Majuli, the island country produces only lobsters and crabs
Economics 11/4
Answer the questions as completely as possible. Draw diagrams and give examples whenever and wherever, you think, they help make your point. Show all your work to receive full credit for correct answers, and partial credit for incorrect answers.
1.
Majuli, the island country produces only lobsters and crabs. The following table gives the prices and quantities in 2009, 2010 and 2011.
GOODS 
2009 
2010 
2011  
Price 
Quantity 
Price 
Quantity 
Price 
Quantity  
Lobster 
20 
1000 
25 
1100 
30 
1100 
Crab 
10 
500 
12 
525 
15 
525 
a) Calculate Majuli’s Nominal GDP in 2009, 2010, and 2011.
b) Calculate real GDP and GDP Deflator in 2009, 2010, and 2011, taking 2009 as the base year.
c) What can you say about the growth of quantity and prices in 2010 and 2011 from your calculations of real GDP and GDP deflator? Calculate the growth rates to answer this question.
2.
a) Consider the following price indexes: 90 in 2009, 100 in 2010, 110 in 2011, and 121 in 2012. Answer the following questions.
i) What is the base year?
ii) What is the inflation rate from 2009 to 2010?
iii) What is the inflation rate from 2011 to 2012?
iv) If the cost of the consumption basket in 2010 is $2,000, what is the cost of the same basket of goods and services in 2009? In 2012?
b) Currently, the CPI used to calculate the inflation rate is equal to 90. The general expectation throughout the economy is that next year the value of CPI will be 94.5. The current nominal interest rate is 4.75 percent. What is the real interest rate?
3.
Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.
a) What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.
b) Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier.
c) Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

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Solution: Majuli, the island country produces only lobsters and crabs Solution