Download Assignment 2 Macro 201 Due 9-27-02

Bryon Gaskin
Macroeconomics 201
Assignment for Unit 2
Macroeconomics--ECN 201
Assignment for Unit 2
Chapters 4-6 Taylor Text, 3rd edition
Remember to explain your responses thoroughly. Be careful most of the questions have
several parts. Be sure to answer the complete question. Please answer every question to
complete the full assignment. There are no optional questions.
1. Given the information in the following table for three consecutive years in the U.S.
Economy, calculate the missing data.
Year
Nominal
GDP in
Billions
REAL
GDP in
billions
GDP
Deflator
1996
1997
1998
7813
8303.805
8759.617
7813
8165
8516.058
100
101.7
102.86
Inflation
%change
in GDP
deflator
1.8
1.7
1.14
Real GDP
per capita
in 1996
dollars
31264.51
32311.04
33,344
Population
in
Millions
249.9
252.7
255.4
2. Suppose there are only three goods in the economy:
Year
Good
Price
Quantity
________________________________________________________________________
2001
Apples
$ 2.50
1000
Bananas
$ 1.25
500
Computers
$ 100
10
2002
Item
Price
Apples
Bananas
Computers
Apples
Bananas
Computers
Quantity
2.5
1000
1.25
500
1
100
$ 3.50
$ 2.25
$ 100
2500
625
100
800
400
14
Item
Price
Quantity
Apples
3.5
800
Bananas
2.25
400
Computers
1
14
2800
900
14
Bryon Gaskin
Macroeconomics 201
Assignment for Unit 2
(A)
2001 NOMIAL GDP=
3225
2002 NOMIAL GDP=
3714
(B)
(percent change in GDP)
Using 2001 Prices
3225 2001 Production
2514 2002 Production
22.05% Decrease in Production
Using 2002 Prices
4725 2001 Production
3714 2002 Production
21.40% Decrease in production
21.72%
(C )Decrease in Real GDP from 2001 to 2002
(in other words the there is -21.72% change in Real GDP
(D) GDP deflator = nominal GDP/real GDP or GDP deflator= 3325/2514= 1.28 *
100 = 128. GDP deflator for 2002 =128
A. Calculate nominal GDP for 2001 and 2002.
B. Calculate the percentage change in GDP from 2001 to 2002 using 2001 prices and
2002
prices.
C. Calculate the percentage change in real GDP from 2001 to 2002 using your answers
from
D. What is the GDP deflator for 2002 if it equals 1.0 in 2001?
3. Why does an increase in investment share in GDP require a decrease in some other
share?
Because when you add all the shares together the
must equal 1. The sum of all parts must not be greater
than the whole. In this case, the GDP is the whole and it
represents 1. The four shares (consumption, investment,
net exports and government purchases) make up the GDP. For
theoretical purposes if they were evenly divided as a part
of GDP, then 25% would go to each share. If for some
Bryon Gaskin
Macroeconomics 201
Assignment for Unit 2
reason there was a 10% in investment, then there would have
to be a 10% decrease in another share.
4. How does the relationship between net exports and the exchange rate tie into the
negative relationship between interest rates and net exports? To clarify, it is easiest to
show the relationship between all of them at the same time.
An increase in the interest rate will cause the exchange
rate to rise. This happens because, foreign investers can
earn more on their investments by placing them in the
United States market. Think about it like a personal
savings account, if the interest rate is 3% on your account
in one bank but then another bank across the street or
across the country will offer 6%, then you will more likely
want to put your money in the other bank and take it out of
your current bank. So this increase in demand for the US
dollar caused by more competing resources, (in this case
foreign investors) for a limited amount of the US dollar,
puts pressure on the dollar to rise. When the exchange rate
rises, it makes the American dollar in compared to
currency X more valuable. When this happens, items
produced in other countries and sold in the US are less
expensive to buy in the US. At the same time, items made
in America but exported out, are more expensive. When this
happens, net exports will decrease. In other words, the
interest rate and the exchange rate are positively related.
The exchange rate and the interest rate are both negatively
related to net exports.
5. What is the difference between monetary and fiscal policy?
monetary policy is how the government goes about
controlling the supply of money and therefore the inflation
Fisical policy is how the government spends, borrows,
and taxes.
6. The following table shows the amount of output that can be produced using different
combinations of labor and capita in a hypothetical economy with a given type of
technology.
For example, 650 units of output are produced when 200 units of labor and 100 units
of
capital are combined. This table is an example of a production function.
a. Hold capital constant at 100 while you increase labor. What happens to output? Out
put will increase. You have an diminishing increase with each increase in the amount of
labor. For example Look the percent changes in production from one set of numbers to
the next.
Bryon Gaskin
Macroeconomics 201
Assignment for Unit 2
246
400
532
600
400
532
600
618
62.60%
33.00%
12.78%
3.00%
b. Now hold labor constant at 100 and raise the level of capital. What happens to
output? Out put would increase by a diminishing amount.
324
400
452
492
400
452
492
526
23.46%
13.00%
8.85%
6.91%
c. Finally, what happens when you raise labor and capital by the same amount? Out put
doubles. As indicated by the red lettered Production amounts in the modified chart
below.
Labor
Capital
50
100
150
200
250
50
100
150
200
250
200
246
278
304
324
324
400
452
492
526
432
532
600
654
700
528
650
734
800
856
618
760
858
936
1000
7. Suppose C = 660, I = 140, G = 200, and X = 0.
a. What is GDP? 1000
Calculate each component's share of GDP.
i. I= 14%
ii. C= 66%
iii. G= 20%
iv. X= 0%
b. Suppose government spending increases to 250 and GDP does not change. What is
government spending's share of GDP now? 45%
What is the new nongovernment share? 55%
c. Without doing any calculations, explain in general terms what happens to C/Y, X/Y,
I/Y
after the government spending increase in (b) above. Describe the mechanisms by
which
each of these changes happens.
There is government spending and nongovernment spending.
When government spending increases and GDP does not change,
Bryon Gaskin
Macroeconomics 201
Assignment for Unit 2
then nongovrenment spending must decrease, because the sum
of the two must equal 1.
Y=C+I+G+X
When we hold Y constant, which is what we are
doing my not increasing GDP in the above example, then if
we have a increase in government spending, then we will
have an equal total decrease spread out amongst the other
shares that belong to the nongovernement shares. It is
the sum total of the decrease in each of these
nongovermental shares that will be equal to the percent
increase in government spending.
8. Why is the sum of all income equal to GDP?
Aggregate income is Equal to GDP.
subdivided by 6 parts.
A.
Labor income
B.
Capital income
C.
Depreciation
D.
Indirect Business Tax
E.
Net income of foreigners
F.
Statistical discrepancy
Aggregate income is
Take a farmer who produces $500,000 a year.
He has 8 farm hands that he pays $25000 year. That
equals $200,000 in labor
He pays himself $75,000 year salary.
That equals $75,000 in labor
He then has 4 tractors that have depreciated
$10,000 in depreciaion
His total production cost is
$285,000
Subtract is cost from what he produced
$500,000
Equals his profits
$215,000
Now if you add all of the labor cost as follows:
$25,000
+$25,000+25,000+25,000+25,000+25,000+25000+25,000+75,000
+
Depreication of $10,000
+
Profits of $215,000
Equals aggregate income of $500, and also GDP.
9. Determine whether each of the following would be included in GDP, and explain why
or why not.
Bryon Gaskin
Macroeconomics 201
Assignment for Unit 2
a. You buy a used CD from a friend. No, because it is not a
newly produced good.
b. You buy a new CD from a music shop. Yes, because, you
have purchased a new produced good.
c. You cook your own dinner. No, because you are not
producing anything, however, the act of buying food, would
have been considered a part of GDP.
d. You hire someone to cook your dinner. Yes, because
you are paying for a new performed service. Now if for
instance you contract someone to cook your dinner for a
year because you think that you will not be able to do it
yourself, and then you later decide that you don’t need the
cooks services, and instead of not using his services, you
allow someone to buy out the cooks contract, then that
would not be counted towards GDP.