- Add one set of arrows to the circular flow model above showing the direction of money flows between agents and markets (label them, “money” or “M”) and a second set of arrows showing the direction of commodity flows (label them, “commodities” or “C”). (1 pt)
- Briefly explain what we mean when we speak of a “market” and an “agent” in the context of the circular flow model. (2 pts).
- The more complex circular flow model adds one more market to t
- he model. What market is that? What additional types of economic behavior does the addition of that market make it possible to analyze? (2 pts)
- The more complex model also adds two more types of economic agents. What are those two additional types of agents? What additional types of economic behavior does the addition of each type of agent make it possible to analyze? (4 pts)
2.
| year | GDP in current dollars | GDP in base year dollars |
| 1923 | $3.2 billion | $5 billion |
| 1924 | $4.5 billion | $4.5 billion |
| 1925 | $6 billion | $5.5 billion |
| 1926 | $7 billion | $6.2 billion |
The table above shows measures of GDP for the country of Elbonia for 1923-1926.
- Does the column headed, “GDP in current dollars,” measure real GDP or nominal GDP? How about the one headed, “GDP in base year dollars?” (1 pt)
- Which year is the base year? How do you know? (1 pt)
- During these four years, was there inflation, deflation, or no change in the price level in Elbonia? Briefly explain how you know the answer to this question. (2 pts)
- Suppose you wanted to form a judgement about how Elbonia’s productivity changed between 1923 and 1926. Which column of figures would it be best to use for that purpose? Why? (2 pts)
- Below is an excerpt from a table posted on the website of the Economic Policy Institute. Do the figures describe real or nominal wages? Explain how you know. (2 pts)
Note: Sample based on all workers ages 18–64.
Source: EPI analysis of Current Population Survey Outgoing Rotation Group microdata
- Continuing to use the data from the previous question:
- Whose average earnings were higher in 2000, people with less than a high school education, or people with some college? How about in 2017? (1 pts)
- How much did average wages change, in dollars AND in percentage terms, between 2000 and 2017 for people with less than a high school education? (2 pts)
- How much did average wages change, in dollars AND in percentage terms, between 2000 and 2017 for people with some college? (2 pts)
- Is the gap between average wages for those with less than a high school education and those with some college smaller or larger in 2017 than it was in 2000? (1 pt)
- The society whose PPF is picture above is producing 100 units of food per time period. It is at full employment, and is making efficient use of its productive resources.
- How many units of housing is the economy producing per time period? (2 pts)
- Suppose the society decides it wants to increase its output of housing by 20 units per time period. What would be the opportunity cost of that increase? (2 pts)
- Suppose, instead, that the society decides it wants to increase its output of food by 100 units per time period. What would be the opportunity cost of that increase? (starting from 100 units of food – the original position) (2 pts)
- Answer the following questions about the national income accounts (30%)
- What are the categories of income in the national income accounts? Which category is largest? Which category guarantees that income equals GDP in each time period? (3 pts)
- What are the categories of expenditures in the national income accounts? Which category is largest? Which category guarantees that expenditures equal GDP in each time period? (3 pts)
- Why do we include the word, “final,” in our definition of GDP as the value of all final goods and services produced within the geographic boundaries of a country during a given time period? (2 pts)
- Why do we count investment goods as final goods, rather than as intermediate goods? (2 pts)
- What does it mean when we say a quantity is measured “net of” some other magnitude? (2 pts)
- What is a transfer payment? Why is “G” (government spending) measured net of transfer payments. (2 pts)
- Trout Fishermen of America collects data about the cost to purchase a representative market basket of trout fishing equipment each year. The table below shows the cost to purchase this market basket in 1965, 1966, 1967 and 1968 in current dollars. (10 pts)
| Year | Cost of market basket |
| 1965 | $200 |
| 1966 | $240 |
| 1967 | $280 |
| 1968 | $320 |
- Use this data to calculate a Trout Fishing Price Index for each of these four years, using 1966 as the base year.
- Calculate the annual rate of inflation of trout fishing equipment between 1967 and 1968. (Round your answer to the nearest tenth of a percent.)
- Explain what it means when we say that inflation is a “self-fulfilling prophecy.” Why does this make disinflation hard? (6 pts)
- Explain why inflation is good for debtors. How could a creditor protect itself from unexpected inflation? (4 pts)
- Explain the role of unplanned changes in inventories in our understanding of business cycles. (4 pts)