# Bryon Gaskin Macroeconomics 201 Assignment for Unit 2

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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 quest
ions have
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

Inflation
%change
in GDP
deflator

Real GDP
per capita
in 1996
dollars

Population
in
Millions

1996

7813

7813

100

1.8

31264.51

249.9

1997

8303.80
5

8165

101.7

1.7

32311.04

252.7

1998

8759.617

8516.058

102.86

1.14

33,344

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 Apples \$ 3.50 800

Bananas \$ 2.25 400

Computers \$ 100 14

Item

Price

Quantity

Item

Price

Quantity

Apples

2.5

1000

2500

Apples

3.5

800

2800

Bananas

1.25

500

625

Bananas

2.25

400

900

Computers

1

100

1
00

Computers

1

14

14

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%

Decre
ase 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 from 2001 to 2002)

(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. C
alculate 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 th
e 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

Macroeconomics 201

Assignment for Unit 2

reason ther
e 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 expor
ts? 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
ney 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 t
he 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 export
ed 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 th
e 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 show
s 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 amou
nt of
labor. For example Look the percent changes in production from one set of numbers to
the next.

Macroeconomics 201

Assignment for Unit 2

246

400

62.60%

400

532

33.00%

532

600

12.78%

600

618

3.00%

b. Now hold labor constant at 100 and raise the level of capital. What happens to
out
put? Out put would increase by a diminishing amount.

324

400

23.46%

400

452

13.00%

452

492

8.85%

492

526

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 Produc
tion amounts in the modified chart
below.

Labor

50 100 150 200 250

50
200

324 432 528 618

100 246
400

532 650 760

Capital 150 2
78 452
600

734 858

200 304 492 654
800

936

250 324

526 700 856

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 spendin
g 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,

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. Aggregate income is
subdivided by 6 parts.

A.

Labor income

B.

Capital income

C.

Depreciation

D.

E.

Net income of foreigners

F.

Statistical discrepancy

Take a farmer who produce
s \$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.

Macroeconomics 201

Assignment for Unit 2

a.
You buy a used CD from a friend. No, because it is not a
newly produ
ced 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 GD
P.

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 la
ter 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.