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Question #1 (worth 5%)
The price of gasoline has decreased during the year.
a. Explain why the law of demand applies to gasoline just as it does to all other goods and services.
b. Explain how the substitutions effect influences gasoline purchases and provide some examples of substitutions that people might make when the price of gasoline rises and other things remain the same.
c. Explain how the income effect influences gasoline purchases and provide some examples of the income effects that might occur when the price of gasoline rises and other things remain the same.
Question #2 (worth 5%)
The Bureau of Labor Statistics reported in December 2018, seasonally adjusted total nonfarm payroll employment increased by 312,000 to 258,888,000 and the unemployment rate increased from 3.7 percent to 3.9 percent. About 1.6 million people were marginally attached workers and 375,000 of them were discouraged.
a. Calculate the change in unemployment in December 2018.
b. With 1,600,000 marginally attached workers and 375,000 of them discouraged workers, what are the characteristics of the other 1,225,000 marginally attached workers?
Question #3 (worth 5%)
Use the following tables to work Question #3. The tables describe an economy’s labor market and its production function in 2018.
Real Wage Rate (dollars per hour) Labor hours supplied Labor hours demanded
80 45 5
70 40 10
60 35 15
50 30 20
40 25 25
30 20 30
20 15 35
Labor (hours) Real GDP (2018 dollars)
5 425
10 800
15 1,125
20 1,400
25 1,625
30 1,800
35 1,925
40 2,000
a. What are the equilibrium real wage rate, the quantity of labor employed in 2018, labor productivity, and potential GDP in 2018?
b. In 2019, the population increases and labor hours supplied increase by 10 at each real wage rate. What are the equilibrium real wage rate, labor productivity, and potential GDP in 2019?
c. In 2019, the population increases and labor hours supplied increase by 10 at each real wage rate. Does the standard of living in this economy increase in 2019? Explain why or why not.
Question #4 (worth 5%)
a. Draw a graph to illustrate the effect of an increase in the demand for loanable funds and an even larger increase in the supply of loanable funds on the real interest rate and the equilibrium quantity of loanable funds.
b. Draw a graph to illustrate the effect of an increase in the supply for loanable funds and a decrease in the demand of loanable funds can lower the real interest rate and leave the equilibrium quantity of loanable funds unchanged.