Macro Economics

Numerical problem solving exercises

Contents
Chapter 2: Measuring National Output and National Income..............................................................1
National Accounts...................................................................................................................................1
Nominal & Real GDP..............................................................................................................................3
Chapter 3: Unemployment........................................................................................................................4
Chapter 4: Inflation...................................................................................................................................6
Chapter 7: Equilibrium.............................................................................................................................7
The Aggregate Output / Aggregate Expenditures Approach to Equilibrium............................................7
The Saving / Investment Approach to Equilibrium..................................................................................8
Chapter 8: Fiscal Policy............................................................................................................................9

Chapter 2: Measuring National Output and National Income

National Accounts

2.1. The table below contains the national income and product accounts data on the
Bananaland economy. Quantities following are given in millions of Bananaland
dollars (B$). Use this information to calculate the following:

Transfer payments 15 dividends 4

Subsidies 5 Indirect taxes 20
Social insurance payments 35 Exports 60
Depreciation 50 Net private domestic investment 100
Receipts of factor income from the 4 Personal taxes 60
rest of the world
Government consumption and 75 Corporate profits 45
investment
Imports 50 Personal consumption expenditures 250
Payments of factor income to the rest 5 Personal interest income from 35
of the world government and households
A. Gross private domestic investment
Gross private investment = Net private investment + Depreciation =
100 + 50 = 150

B. Net exports

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 Net exports = Exports - Imports = 60 – 50 = 10

C. Gross domestic product

GDP = Personal consumption expenditures + Gross private investment
+ Government purchases + Net exports = 250 + 150 + 75 + 10 = 485

D. Gross national product

GNP = GDP + (Receipts of factor income from the rest of the world
- Payments of factor income to the rest of the world) = 485 + (4 - 5) = 484
E. Net national product
NNP = GNP - Depreciation = 484 - 50 = 434

F. National income
National income = NNP - (Indirect taxes - Subsidies) = 434 - (20 - 5) = 419

G. Personal income
Personal income = National income - (Corporate profits - Dividends) - Social
insurance payments + Personal interest income + Transfer payments =
419 - (45 - 4) - 35 + 35 + 15 = 393

H. Disposable personal income

Disposable personal income = Personal income - Personal taxes =
393 - 60 = 333

2.2. Table 6.7 contains the national income and product accounts data on the Freedonia
economy. Quantities following are given in millions of Freedonian dollars (F$). Use
this information to answer Parts (a) through (g) below.

ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
ÄÄ
Depreciation 168.0
Compensation of employees 1,407.7
Corporate profits 257.6
Dividends 78.4
Exports 212.8
Government purchases 716.8
Imports 235.2
Indirect taxes 593.6
Net interest income 182.2
Net private domestic investment 784.0
Personal consumption expenditures 2,203.2
Personal interest income 112.0
Receipts of factor income from the rest of the world 35.2
Personal taxes 627.2

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Proprietor's income 173.9
Payments of factor income to the rest of the world 68.8
Rental income 34.1
Social insurance payments 380.8
Subsidies 44.8
Transfer payments 504.0

Table 6.7

(a) Gross private investment = 952.0.

(b) net export
(c) GDP = 3,849.6.
(d) GNP = 3,816.0.
(e) NNP = 3,648.0.
(f) National income = 3,099.2.
(g) Personal income = 3,155.2.
(h) Disposable personal income = 2,528.0.

Nominal & Real GDP

2.3. The table below contains data on the “Banana Island”. The economy only produces food and
computers. Use this information to answer the following questions:
Food Computers
Year
Quantity Price Quantity Price
2006 3000 Dhs 2 50 Dhs 10
2007 3300 Dhs 2.30 40 Dhs 11

A. Calculate nominal GDP for 2006.

Nominal GDP for 2006 = (Qf6 x Pf6 ) + (Qc6 x Pc6 )
= (3000 x Dhs 2) + (50 x Dhs 10) = Dhs 6500.

B. Calculate nominal GDP for 2007.

Nominal GDP for 2007 = (Qf7 x Pf7 ) + (Qc7 x Pc7 )
= (3300 x Dhs 2.30) + (40 x Dhs 11) = Dhs 8030.

C. Calculate real GDP for 2006, using 2006 as base.

Real GDP for 2006 = (Qf6 x Pf6 ) + (Qc6 x Pc6 )
= (3000 x Dhs 2) + (50 x Dhs 10) = Dhs 6500.

D. Calculate real GDP for 2007, using 2006 as base

Real GDP for 2007 = (Qf7 x Pf6 ) + (Qc7 x Pc6 )
=(3300 x Dhs 2) + (40 x Dhs 10) = Dhs 7000.

E. What was the GDP deflator in 2006, using 2006 as base?

Nominal GDP for 2006 6500

GDP Deflator in 2006 = ×100= × 100=100
Real GDP for 2006 6500
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 F. What was the GDP deflator in 2007, using 2006 as base?

Nominal GDP for 2007 8030

GDP Deflator in 2007 = ×100= × 100=114.7
Real GDP for 2007 7000

G. Calculate the inflation rate in 2007 according to GDP deflator.

GDP Deflator ∈2007−GDP Deflator ∈2006

Inflation rate in 2007 = × 100
GDP Deflator ∈2006

114.7−100
¿ ×100=14.7 %
100

H. Calculate Economic Growth rate in 2007, based on fixed prices of 2006.

Real GDP for 2007−Real GDP for 2006

Economic Growth rate in 2007 = ×100
Real GDP for 2006

7000−6500
= ×100=7.7 %
6500

2.4. The table below contains data on the “Banana Island”. The economy only produces food
and clothing. Use this information to answer the following questions:
Food Clothing
Year
Quantity Price Quantity Price
2006 2000 Dhs 1.00 100 Dhs 6.00
2007 2200 Dhs 1.50 80 Dhs 7.00

A. Calculate nominal GDP for 2006 = 2600

B. Calculate nominal GDP for 2007 = 3860
C. Calculate real GDP for 2006, using 2006 as base = 2600
D. Calculate real GDP for 2007, using 2006 as base = 2680
E. What was the GDP deflator in 2006, using 2006 as base? 100
F. What was the GDP deflator in 2007, using 2006 as base? 144
G. Calculate the inflation rate in 2007 according to GDP deflator = 44%
H. Calculate Economic Growth rate in 2007, based on fixed prices of 2006 = 3%

Chapter 3: Unemployment

3.1. SCENARIO: The nation of Arbez has a population of 3 million citizens in 2020. The
labor-force participation rate is 75%. The number of Arbezanis with jobs is 1,500,000.

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 Answer parts (A) through (H) using the information in the scenario.
A. Calculate the number in the labor force.

Labor force
Labor force participation rate = × 100
population

Labor force = participation rate X population = .75 X 3,000,000 = 2,250,000

B. Calculate the number of unemployed workers.

Labor Force = Employed + Unemployed
Unemployed = Labor force - Employed = 2,250,000 - 1,500,000 = 750,000

C. Calculate the unemployment rate.

Unemployed
Unemployment rate = × 100
Labor force

750 000
= ×100=33.3 %
2250 000
D. Arbez has determined that the natural rate of unemployment is 6%.
Calculate the Cyclical unemployment rate.

Cyclical unemployment rate = Unemployment rate - Natural rate of unemployment

= 33.3 % - 6 % = 27.3 %

E. How many cyclically unemployed workers are there?

Cyclically unemployed = Cyclical unemployment rate X Labor Force
= .273 X 2 250 000 = 614 250
F.The Arbezani economy moves out of a long recession, job openings increase, and 100,000
discouraged workers become "encouraged" and begin searching for a job. Calculate the
new unemployment rate.
When 100,000 new (unemployed) workers enter the labor force, the new
850000
unemployment rate = ×100=36.2 %
2350 000
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

3.2. SCENARIO: The nation of Arbez has a population of 5 million citizens in 2020. The labor-
force participation rate is 50%. The number of Arbezanis with jobs is 2,250,000.
Answer parts (A) through (H) using the information in the scenario.
A. Calculate the number in the labor force.
B. Calculate the number of unemployed workers.
C. Calculate the unemployment rate.
D. Arbez has determined that the natural rate of unemployment is 4 %.
Calculate the Cyclical unemployment rate.

E. How many cyclically unemployed workers are there?

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 F. The Arbezani economy moves out of a long recession, job openings increase, and
60,000 discouraged workers become "encouraged" and begin searching for a job.
Calculate the new unemployment rate.
Answers:
A- 2,500,000 B- 250,000 C- 10% D- 6% E- 150,000 F- 12.1%

Chapter 4: Inflation
4.1 The table below contains data on the “Banana Island”. The economy produces only
three goods A, B, and C. Suppose 2018 is the base year. Use this information to answer the
questions that follow:

Units (Q) Price per unit in (Dhs)

Goods
Purchased in 2018 2017 2018 2019 2020
A 8 2 2 2.1 2.4
B 5 2 2.5 2.5 3
C 3 2.5 3 3.5 4
A. Calculate the cost of the purchased bundle of goods in 2017, 33.5
B. Calculate the cost of the purchased bundle of goods in 2018, 37.5
C. Calculate the cost of the purchased bundle of goods in 2019, 39.8
D. Calculate the cost of the purchased bundle of goods in 2020, 46.2
E. Calculate the price index in 2017, 89.3
F. Calculate the price index in 2018, 100
G. Calculate the price index in 2019, 106.1
H. Calculate the price index in 2020, 123.2
I. Calculate the inflation rate in 2018, 12%
J. Calculate the inflation rate in 2019, 6.1%
K. Calculate the inflation rate in 2020, 16.1%
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
4.2 The table below contains data on the “Banana Island”. The economy produces only
three goods A, B, and C. Suppose 2018 is the base year. Use this information to answer the
questions that follow:

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A. Calculate the cost of the purchased bundle of goods in 2017
B. Calculate the cost of the purchased bundle of goods in 2018
C. Calculate the cost of the purchased bundle of goods in 2019
D. Calculate the cost of the purchased bundle of goods in 2020
E. Calculate the price index in 2017
F. Calculate the price index in 2018, 100
G. Calculate the price index in 2019
H. Calculate the price index in 2020
I. Calculate the inflation rate in 2018
J. Calculate the inflation rate in 2019
K. Calculate the inflation rate in 2020

Chapter 7: Equilibrium

The Aggregate Output / Aggregate Expenditures Approach to Equilibrium

7.1 Suppose consumption function is specified as C = $50 + 0.75Y, investment spending

is $100, and net exports total $35 of a hypothetical economy in 2020. Find algebraically:
A. The equilibrium level of output by equating aggregate output and aggregate spending.
Y = C + I + (X – M)
Y = 50 + 0.75Y + 100 + 35
Y - 0.75Y = 185
0.25Y = 185
185
Y= = 740
0.25
B. Consumption when output is at the equilibrium level.
C = 50 + 0.75 Y
= 50 + 0.75 (740)

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 = 605
C. Saving when output is at the equilibrium level.
Y=C+S
S = Y – C = Y – (50 + 0.75 Y)
= -50 + 0.25Y
= -50 + 0.25 (740) = 135
D. Establish that leakages equal injections at the equilibrium level of output.
Leakages = Injections
S+M=I+X
S = I + (X – M)
135 = 100 + 35
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
7.2 Suppose consumption function is specified as C = $100 + 0.80Y, investment
spending is $150, and net exports total $50 of a hypothetical economy in 2020. Find
algebraically:
Answers: Y:1500, C:1300, S:200
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
The Saving / Investment Approach to Equilibrium

7.3 Suppose saving function is specified as S = - $40 + 0.30Y, investment spending is

$120, gross exports total $60, and gross imports equal $40 of a hypothetical economy in
2020. Find algebraically:
A. The equilibrium level of output by equating leakages and injections.
Leakages = Injections
S+M=I+X
(-40 + 0.30 Y) + 40 = 120 + 60
0.30 Y = 180
180
Y= = 600
0.30
B. Saving when output is at the equilibrium level.
S = -40 + 0.30 Y

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 = -40 + 0.30 (600)
= 140
C. Consumption when output is at the equilibrium level.
Y=C+S
C = Y – S = Y – (-40 + 0.30 Y)
= Y + 40 – 0.30 Y = 40 + 0.70 Y
= 40 + 0.70 (600) = 460
D. Establish that the equilibrium level of output equals aggregate spending.

Y = C + I + (X – M)
= 460 + 120 + (60 – 40)
600 = 600
,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
7.4 Suppose saving function is specified as S = - $50 + 0.20Y, investment spending is
$100, gross exports total $70, and gross imports equal $50 of a hypothetical economy in
2020. Find algebraically:
Answers: Y:850, S:120, C:730

Chapter 8: Fiscal Policy

8.1 Suppose consumption function is specified as C = $200 + 0.70Yd, planned investment

is $200, net taxes are $200, and government spending totals $500 of a hypothetical economy
in 2020. Find algebraically:
A. The equilibrium level of aggregate output by equating aggregate output and planned
aggregate expenditure.
Y=C+I+G
Y = 200 + 0.70Yd + 200 + 500
Y = 200 + 0.70(Y –200) + 200 + 500
Y- 0.70Y= 200 – 140 + 200 + 500
0.30Y = 760
760
Y= = 2533.3
0.30
B. Consumption when aggregate output is at the equilibrium level.
C = 200 + 0.70 Yd
= 200 + 0.70 (2533.3 - 200) = 1833.3

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C. Saving when aggregate output is at the equilibrium level.
Yd = C + S
S = Yd – C = (2533.3 - 200) - 1833.3 = 500

D. Establish that leakages equal injections at the equilibrium level of aggregate output.
Leakages = Injections
S+T=I+G
500 + 200 = 200 + 500
E. A change in equilibrium level of aggregate output if government spending is increased by
$100.
1 1
∆ Y =∆ G × =100 × =333.3
MPS 0.30

F. A change in equilibrium level of aggregate output if net taxes are increased by $100.

−MPC −0.70
∆ Y =∆ T × =100 × =−233.3
MPS 0.30

G. A change in equilibrium level of aggregate output if government spending is increased by

$100 and net taxes are increased by $100 simultaneously.
∆ Y =∆ G ×1=100 ×1=100

H. A change in equilibrium level of aggregate output if government spending is increased by

$100 and net taxes are decreased by $100 simultaneously.
1 −MPC
∆ Y =( ∆ G× )+(∆ T × )
MPS MPS

1 −0.70
(
∆ Y = 100 ×
0.30)(
+ −100 ×
0.30 )
=333.3+233.3=566.6

8.2 Suppose consumption function is specified as C = $500 + 0.85Yd, planned

investment is $400, net taxes are $500, and government spending totals $600 of a
hypothetical economy in 2020. Find algebraically:
A. The equilibrium level of aggregate output by equating aggregate output and planned
aggregate expenditure.
Y = 7166.7
B. Consumption when aggregate output is at the equilibrium level.
C = 6166.7
C. Saving when aggregate output is at the equilibrium level.
S = 500
D. Establish that leakages equal injections at the equilibrium level of aggregate output.
500 + 500 = 400 + 600
E. A change in equilibrium level of aggregate output if government spending is increased by
$100.

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 666.7
F. A change in equilibrium level of aggregate output if net taxes are increased by $100.
-566.7
G. A change in equilibrium level of aggregate output if government spending is increased by
$100 and net taxes are increased by $100 simultaneously.
100
H. A change in equilibrium level of aggregate output if government spending is increased by
$100 and net taxes are decreased by $100 simultaneously.
1233.4

March 2, 2021

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