Econ 301B

Winter 2012

Problem Set 1
Due date: Monday, January 23 in class
1. Suppose the country of Utopia has a population of 1,000 and produces only three goods:
T-shirts, cars and pineapples. Assume that Utopia does not trade with other countries. The production amounts and prices (in US Dollars) for 2009, 2010 and 2011 are given in the table below:

Year
2009
2010
2011

Quantity of Tshirts
10,000
9,500
10,500

Price of Tshirts

Quantity of cars Price of cars

Quantity of pineapples Price of pineapples $10
$10.50
$11

75
85
90

$15,000
$16,000
$15,500

50,000
60,000
45,000

$4
$4.50
$5

a) Using 2009 as base year, calculate nominal and real GDP per capita for 2009,
2010 and 2011.
b) Keeping 2009 as base year for prices, compute Utopia’s inflation rates for 2010 and 2011 using both the CPI and the GDP deflator. When calculating the CPI, assume that the representative consumer purchases in any given year 10 T -shirts, 1 car and 100 pineapples.
c) Explain why the computed inflation rates are not the same when u sing the two different methods.
2. For this question assume that we are within the short -run goods market framework developed in Chapter 3 in Blanchard. Suppose that the economy is characterized by the following behavioral equations:

Note that in this economy investment, I, depends positively on output, Y. This mirrors the fact that firms in the real world will increase their investment expenditure on capital goods when sales are picking up.
a) Write down and graph the supply and demand functions for the economy’s goods market. When drawing the goods market diagram, make sure to accurately label the intercepts and slopes of both fu nctions.

Econ 301B

Winter 2012

b) Solve for the following variables: equilibrium GDP (Y), disposable inco me (YD), consumption spending (C)