Professional Documents
Culture Documents
Principles of
Macroeconomics
Problem Session-1
by
Research Assistant
Serkan Deirmenci
02.03.2012
Today
Mankiw (2008), Principles of Economics:
- Chapter 23: Measuring A Nations Income:
Questions for Review (QfR): 1-8 (page: 525)
Problems and Applications (P&A): 1-11 (page:
525-527)
- Chapter 24: Measuring the Cost of Living:
Questions for Review (QfR): 1-5 (page: 543)
Problems and Applications (P&A): 1-10 (page: 543545)
- Chapter 25: Production and Growth:
Questions for Review (QfR): 1-8 (page: 573)
Problems and Applications (P&A): 1-10 (page: 574)
- Chapter 26: Saving, Investment, and the
Financial System:
Questions for Review (QfR): 1-6 (page: 594)
CHAPTER 23
MEASURING A NATIONS INCOME
100 X $2 =
100 X $2 =
($200/$200) X 100 =
100
$200
$200
2011
200 X $3 =
200 X $2 =
($600/$400) X 100 =
$600
$400 GDP is (600 150
The percentage
change in nominal
200)/200 x
100 = 200%.
The percentage change in real GDP is (400 200)/200 x 100
= 100%.
What components of GDP (if any) would each of the following transactions
affect? Explain.
a. A family buys a new refrigerator.
b. Aunt Jane buys a new house.
c. Ford sells a Thunderbird from its inventory.
d. You buy a pizza.
e. California repaves Highway 101.
f. Your parents buy a bottle of French wine.
g. Honda expands its factory in Marysville, Ohio.
ANSWER: (page: 512-514)
a. Consumption increases because a refrigerator is a good purchased by
a household.
b. Investment increases because a house is an investment good.
c. Consumption increases because a car is a good purchased by a
household, but investment decreases because the car in Fords
inventory had been counted as an investment good until it was sold.
d. Consumption increases because pizza is a good purchased by a
household.
e. Government purchases increase because the government spent
money to provide a good to the public.
f. Consumption increases because the bottle is a good purchased by a
year.
b. Compute the percentage change in nominal
GDP, real GDP, and the GDP deflator in 2009 and
2010 from the preceding year. For each year,
identify the variable that does not change.
Explain in words why your answer makes sense.
c. Did economic well-being rise more in 2009 or
ANSWER:
a.
Calculating nominal GDP:
2008: ($1 per qt. of milk 100 qts. milk) + ($2 per qt. of honey 50 qts. honey) = $200
100%
2009: ($1 per qt. of milk 200 qts. milk) + ($2 per qt. of honey 100 qts. honey) = $400
100%
2010: ($2 per qt. of milk 200 qts. milk) + ($4 per qt. of honey 100 qts. honey)
= $800
Calculating real GDP (base year 2008):
2008: ($1 per qt. of milk 100 qts. milk) + ($2 per qt. of honey 50 qts. honey) = $200
100%
2009: ($1 per qt. of milk 200 qts. milk) + ($2 per qt. of honey 100 qts. honey) = $400
2010: ($1 per qt. of milk 200 qts. milk) + ($2 per qt. of honey 100 qts. honey)
0%= $400
Calculating the GDP deflator:
2008: ($200/$200) 100 = 100
2009: ($400/$400) 100 = 100 0%
2010: ($800/$400) 100 = 200100%
b.
Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2009 = [($400 $200)/$200] 100 = 100%.
Percentage change in nominal GDP in 2010 = [($800 $400)/$400] 100 = 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2009 = [($400 $200)/$200] 100 = 100%.
Percentage change in real GDP in 2010 = [($400 $400)/$400] 100 = 0%.
Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2009 = [(100 100)/100] 100 = 0%.
Percentage change in the GDP deflator in 2010 = [(200 100)/100] 100 = 100%.
Prices did not change from 2008 to 2009. Thus, the percentage change in the GDP
deflator is zero. Likewise, output levels did not change from 2009 to 2010. This
means that the percentage change in real GDP is zero.
c.
Economic well-being rose more in 2009 than in 2010, since real GDP rose in
2009 but not in 2010.
199
6
200
0
199
9
9873
9269
118
113
CHAPTER 24
MEASURING THE COST OF LIVING
ANSWER:
2009 price
2009
quantity
2010 price
2010
quantity
a. What
is the percentage change in the price of each of three
goods?
b. Using the method similar to the consumer price index,
compute the percentage change in the overall price level.
c. If you were to learn that a bottle of Gatorade increased in
size from 2009 to 2010, should that information affect your
calculation of the inflation rate? If so, how?
d. If you were to learn that Gatorade introduced new flavors in
2010, should that information affect your calculation of the
ANSWER:
a. The percentage change in the price of tennis balls is (2
2)/2 100% = 0%.
The percentage change in the price of golf balls is (6 4)/4
100% = 50%.
The percentage change in the price of Gatorade is (2 1)/1
100% = 100%.
b. The cost of the market basket in 2009 is ($2 100) + ($4
100) + ($1 200) = $200 + $400 + $200 = $800.
The cost of the market basket in 2010 is ($2 100) + ($6
100) + ($2 200) = $200 + $600 + $400 = $1,200.
The percentage change in the cost of the market basket
from 2009 to 2010 is (1,200 800)/800 100% = 50%.
c. This would lower my estimation of the inflation rate
because the value of a bottle of Gatorade is now greater than
before. The comparison should be made on a per-ounce basis.
d. More flavors enhance consumers well-being. Thus, this
would be considered a change in quality and would also
Year
2008
2009
Cauliflower
$2
$3
Broccoli
$1.50
$1.50
Carrots
$0.10
$0.20
b. If 2008 is the base year, the market basket used to compute the CPI is 100
heads of cauliflower, 50 bunches of broccoli, and 500 carrots. We must now
calculate the cost of the market basket in each year:
2008: (100 x $2) + (50 x $1.50) + (500 x $.10) = $325
2009: (100 x $3) + (50 x $1.50) + (500 x $.20) = $475
Then, using 2008 as the base year, we can compute the CPI in each year:
2008: $325/$325 x 100 = 100
2009: $475/$325 x 100 = 146
c. We can use the CPI to compute the inflation rate for 2009:
(146 100)/100 x 100% = 46%
CHAPTER 25
PRODUCTION AND GROWTH
In
have
lower enrollment rates in secondary school than do
young men. Describe several ways in which greater
educational opportunities for young women could
lead to faster economic growth in these countries.
ANSWER:
Greater educational opportunities for women could
lead to faster economic growth in these developing
countries because increased human capital
would increase productivity and there would
be external effects from greater knowledge in
the country.
Second, increased educational opportunities
for young women may lower the population
. ANSWER:
a. Individuals with higher incomes have better access to
clean water, medical care, and good nutrition.
b. Healthier individuals are likely to be more productive.
. ANSWER:
a. If output is rising and the number of workers is declining, then
output per worker must be rising.
CHAPTER 26
SAVING, INVESTMENT, AND
THE FINANCIAL SYSTEM
S=I
For each of the following pairs, which bond would you expect to pay a
higher interest rate? Explain.
a. a bond of the U.S. government or a bond of an eastern European
government
b. a bond that repays the principal in 2013 or a bond that repays the
principal in 2030
c. a bond from Coca-Cola or a bond from a software company you run
in your garage
d. a bond issued by the federal government or a bond issued by New
York State
ANSWER:
a. The bond of an eastern European government would pay a higher
interest rate than the bond of the U.S. government because there
would be a greater risk of default.
b. A bond that repays the principal in 2030 would pay a higher interest
rate than a bond that repays the principal in 2013 because it has a
longer term to maturity, so there is more risk to the principal.
c. A bond from a software company you run in your garage would pay
a higher interest rate than a bond from Coca-Cola because your
software company has more credit risk.
Many workers hold large amounts of stock issued by the firms at which
they work. Why do you suppose companies encourage this behavior?
Why might a person not want to hold stock in the company where he
works?
ANSWER:
Companies encourage their employees to hold stock in the company
because it gives the employees the incentive to care about the firms
profits, not just their own salary. Then, if employees see waste or see
areas in which the firm can improve, they will take actions that benefit
the company because they know the value of their stock will rise as a
result. It also gives employees an additional incentive to work hard,
knowing that if the firm does well, they will profit.
But from an employees point of view, owning stock in the company
for which she or he works can be risky. The employees wages or
salary is already tied to how well the firm performs. If the firm has
trouble, the employee could be laid off or have her or his salary
reduced. If the employee owns stock in the firm, then there is a double
whammy the employee is unemployed or gets a lower salary and the
value of the stock falls as well. So owning stock in your own company
is a very risky proposition. Most employees would be better off
factory.
a. Assuming that Intel needs to borrow money in the bond market,
why would an increase in interest rates affect Intels decision
about whether to build the factory?
b. If Intel has enough of its own funds to finance the new factory
without borrowing, would an increase in interest rates still affect
Intels decision about whether to build the factory? Explain.
ANSWER:
a. If interest rates increase, the costs of borrowing money to build
the factory become higher, so the returns from building the new
plant may not be sufficient to cover the costs. Thus, higher
interest rates make it less likely that Intel will build the new
factory.
b. Even if Intel uses its own funds to finance the factory, the rise in
interest rates still matters. There is an opportunity cost on the use
of the funds. Instead of investing in the factory, Intel could invest
the money in the bond market to earn the higher interest rate
available there. Intel will compare its potential returns from
ANSWER:
a. Figure 2 illustrates the effect of the $20 billion increase in government
borrowing. Initially, the supply of loanable funds is curve S1, the equilibrium
real interest rate is i1, and the quantity of loanable funds is L1. The increase
in government borrowing by $20 billion reduces the supply of loanable
funds at each interest rate by $20 billion, so the new supply curve, S2, is
shown by a shift to the left of S1 by exactly $20 billion. As a result of the
shift, the new equilibrium real interest rate is i2. The interest rate has
increased as a result of the increase in government borrowing.
b. Because the interest rate has increased, investment and national saving
decline and private saving increases. The increase in government
borrowing reduces public saving. From the figure you can see that total
loanable funds (and thus both investment and national saving) decline by
less than $20 billion, while public saving declines by $20 billion and private
saving rises by less than $20 billion.
c. The more elastic is the supply of loanable funds, the flatter the supply
curve would be, so the interest rate would rise by less and thus national
saving would fall by less, as Figure 3 shows.
Figure
4
ANSWER:
d. The more elastic the demand for loanable funds, the
flatter the demand curve would be, so the interest rate
would rise by less and thus national saving would fall by
more, as Figure 4 shows.
e. If households believe that greater government borrowing
today implies higher taxes to pay off the government debt
in the future, then people will save more so they can pay
the higher future taxes. Thus, private saving will increase,
as will the supply of loanable funds. This will offset the
reduction in public saving, thus reducing the amount by
which the equilibrium quantity of investment and national
saving decline, and reducing the amount that the interest
rate rises.
If the rise in private saving was exactly equal to the
increase in government borrowing, there would be no shift
in the national saving curve, so investment, national saving,
to be continued