SCHOOL OF BUSINESS ADMINISTRATION

ECON 202: PRINCIPLES OF MACROECONOMICS

Spring 2024

Assignment 1
Due Feb 9, 2024 midnight
(Submit it through BB)
Send only one single file (Word or Pdf). Show all your calculations/work. Solve
questions in order. Do not send separate sheets/files. I will not accept if you do.

1.You find that your paycheck for the year is higher this year than last. Does that mean that
your real income has increased? Explain carefully.

2.Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food
or a 3 percent increase in the price of diamond rings? Explain.

3.Compute how much each of the following items is worth in terms of today's dollars using
177 as the price index for today.
a. In 1950, the CPI was 17.7 and the price of a movie ticket was $0.25.
b. In 1960, the CPI was 13.1 and a cook earned $15.00 a week.
c. In 1965, the CPI was 17.4 and a gallon of gas cost $0.19.

4. Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture, which
manufactures wooden furniture. He wants your advice on whether to buy stock or bonds.
Explain how each of his quotes below should affect his choice between the stock and the
bond.

a. "I have reason to believe that people are soon going to find rocking chairs
have health benefits."
b. "I would like to tell people I am part owner of Cedar Valley Furniture."
c. "I do not want to take on much risk."

5. Give an example of adverse selection and an example of moral hazard using home owners’
insurance.