ASSIGNMENT 3

PRINCIPLES OF MACROECONOMICS 1202

Summer 2014

Assigned: June 5, 2014

Due: June 12, 2014

Instructions:

1 Answer all the questions

2 Late assignment will not be accepted.
3 Get to the point. Be clear and concise.
4 You may submit the assignment in a group of up to four students. Make sure
you indicate clearly the names and IDs on the cover page of the assignment

Q1. Suppose all final commodities produced in a hypothetical economy are classified into three
categories of A, B, and C. Further suppose that the market price and quantity of each of these
commodity categories in the three consecutive years I, II and III are as shown in the table
below.

Year I Year II Year III

Commodit Price Quantity Pric Quantity Pric Quantity

y e e
A 10 1000 12 750 15 1250
B 30 2500 35 3000 35 3250
C 40 5000 40 5500 45 5000

a. Calculate nominal GDP in years I to III.

b. Calculate Real GDP for years I to III using Year I as the base year.

c. Using the real GDP figures calculated in (b) above, calculate annual growth rate of
output for years II and III.

d. Calculate GDP deflator for years I to III using Year I as the base year.

e. Calculate CPI price index for years I to III using Year I as the base year.

f. Comment briefly on the movement of prices over the three years as indicated by CPI
and GDP deflator.

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 Q2. What are the steps of calculating the inflation rate?. Go to the Statistics Canada website
(www.statcan.gc.ca). Print off the CPI for a year of your choice.

Q 3. Consider a hypothetical economy for which you are given the following data for
aggregate demand, aggregate supply, and several different price levels. (Depending on
the size of the economy as many zeros could be added to the aggregate demand and
supply figures as you like. The price level is represented by an index number.)
 
 
Price Level (Index) Aggregate Demand 1 Aggregate Demand 2 Aggregate Supply
300 100 300 500
200 200 400 500
100 300 500 300
50 350 550 200
50 350 550 100
     
(a) Plot Aggregate Demand 1 and Aggregate Supply. What will be the equilibrium
price level and equilibrium level of Real Domestic Product in this economy?
(b) Why would a price level of 250 not be an equilibrium price level under these
initial conditions? Explain briefly.
(c) Suppose something happened to increase aggregate demand to the amounts
shown in Aggregate Demand 2. Plot the new data on the same graph.  What
would happen to the equilibrium level of prices and Real Domestic Product?
(d) What might cause the kind of shift in aggregate demand from the initial position
to the second position?

Q4. Graphically show the effects of the following on aggregate demand or aggregate
supply. Show the expected effects on the equilibrium price level and level of real output.
Assume ceteris paribus.
(a) A large purchase of Canadian wheat by Russia.
(b) A reduction in interest rates
(c) A major cut in Federal spending
(d) The expectation of a rapid rise in the price level.
(e) A disintegration of OPEC, causing oil prices to fall by one-half.
(f) An increase in labor productivity.
(g) A 10 percent increase in wages.

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