Majuli, the island country produces only lobsters and crabs

Economics
11/4

Answer the
questions as completely as possible. Draw diagrams and give examples whenever
and wherever, you think, they help make your point. Show all your work to
receive full credit for correct answers, and partial credit for incorrect answers.

1.
Majuli, the
island country produces only lobsters and crabs. The following table gives the prices
and quantities in 2009, 2010 and 2011.

GOODS

2009

2010

2011

Price

Quantity

Price

Quantity

Price

Quantity

Lobster

20

1000

25

1100

30

1100

Crab

10

500

12

525

15

525

a) Calculate
Majuli’s Nominal GDP in 2009, 2010, and 2011.
b) Calculate
real GDP and GDP Deflator in 2009, 2010, and 2011, taking 2009 as the base
year.
c) What can
you say about the growth of quantity and prices in 2010 and 2011 from your
calculations of real GDP and GDP deflator? Calculate the growth rates to answer
this question.

2.
a) Consider
the following price indexes: 90 in 2009, 100 in 2010, 110 in 2011, and 121 in
2012. Answer the following questions.
i) What is
the base year?
ii) What is
the inflation rate from 2009 to 2010?
iii) What is
the inflation rate from 2011 to 2012?
iv) If the
cost of the consumption basket in 2010 is $2,000, what is the cost of the same
basket of goods and services in 2009? In 2012?
b) Currently,
the CPI used to calculate the inflation rate is equal to 90. The general
expectation throughout the economy is that next year the value of CPI will be
94.5. The current nominal interest rate is 4.75 percent. What is the real
interest rate?

3.
Suppose that
there are 10 million workers in Canada and that each of these workers can
produce either 2 cars or 30 bushels of wheat in a year.
a) What is
the opportunity cost of producing a car in Canada? What is the opportunity cost
of producing a bushel of wheat in Canada? Explain the relationship between the
opportunity costs of the two goods.
b) Draw
Canada’s production possibilities frontier. If Canada chooses to consume 10
million cars, how much wheat can it consume without trade? Label this point on
the production possibilities frontier.
c) Now
suppose that the United States offers to buy 10 million cars from Canada in
exchange for 20 bushels of wheat per car. If Canada continues to consume 10
million cars, how much wheat does this deal allow Canada to consume? Label this
point on your diagram. Should Canada accept the deal?

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