Econ 1020

Winter 2019

Assignment 3

Due date: March 1

Exercise 1

Assume an economy produces just cars and computers; use the information in the table below to answer the following questions about the GDP.

Cars Computers

Year Quantity Price Quantity Price

2003 100 $10,000 1,000 $1,000

2004 110 $12,000 1,100 $900

(1) Calculate nominal GDP in 2003 and 2004. What is the growth rate in nominal GDP?

(2) Using 2003 as a base year, calculate real GDP in 2004. What is the growth rate in real GDP (i.e. economic growth)?

(3) Calculate the GDP deflator in 2004.

Exercise 2

Which of the following transactions would be counted in GDP and which ones would not be counted? Explain all your answers.

(a) General Motors issues new shares of stock to finance the construction of a plant.

(b) General Motors builds a new plant.

(c) Company a successfully launches a hostile takeover of company B, in which company A purchases all the assets of company B.

(d) Your grandmother wins $10 million in the lottery.

(e) You buy a new copy of a textbook.

(f) You buy a used copy of a textbook.

(g) The government pays out Social Security Benefits.

(h) A public utility installs new antipollution equipment in its smokestacks.

(i) Luigi’s Pizza buys 30 pounds of mozzarella cheese, holds it in its inventory for 1 month, and then uses it to make pizza (which it sells).

(j) You spend the weekend cleaning your apartments.

(k) A drug dealer sells $500 worth of illegal drugs.

Exercise 3

Use the figures in the table to calculate the requested economic variables:

2005 2010

Working age population 200 million 210 million

Labor force 130 million 144 million

Employed 120 million 125 million

(a) Calculate the labor-force participation in 2005 and 2010;

(b) The number of unemployed in 2005 and 2010;

(c) The unemployment rate in 2005 and 2010;

(d) In which year you expect to observe an economic contraction? Explain.

(e) How would the number of unemployed change in 2005 and 2010 if 50 percent of the unemployed in each year stopped searching for a job and they became “discouraged?”

Exercise 4

Assume the bundle that is used to calculate the Consumer Price Index (CPI) is composed by 100 units of good X,150 units of good Y, and 25 units of good Z. The price of one unit of good X, Y and Z in 1008, 2009, and 2010 is summarized by the following table:

GOOD QUANTITY 2008 PRICES 2009 PRICES 2010 PRICES

X 100 $1.00 $1.50 $1.75

Y 150 1.50 2.00 2.00

Z 25 3.00 3.25 3.00

(a) Assuming 2008 is the base year, calculate the CPI in 2009 and 2010.

(b) Calculate the inflation rate in 2009 and 2010.

Exercise 5

You are given the following data concerning a certain country:

1) Consumption function: C = 200 + 0.8 Y

2) Investment function: I =100

3) AE C + I

4) AE Y

(a) What is the marginal propensity to consume for this economy? And what is the marginal propensity to save?

(b) Graph equations 3) and 4), calculate the equilibrium level of income (or output), and show it on your graph.