Problem Set 2

Your Name:

Question 1:

Look at the following table.

Prices and Quantites

Item Q1 P1 Q2 P2

Houses 2 100 3 90

Food 50 2 40 3

Games 10 5 20 5

Using Year 2 as the Index Year, calculate Y n1 , Y n 2 , Y

r 1 , Y

r 2 . Then calculate P for

both years, using the GDP deflator. What is the inflation rate from Year 1 to Year 2?

(Percentage change formula: Pold−Pnew Pold


Question 2:

Use the same data from the table. Assuming no production of games, draw a linear

Production Possibilities Frontier for Year 1 and Year 2 comparing Houses and Food.

What is the (opportunity) cost of one house in Year 1? What is the (opportunity)

cost of one unit of food in Year 2?


Question 3:

Using the same data from the table, draw the Long-Run Aggregate Supply curve

for Year 1 and Year 2. (You can use two graphs or one. Two might be easier.) Then

draw the correct Aggregate Demand curve for both graphs, that will give the correct

general price level P for both years. Did AS shift in or shift out in Year 2? Did AD

shift in or shift out?

Question 4: Draw a LRAS curve for Year 2 again. Next draw an aggregate demand

curve, and show the general price level P . Now draw a Short-Run Aggregate Supply

curve that passes through the intersection of LRAS and AD. Suppose that the country

prints a lot of new money in order to pay off its debts. What happens to AD? What

happens to the general price level and output in the short run? What happens to to

the general price level and output in the long run? Show the short-run and long-run

equilibrium, and what happens to P and Y both in the short run and also in the long



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