Homework 2
ECO 1000, Fall 2013
Due: 12:50 PM, October 31.
Total Points: 25
Be as precise and specific as possible, but do not miss important aspects/features. Pay special attention while drawing the graphs, so that they are illustrative, and are to the scale, wherever relevant.

Q.1. (10 Points).

Above graph depicts an inflationary gap in the economy (a situation where the current equilibrium level output is above the potential level output). Discuss the various ways (including an appropriate government policy) by which the equilibrium output can be brought to equalize with the potential level output. Discuss how each of these measures (or ways) would affect the general price levels. Draw necessary diagrams for clarity.
One way to equalize the equilibrium output with the potential level output is by shifting the short-run aggregate supply curve to the left. One way to do this is to cause wages and inpute prices to go up by allowing the market forces to take their course. Similarly, we could also shift the aggregate demand curve to the left by waiting for spending in the private sector to recede. Finally, a government policy could be implemented where takes are raised, spending is cut, or both. In either case, the aggregate demand curve will shift to the left.

Q. 2. Look at the following production function of a wheat grower, operating with a fixed land size, and fixed equipments in the short run.
# of Workers
(L)
Bushels of Wheat
(Q)
Average Product
(Q/L)
Marginal Products
(ΔQ/ΔL)
0
0
0

1000
1
1000
1000

800
2
1800
1400

600
3
2400
800

400
4
2800
700

200
5
3000
600

(a) ( 4 Points). Fill up the boxes in the last two columns by appropriate numbers.

(b) (6 Points). With L in the horizontal axis, plot the total product (Q), average product (Q/L),