficits, the relationship between inflation rates and the GDP deflator versus CPI, factors that reduce frictional unemployment,

Uploaded by

ADRIAN VAREZ GARCIA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Universidad Carlos III de Madrid – Department of Economics


Principles of Economics - Problem Set 9

Conceptual Questions

Write down a short and concise answer. When you are asked to solve the question in class,
explain the concept clearly and give examples or pieces of evidence.

1. Why we say that national savings are equal to investment? What assumption is
crucial for the statement being true?
We have to be in a closed economy

2. Why the supply of loanable funds has a positive slope and the demand for loanable
funds has a negative slope?
Because for the demand, a decrease in the int.rate will cause a higher number of people
demanding it. For the supply an increase in the int.rate will cause a higher number of
people who wants to sell.
3. What is the difference between the natural rate of unemployment and the rate of
unemployment during a recession?
The unemployment during a recession period has the normal unemployed+unemployed
caused by the cyclical economic situation.

4. Is true that if a person losses her/his job, unemployment rate always increases?
No if the job is given to an unemployed person, or that person finds a job before 4
weeks have happened or if that person doesn’t look for a job.

5. Explain why can be the case that some prices increase but the CPI does not
increase.

6. Why an increase of 10% in the price of bread will have a larger impact in the CPI
than an increase of 10% in the price of salt.

1
Problems

1. In an economy, two goods are produced in: orange juice and sandwiches with the
following prices

GOODS Orange juice Sandwiches


(per liter)
2012 3 2
2013 6 2
2014 6 4

a) Calculate the price index for this economy if the basket is 1 liters of orange juice
and 1 sandwich and the base year is 2012.
Baskets
A: 5
B: 8
C: 10
CPI
100%
160
200
b) Calculate the price index for this economy if the basket is 1 liter of orange juice and
15 sandwiches and the base year is 2012.
33
36
66
100
109
200
c) Compare the evolution of the price indexes and explain why they behave
differently
Basket a
60
25
Basket b

2
9
84

2. Explain what happens to savings, investments and interest rate if


a) The government decides to reduce public expenditure (G) but it does not change
tax revenues (T)
b) What would be the impact of such a measure in the prospective for economic
growth in the long run?

3. According to the EPA (Encuesta de Población Activa) in the second quarter of 2018 in
Spain there were 22,834.2 thousand active people, 19,344.1 thousand occupied and
3,490.1 thousand unemployed. Activity rate was 58.80%.
a) Calculate unemployment rate and population older than 16
b) Recalculate unemployment rate if 1,000 thousand individuals lose their job and
become immediately non-active.

Other questions

1. Suppose that in a closed economy GDP is 10,500, consumption is 7,500, and taxes are
500. What value of government purchases would make national savings equal to 2,000
and at that value would the government have a deficit or surplus?
a. 1,500, deficit
b. 1,500, surplus
c. 1,000, deficit
d. 1,000, surplus

2. If the government currently has a budget deficit, then


a. the current level of public debt must be above zero.
b. its debt is increasing.
c. government expenditures are lower than taxes.
d. All of the above are incorrect.

3. If there is a sudden increase in the oil price (not produced in Spain). What will be the
behavior of the GDP deflator in relation to the CPI?

4. The inflation rate is defined as the


a. price level in an economy.
b. change in the price level from one period to the next.

3
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.

5. Suppose that the adult population in the town of Springfield is 225 million. If 40
million are unemployed and 100 million are employed, then the unemployment rate is
approximately
a. 29%.
b. 18%.
c. 24%.
d. 6%.

6. Which of the following helps to reduce frictional unemployment?


a. government-run employment agencies
b. public training programs
c. the Internet
d. All of the above are correct.

7. Assume an economy experienced a positive rate of inflation between 2003 and 2004
and again between 2004 and 2005. However, the inflation rate was lower between 2004
and 2005 than it was between 2003 and 2004. Which of the following scenarios is
consistent with this assumption?
a. The CPI was 100 in 2003, 110 in 2004, and 105 in 2005.
b. The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.
c. The CPI was 100 in 2003, 105 in 2004, and 130 in 2005.
d. The CPI was 100 in 2003, 90 in 2004, and 88 in 2005.

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