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TUTORIALS
Tutorials are scheduled on different days during the week for different students.
Tutorial questions are printed on the following pages.
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ECMA06H
TUTORIAL #1 (WEEK 1)
QUESTIONS
NOTE -There is no tutorial class this week - you should work on these questions on your
own (answers will be handed out in next tutorial).
1.An economy with only two consumption goods, no inventory, and no imports and exports, has
the following prices and quantities consumed (and produced) in 2001 and 2002:
PRICE
$10
$15
2001
QUANTITY
180
100
PRICE
$12
$25
2002
QUANTITY
200
64
a) Compute the equivalent of the CPI for this economy. Compute the equivalent of the GDP
deflator for this economy. (Note that Statistics Canada – Canada’s main statistical agency - is
changing the way it calculates the price index ; we will continue to use the older – and simpler methods to compute the price index in this course, in order to teach the fundamentals about
construction of price indexes). In each case assume that the index is 100 for 2001 - i.e., 2001 is
the base year. Verify that the CPI is larger than the GDP deflator. What is the annual rate of
inflation for this period?
b) Compute current dollar GDP for 2001 and 2002. Compute the constant dollar GDP for 2001
and 2002, using 2001 dollars. Can you state whether consumers are better or worse off in 2001
than in 2002?
c) Would all individual consumers agree with your conclusion about being better or worse off?
Explain fully.
d) Does this model capture entirely the real-life differences between the CPI and the
GDP-deflator?
2a) The Canadian CPI in 1971 was 25.1; the CPI for 2001 was 116.4 (these are the real-life
numbers, based on setting the CPI for June 1992 equal to 100). By how much did prices rise
over the 30-year period. Compute the annualized rate of inflation over this period.
b) A friend boasts that his father’s starting salary in 1971 was $8000 per year, while his salary at
his new job in 2001 was $32,000. Express the father=s salary in 2001 dollars. Express your
friend=s starting salary in 1971 dollars. Who had the higher income, and by how much?
ECMA06H
TUTORIAL #2 (WEEK 2)
QUESTIONS
1. You are given the following pieces of information about the Canadian economy for 2001
(actually, these are annualized figures, based on the data from the 2nd quarter of 2001):
Net income of non-farm unincorporated businesses, including rent
$64.7B
Exports of goods and services
$496.2B
Corporation profits before taxes
$133.8B
Government business profits before taxes
$10.8B
Fixed capital formation (i.e., purchases of capital equipment)
by business and government
$214.0B
Personal expenditure on consumer goods and services
$619.6B
Interest and miscellaneous investment income
$58.5B
Capital consumption allowances
$141.2B
Wages, salaries and supplementary labour income
$557.1B
Inventories (accumulated over the last year)
-$1.0B
Net income of farm operators
$2.9B
Indirect taxes minus subsidies
$132.0B
Imports of goods and services
$427.1B
Government current expenditure on goods and services
$198.4B
IVA (this goes on the incomes side)
-$1.3B
a. Calculate GDP using the Expenditure Approach, using only those items listed above. Now
calculate GDP using the Factor Incomes Approach and only those items listed above?
b. Are the two totals from part (a) the same? What should you do about it? What is the name of
the thing you have just calculated?
c. Since imported goods are not part of Canada=s GDP, why do we even mention them in
calculating GDP using the expenditure approach? How does the issue of imports provide a
warning to you about how to interpret Aconsumer spending@ data from the National Accounts?
2. An economy consists of two firms and there is no foreign sector. Firm #1 produces $10,000
worth of output. The firm sells $4000 of the output to consumers, $3000 of the output to the
government, and $2600 of the output to firm #2 (which uses $1600 of it as an input into its
production and $1000 of it as an investment good). The remaining $400 worth of output is
unsold at the end of the year and remains in inventory. The firm pays out $3200 to firm #2
($2100 for intermediate goods used in production and $1100 for goods used for investment),
$4000 in wages, $1000 in taxes, sets aside $800 for capital consumption allowance, and has
before tax profits (which you can determine). Firm #2 produces $8000 worth of output. This
firm sells $3000 of the output to consumers, $1800 of the output to the government, and $3200
to firm #1 (used as described above). Firm #2 pays out $2600 to firm #1 (as discussed above),
$3200 in wages, $800 in taxes, sets aside $600 for C.C.A., and also has before tax profits. Using
this information, determine GDP (the income approach) and GDE (expenditure) in this economy.
ECMA06H
TUTORIAL #3 (WEEK 3)
QUESTIONS
1.
An economy with no government and no foreign sector has the following structure:
C = 60 + 0.75Y
I = 100
a) Find the aggregate expenditure function and equilibrium output/income.
b) Suppose that output is set accidentally at $600. What mechanism will bring output
back to equilibrium?
c) Repeat part (b) when output is set accidentally at $700.
d) Find the multiplier dY/dI in this model. What is the "transmission mechanism" that
causes output to rise when investment rises?
e) In this model, suppose that consumers decide to increase their savings by reducing the
consumption function (say, to C = 50 + 0.75Y). Will they be successful in increasing
savings? Explain. (Note - this problem illustrates the Aparadox of thrift@)
ECMA06H
TUTORIAL #4 (WEEK 4)
QUESTIONS
1)
An economy has the following structure:
C = 10 + (10/11)Yd
TA = TA0 + tY = 44 + 0.3Y
TR = TR0 - trY = 110 - 0.1Y
I = 50; G = 300; X = 220; IM = (3/11)Y
a)
Find AE and equilibrium GDP
b)
What is the effect of an increase in G of 40 on Y, on the government budget
balance (GBB), and on the trade balance (X - IM)? What is the multiplier on an
increase in G (that is, what is dY/dG)?
c)
Suppose that taxes are cut so that government tax revenue falls by 44 at each level
of Y. What is the effect of this tax cut of 44 on Y and on the deficit? What is the
multiplier on a cut in taxes (that is, what is dY/dTA0) ? Why is it less than the
multiplied effect of an increase in G?
d)
Relate the size of these multipliers (sometimes called Athe government
expenditure multiplier@ and Athe tax and transfer multiplier@) to the parameters
of the model.
Return to the original model. Now investment falls by 22. What happens to Y and to the
deficit? Should we blame governments when deficits rise during recessions?
Again return to the original model. A boom in a neighbouring country causes exports to
rise by 22. What happens to Y and to the deficit? Should we give the
government credit for low deficits (or surpluses) during boom times?
Return to the original model. Find equilibrium GDP and the multiplier if the
consumption function changes to
C = 55 + (5/6)Yd