Problem I
Classify each of the following statements as either "positive" or "normative". If the statement is positive, how would you test it to see if it were true?
a. A cut in wages will reduce the number of people who are willing to work.
b. High interest rates are making it impossible for young people to buy their first homes.
c. No family should have to pay more than 25% of its income in taxes.
d. The government should reduce the proportion of its budget going to health expenditures.
e. Doctors in every country should provide medical services to young people free of charge.
f. The level of per capita income is higher in Viet Nam than in Thailand.
Problem II
Classify each of the following statements as "microeconomic" or "macroeconomic". Explain the reason for your choice in each case.
a. An increase in the price of rice will cause Vietnamese farmers to plant more rice.
b. A fall in the rate of interest will encourage more Vietnamese businessmen to invest in new factories.
c. As more workers are hired in the Daewoo factory, the output of each additional worker will be less than the output of earlier workers.
d. If the the State Bank of Viet Nam were to double the money supply, the price level in every city in Viet Nam would double.
e. If the government of Viet Nam were to spend more than it collects in taxes, imports to Viet Nam will increase and exports from Viet Nam would decrease.
f. The State Bank of Vietnam will begin to use open market operations in 1997 to control the economy.
Problem III
The Town of Middlebury produces only two products (dishes and suitcases). There are 8,000 workers in the Middlebury economy. Each worker can make either four dishes per day or one suitcase per day. The amount of output each worker can produce is independent of the number of other workers in the same industry.
a. Draw the production possibility curve for the Town of Middlebury.
b. How many dishes could the Town of Middlebury have if it was willing to do without any suitcases? What would be the opportunity cost of one suitcase?
c. Identify a point in your diagram that would indicate a very inefficient organization of production in Middlebury. What could be some of the possible causes of this inefficiency?
d. Identify a point in your diagram that would correspond to a combination that the Middlebury economy could not produce. What are some of the possible reasons that the Middlebury economy could not produce that output?
Problem IV
Your company manufactures musical compact discs (CDs). You plan to sell them in a city that has 10 million people. A survey showed that 50% of the people in that city buy only popular music CDs and 10 % buy only classical music CDs and the rest do not buy any CDs. Another survey shows that the income of buyers of popular music CDs is $10,000 per year and the income of buyers of classical music is $50,000 per year. A third survey shows that people who buy popular music spend one quarter of one percent of their income on CDs. While people who buy classical CDs spend 2% of their income on CDs.
a. Build a model to help you predict how much will be spent on popular music CDs and how much will be spent on classical music CDs in one year.
b. What are your assumptions?
c. What are the possible source of errors in your prediction?
Problem V
Draw graphs showing the likely relationship between each of the following variables. Assume that the first variable mentioned is the independent variable. Label the axes of each graph.
a. When prices go up, the unemployment rate remains the same.
b. Nations with higher levels of per capita incomes save a larger share of their incomes.
c. Nations with high interest rates spend a smaller proportion of their incomes on machinery.
Problem VI
The inflation rate in the United States and the interest rates on U.S. Treasury bills between 1974 and 1994 were as follows:
Year Inflation Rate Interest Rate
(% per year) (% per year)
1974 11.0 7.9
1975 9.1 5.8
1976 5.8 5.0
1977 6.5 5.3
1978 7.6 7.2
1979 11.3 10.0
1980 13.5 11.5
1981 10.3 14.0
1982 6.2 10.7
1983 3.2 8.6
1984 4.3 9.6
1985 3.6 7.5
1986 1.9 6.0
1987 3.6 5.8
1988 4.1 6.7
1989 4.8 8.1
1990 5.4 7.5
1991 4.2 5.4
1992 3.0 3.4
1993 3.0 3.0
1994 2.9 4.3
a. Prepare a single time series diagram showing the trends in these two variables. What conclusions do you draw from studying the graph?
b. Prepare a scatter diagram showing the relationship between inflation and interest rates. Based of the scatter diagram, what is the relation between prices and interest rates?
Problem VII
You have been asked by the government to determine whether the level of crime is affected by the percentage of people who are unemployed.
a. Explain how you would test this idea.
b. What data would you need?
c. What problems would you have in drawing conclusion from your data?