ECO104: Introduction to Macro Economics

Assignment- 1

Spring 2021

Instructor: Parisa Shakur (PSk)

Instructions to candidates

▪ Deadline: 7/5/2021 (Friday) 4:00 PM

▪ This assignment has 8 questions
▪ Total Marks: 20
▪ Answer all of the questions.
 1. Interpret the following graph (3)

Note: Inflation, annual variation of consumer price index (CPI) in % (aop).

Source: Bangladesh Bureau of Statistics

2. Assume that tea and lemons are complements and coffee and tea are substitutes. Say
that the government imposes a price ceiling on tea that is below the current market
equilibrium price. (2)
a) How, if at all, will this affect the price of lemons?
b) How, if at all, will this affect the price of coffee?

3. Using information from the box below, calculate the firm’s total contribution to US GDP.
This Japanese-owned firm is located in the US (2)

Japanese-owned Company’s Balance Sheet

Total Sales Revenues 1,000,000

Total Wages 600,000
Wages of American Workers 500,000
Wages of Japanese Manager 100,000
Operating Expenses 100,000
Interest payment to a US bank 50,000
Rent to a US landlord 50,000
Profits 300,000

4. When people retire, their incomes fall by 1/3rd and so does their consumption. What
happens to the GDP as a result of this? Also, comment on the wellbeing of these people
due to the change in GDP. (3)
5. Given the data below, calculate the unemployment rate by showing your workings. (2)

Total adult population over the age of 249.9 million

16

In the labor force 157 million

(62.8%)

Employed 148.3 million

Unemployed 8.7 million

Out of the labor force 92.9 million

(37.2%)

6. Using an AD-AS diagram, illustrate what happens when the AD increases both in the
short run and the long run. (2)

7. Using a diagram, illustrate the classical economists' solution to the inflationary gap. (3)

8. Explain any two reasons why Aggregate Demand curve is downward sloping (3)