Econ

Topics: Gross domestic product, Economics, Inflation Pages: 5 (993 words) Published: March 2, 2014
ECONOMICS 110/112
Assignment #5/#2
2013/2014
Due Dates and Notes:


DUE: By Friday February 28, 2:00 PM. Completed assignments should be placed in the slot marked for your section in the white assignment collection box on the 2nd floor of Dunning Hall. Late assignments will not be accepted.



Use the Cover Page when submitting assignments. Place diagrams for particular questions with your answers to those questions.



Group Work: Maximum four per group, all students must be registered in the same section of the same course. Names must be in alphabetical order on the cover page.



Graded work will be available for pick-up beginning on the afternoon of Friday March 14 in the Econ Distribution Center, Dunning Hall Room 334. You will require your student card.



This assignment covers material from Chapters 20-24 of the text.

True, False, or Uncertain

[48 marks - 6 marks each]

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.

A5-1. Suppose on Feb 2, 2013 an individual pays $350,000 for a new home purchased from a builder who finished building the house on Oct 12, 2012. The transaction includes a sales commission of $20,000. This transaction adds $350,000 to 2013 GDP.

A5-2. The building of Olympic venues in Russia increases both actual and potential GDP in that country. A5-3. In Saudi Arabia, gross domestic product (GDP) is less than gross national product (GNP). This means that the nation produces domestically more than it is able to consume domestically. A5-4. If aggregate household saving is negative, the marginal propensity to save from disposable income must be negative.

A5-5. If desired aggregate expenditure is greater than actual national output, national output will increase. A5-6. If the domestic price level decreases, the price of domestic goods decreases relative to foreign goods. This will result in an upward shift of aggregate expenditures and a rightward shift of the aggregate demand curve.

A5-7. When national income is below potential, the price level does not have to increase greatly to induce firms to increase output by $100B, but when national income is above potential, the price level must increase by much more to induce the same change in output.

A5-8. Ceteris paribus, an increase in domestic wages (and/or other factor prices) leads to a decrease in national income in both the short and long run.

Problems

[52 marks - marks for each part as shown]

A5-9. We return to Couch-Potatoland, but we now assume that the data below represents the entire production of its economy, where the table shows the production of goods and their prices for 2012 and 2013: Streaming Movies

Popcorn

2012 {quantity, price/unit}

{10000 hrs, $1.00/hr}

{5000 bags, $2.00/bag}

2013 {quantity, price/unit}

{12000 hrs, $0.95/hr}

{4000 bags, $2.20/bag}

(a) Calculate nominal GDP for each year. Calculate the percentage growth rate of nominal GDP. [3] (b) Calculate real GDP for each year using 2012 as the base year. Calculate its growth rate. [3] (c) Calculate the GDP deflator for each year. Calculate the inflation rate in the GDP deflator. Can you see a simple relationship between this inflation rate and the growth rates of nominal and real GDP? Briefly explain this result. [4]

A5-10. Consider the following aggregate expenditure model of the US economy: C = 1 + (8/9)Yd

T = (1/4)Y

I=2

G=4

X=3

IM = (1/3)Y

where C is consumption, Yd is disposable income, T is taxes, Y is national income, I is investment, G is government spending, X is exports, and IM is imports, all in trillions $US. (a) Solve for aggregate expenditure (AE) as a function of Y, and calculate the equilibrium level of national income. Illustrate your equilibrium in a diagram with AE on the vertical and Y on the...
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