Gold Coast and Silver Coast Answer

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Midterm II



Please answer the following five questions.




  1. Suppose we have 2 countries – Gold Coast and Silver Coast. The following table represents the nominal GDPs of both countries between 2008 and 2010. (For both countries, the base year is 2007.)


YEAR Nominal GDP

(Gold Coast)

GDP Deflator

(Gold Coast)

Nominal GDP

(Silver Coast)

GDP Deflator

(Silver Coast)

2008 $8000 102 $8000 102
2009 $8500 110 $8000 99
2010 $9000 115 $8500 98



  1. Compute Real GDP for each year for both countries.

The Change in the money supply would be $63 billion for the Gold Coast and $104


  1. Calculate the growth rates in real GDP for the periods 2008-2009 and 2009-2010 for both countries.
  2. Compute the inflation rate for the periods 2008-2009 and 2009 and 2010 for both countries.
  3. Explain in words the key differences in the macroeconomic experiences of Gold Coast and Silver Coast.


  1. Suppose economic managers of the US economy wish to expand output by $10 billion. The managers know that the marginal propensity to consume is .5 and that only the marginal propensity to consume determines the value of the multiplier.  Given these data and the goal of expanding output by $10 billion, by how much should the government expand aggregate demand through the use of fiscal policy?  Describe two different types of fiscal policy that might accomplish this goal.


  1. Assume the Fed wants to contract economic activity because it is concerned about inflationary pressures. Explain what type of open market operations the Fed will initiate in order to accomplish this goal.  If the mandated reserve ratio is 20%, and the Fed initially changes the money supply by $50 million as a result of its activities, what will be the total change in the money supply?  Will the money supply be expanded or reduced?



  1. Use the following Aggregate Supply – Aggregate Demand diagram as a starting point for your analysis.













  1. Label the curves.
  2. The Government decides to increase payroll taxes in order to improve the finances of the social security system. What will happen to the short-term output and price level of the economy?
  3. Nominal wages rise by 4%, while labor productivity rises by six percent. What will happen to the short-term output and price level of the economy?
  4. As a result of bank failures in Spain and the inability of the Italian government to borrow money at low rates to fund its government debt, economic activity sharply declines throughout the Euro zone. What will happen to the short-run output and price level of the American economy?



  1. Use the following data to find the unemployment rate and the labor force participation rate for the years 1992 and 1996. (These data are taken from the Economic Report of the President, 2013.)


Year Number of people unemployed Number of people employed Number of people who could be in labor force
1992 9.6 million 118.5 million 192.8 million
1996 7.2 million 126.7 million 200.6 million



After finding these answers, evaluate in one or two sentences how the labor market was performing between 1992 and 1996.