1. Office Hours: Monday 3:00-4:00 – LUMS C85
ECON 101 Tutorial: Week 14
Shane Murphy
Office Hours: Monday 3:00-4:00 – LUMS C85

2. Outline
Roll Call
Problems
Exam Notes

3. Chapter 20: Problem 5 Here are some data from the land of milk and
Year
Price of milk
Quantity of milk
Price of honey
Quantity of honey
2013 1
100 2 50
2014
200
2015 4
Here are some data
from the land of milk and
honey.
Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2013 as the base year.
Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2014 and 2015 from the preceding year. For each year, identify the variable that does not change.
Did economic well-being rise more in 2014 or 2015?

4. Chapter 20: Problem 5

5. Chapter 20: Problem 5

6. Chapter 20: Problem 7
One day Boris the Barber, plc, collects €400 for haircuts. Over this day, his equipment depreciates in value by €50. Of the remaining €350, Boris sends €30 to the government in sales taxes, takes home €220 in wages, and retains €100 in his business to add new equipment in the future. From the €220 that Boris takes home, he pays €70 in income taxes. Based on this information, compute Boris’ contribution to the following measures of income: GDP, net national product, national income, personal income, and disposable personal income.

7. Chapter 20: Problem 7
GDP equals the dollar amount Boris collects, which is €400.
NNP = GDP – depreciation = €400 - €50 = €350.
National income = NNP - sales taxes = €350 - €30 = €320.
Personal income = national income - retained earnings = €320 - €100 = €220.
Disposable personal income = personal income - personal income tax = €220 - €70 = €150.

8. Chapter 21: Problem 1 Suppose that people consume only three goods,
Tennis balls
Tennis racquets
Cola
2014 price 2 40 1
2014 quantity
100 10
200
2015 price 60
2015 quantity
Suppose that people
consume only three goods,
as shown in this table:
What is the percentage change in the price of each of the three goods? What is the percentage change in the overall price level?
Do tennis racquets become more or less expensive relative to cola? Does the well-being of some people change relative to the well-being of others?

9. Chapter 21: Problem 1 Suppose that people consume only three goods,
Tennis balls
Tennis racquets
Cola
2014 price 2 40 1
2014 quantity
100 10
200
2015 price 60
2015 quantity
Suppose that people
consume only three goods,
as shown in this table:
The price of tennis balls increases 0 percent; the price of tennis racquets increases 50 percent [=(€60-€40)/€40 x 100%]; the price of Cola increases 100 percent [= (€2 - €1)/€1 x 100%].
Tennis racquets are less expensive relative to Cola, since their price rose 50 percent while the price of Cola rose 100 percent. The well-being of some people changes relative to the well-being of others. Those who purchase a lot of Cola become worse off relative to those who purchase a lot of tennis racquets or tennis balls.

10. Chapter 21: Problem 7
In some years in some countries, income tax brackets are not increased in line with inflation. Why do you think the government might do this? When bracket creep occurs, inflation increases people's nominal incomes, pushing them into higher tax brackets, so they have to pay a higher proportion of their incomes in taxes, even though they are not getting higher real incomes. As a result, the government’s real tax revenue rises.

11. Chapter 21: Problem 9
Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.
Is the real interest rate on this loan higher or lower than expected?
When inflation is higher than was expected, the real interest rate is lower than expected.
Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?
Since the real interest rate is lower than was expected, the lender loses and the borrower gains. The borrower is repaying the loan with money that is worth less than was expected.

12. Exam Notes
I should have finished grading by this point and might have a few words to say about the second exam.