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Homework Assignment #2
Chapter 5
Problem 6: Nominal GDP is calculated by multiplying the price of each good by the quantity produced of that good. Once that is done for both goods then add those two figures together. That's nominal GDP. So, it's like this: (P1 x Q1) + (P2 x Q2) = nominal GDP (or constant dollar GDP). The growth rate of nominal GDP is simply (GDP2 - GDP1)/GDP1. Real GDP in the first year (the base year) is the same as the nominal GDP. The real GDP in the second year is calculated by multiplying GDP1 prices times GDP2 quantities (i.e. you're assuming prices have not changed, therefore you are isolating the physical output of goods). The growth rate in real GDP is calculated by (real GDP2 - GDP1)/GDP1.
Problem 7: A constant-weight price index uses fixed quantities instead of fixed prices to calculate the second year's GDP. So, for example:
year 1 prices year 1 quantities year 2 prices year 2 quantities
Apples $2.00 10 $2.50 15
Oranges $3.00 5 $4.00 20
Constant-weight price index = (GDP2 prices x GDP1 quantities)/ GDP1 ) x 100 = 129 (rounded). So, the growth rate of prices is 29% (inflation rate) from the base year to year 2.
Chapter 6
Problem 6: This should be easy. What isn't counted in GDP and is very difficult to impute a value to but has real value to one's life? What isn't counted in GDP that undermines our well-being but isn't taken into account when GDP is calculated?
Chapter 7
Problem 1: The unemployment rate = [#unemployed/(size of labor force)] x 100. The size of the labor force includes only those employed and those unemployed who are actively seeking employment. The labor force also excludes those who are under 16 or unable to work.
Homework Assignment #3
Chapter 8
Problem 1: This can be answered by examining the table 8.1 and the Figure 8.4 and the accompanying discussion.
Problem 2: The Financial Times, the Wall Street Journal, the New York Times and sources on my link (cool sites [sic]), especially to the Bank for International Settlements should provide you with good sources for this exercise.
Chapter 9
Problem 1: Remember, the demand for loanable funds comes from banks and the supply of loanable funds comes from households. So, what happens when households decide to spend less -- think C and S?
Problem 3: MPC (or b) is the percentage of a change in Y that will be spent. To calculate the values for consumption when we know Y requires plugging that number into the equation and solving for C. Any rise in income (Y) causes consumption to rise by mpc x the change in Y (sorry, Frontpage doesn't have the delta symbol) and savings to rise by mps x the change in Y. The slope of the consumption function is mpc -- how would you calculate that? The intercept of the consumption function is the value of the constant in the formula C = C(bar) + mpcY. Plug 600 into the equation for C and solve for Y.
Note: C(bar) is the constant. I can't put a line above C in this software (the tyranny of Microsoft proprietary software!).
Chapter 10
Problem 1: Now with government spending, the Keynesian formula is Y = C + II + G + mpcY. But you don't have to go to all the trouble of solving for Y. A fall (or rise) in one of the spending components like G just requires applying the multiplier to the change in spending. That gives you the change in equilibrium Y from 800 (the current equilibrium Y). Remember, the multiplier is ( 1/(1-b) times the change in G. Then subtract that from 800 -- it's a decline in G so equilibrium Y will fall. b = mpc in my formula.
Homework Assignment #4
Ch. 11
Exercise #4 : This problem addresses the differences between the Classical Monetary Theory and the Quantity Theory of Money. They both hold that V is constant (V with a bar over it). The Classical Monetary Theory also holds that Y is constant at the full-employment level of output (Y*). Remember that Y is real GDP while PY is nominal GDP.
Ch. 12
Excercise #5: This would be a detrimental supply shock. An appropriate shift in the ASR curve should allow you to comment on what would happen.