Group Exercise #1:

Answer on a separate sheet. Only one copy is need for a group. Include the names of all group members. No more than four persons can be in a group. Be legible—I have to read it. You can hand it to me at the end of class or put it in mailbox by 4:30 PM Wednesday.

 

Short Answer Questions:

1)      The CPI is now 210. Last year (Dec. 2006) the CPI was 201.8. Compute the Inflation rate.

2)      What has been “normal” inflation for the past 50 years?

 

Discussion Question 1:

Consider the effect of an overnight doubling of prices. Everything doubled in price while you slept. A soft drink that sold for a dollar, now sells for two dollars; a car that sold for $20,000 now sells for $40,000.

The price of labor doubled as well, so a job paying $6 an hour, now pays $12; a $30,000 annual salary becomes a $60,000 annual salary.

The value of all assets doubled as well. Stock prices are twice what they were at yesterday’s closing. A thousand-dollar bond becomes a two thousand dollar bond. A $35 balance in a checking account becomes $70, and so on.

Debts have also doubled. The $5 borrowed from a roommate becomes $10. The $3000 in student loans becomes $6000. A $75,000 home mortgage becomes a $150,000 mortgage.

And even cash balances double. The inflation fairy sneaks in at night and replaces the $10 bill in their wallet with a new $20 bill. The inflation fairy even doubles the coins in their penny jars.

If the prices of everything doubled overnight, what would happen? Compare this to what would happen if the prices of everything doubled overnight except cash balances. Then compare it to what would happen if instead debts did not double. What is the problem with inflation?

 

Discussion Question 2:

We are going to create a market for Pepperidge Farm Milano cookies. Make a table listing how many cookies each group member would be willing to buy at various prices. Record these prices and quantities.[1]Try to make the numbers as accurate as possible. Treat it as if it isn’t a hypothetical exercise and you will have to pay real money.

Sketch a graph the individual demand curves.[2]Then add the individual quantities at each price to find the market demand curve. This overall demand is used to find the market equilibrium. Sketch a graph of the market demand.

Supply, in this case, is fixed at the number of cookies in the bag. There are fifteen cookies. No more can be produced, and any leftovers will spoil. Sketch the supply curve on the same axis as the market demand curve. Identify the equilibrium price and quantity.

 

 

 

Discussion Question 3:

Using the attached sheets calculate a Price Index for Dublin. Use at least ten goods and do not use the same unit of measurement listed (for instance use 5kg of Round Steak instead of 1kg). Set May 2007 as the base year. What was the inflation rate?

The quarterly nominal GDP for Ireland was about 45,322 million Euros in November 2007 and about 44,696 million Euros in May 2007. Use your Price Index to adjust the November 2007 GDP for inflation. Compare the percent growth rate of the nominal and real GDP.

 

Discussion Question 4:

Classify each of the following individuals in one of the following categories: employed, unemployed, not in the labor force. If unemployed, which type of unemployment? In addition, identify anyone who is underemployed or a discouraged worker.

 

a)      Last week, Elizabeth worked 10 hours as a computer programmer for the National Video Company and attended night classes at the local college. She would prefer a full-time job.

b)      Mary-Helen has been out of work for a full year. She would take a job if it was offered, but no local companies are hiring. She is not actively searching for work.

c)      Carl worked forty hours last week in a Music Supply store.

d)      Bob worked at Wal-Mart in the appliances department. He was laid off last week because of the recent sales slump. He expects to be rehired when this sales slump is over.

e)      Linda’s father is unable to work.

f)        Scott has a Ph.D. He works full-time but doesn’t like his job as a dishwasher. He has applied for jobs with three companies and five universities. As soon as he gets an offer he’ll quit his current job.

g)      Stephen works part time as your teaching assistant. He is only paid for ten hours a week. For the rest of the week he is a graduate student at UVA.

h)      Glen just graduated from UVA and has been unable to find a satisfactory job. Last week he was offered a job cooking burgers, but he turned it down because he thought he could do much better.

i)        Roger lost his job at the Helme Tobacco Factory. Not many people buy gentleman’s snuff anymore, so the factory had to shut down. Since then he has been trying to find a job at another factory, perhaps in another industry.

Note Source: Consumer Prices Bi-annual Average Price Analysis Dublin and Outside of Dublin November 2007. Central Statistics Office Ireland. Website: http://www.cso.ie/releasespublications/documents/prices/current/apa.pdf