ASSIGNMENT 1

Chap 10
Problem 6:
a. The growth rate of nominal GDP: 100 x [(15.676 /10.642)1/ 10 -1] = 3.949%
b. The growth rate of the GDP deflator: 100 x [(115.4 /92.2)1/ 10 -1] = 2.27%
c. Real GDP in 2002 measured in 2005 prices: (10.642/ 92.2) x 100 = 11.542
d. Real GDP in 2012 measured in 2005 prices: (15.676/115.4) x 100 = 13.584
e. The growth rate of real GDP: 100 x [(13.584 /11.542)1 /10 -1] = 1.642%
f. The growth rate of nominal GDP is higher than the growth rate of real GDP (3.949 >
1.642) because of inflation.
Problem 8:
a. GDP is the market value of the final good sold (as bread is the only final product). The
GDP is $180.
b. Value added by farmer = $100
Value added by miller = 150 – 100 = $50
Value added by baker = 180 – 150 = $30
c. The sum of value added of three producers is $180
It is equal to GDP. This suggests that GDP could be calculated as the sum of the value
added by all producers.

Chap 11:
Problem 5:
a. 2014 basket price = (1 x $40) + (3 x $10) = $70
2015 basket price = (1 x $60) +( 3 x $12)= $96
70
2014 CPI = x 100 = 100
70
96
2015 CPI = x 100 = 137.14
70
% change in price level = 137.14 – 100 = 37.14%
b. 2014: Nominal GDP = (10 x 40) + (30 x 10) = $700
Real GDP = (10 x 40) + (30 x 10) = $700
700
GDP deflator = x 100 = 100
700
2015: Nominal GDP = (12 x 60) + (50 x 12) = $1320
Real GDP = (12 x 40) + (50 x 10) = $980
1320
GDP deflator = x 100 = 134.69
980
% change in price using GDP deflator = 134.69 – 100 = 34.69%
 c. The inflation rate is not the same using 2 methods. When we calculate CPI using the
given basket of goods, that is constant among the 2 years. When we determine the GDP
deflator the total amount of goods for both years are included in the calculations. The
GDP deflator method gives us a more dynamic look at the inflation rate based on the
changing prices and quantities.

Problem 8:
a. If the elderly consume the same market basketas other people, Social Security does
provide the elderly with an improvement in their standard of living. Social Security
payments are increased each year based on increases in CPI and again if CPI is
overstating inflation, the elderly benefits of Social Security are getting an imrproved
standard of living each year.
b. In order to determine if elderly people are truly better off we can make a separate CPI for
elderly people based on their unique market basket. We can then use changes in CPI to
compare against changes in Social Security benefits from year to year. This will give us a
better idea if the elderly are better off each year.

Chap 12:

Problem 3:
a) - Private spending represent consumption would be household consumptions on goods
and services. The consumption on goods includes durable goods such as automobiles and
refrigerator and non durable goods such as food. The consumption on services is the
consumption on education, travel agencies, etc.
Private spending represent investment would be spending on housing.
- As far as national income is concerned, the cost of education is categorized as
consumption. On th other hand, the result of education is to accumulate higher quality of
human capital when graduated. Thus, tuition can also be viewed as an investment on
future human capital.
b) - Government consumption spending includes paying salary for workers,..
Government investment spending includes buying military equipment and building roads.
- Health programs for the elderly are consumptions, whereas those for the young are
investment. Because the young uses healthcare less than the elderly do, the expense on
the young are for their future use, or for increase their human capital. Healthcare for the
elderly is consumed today and do not produce more goods and services.
Problem 5:
a) It was better for the United States to receive this foreign investment than not to receive it
in the way that made the capital stock larger.
b) It would have been better still for Americans to have made this investment in the way
they would have received the returns on the investment themselves
Chap 13:

Problem 8:
a) Interest rate S1
S

I1
I

D
Quantity of loanable funds
Q1 Q

The interest rate rises

b) National savings decreases by less than $20 billion (1) (Q1 is not quite Q – $20 bil
because S curve and D curve intersect at different point. Q – $20 is further to the left of x
axis)
We have: Nation savings = Investment so Investment also decreases by less than $20
billion.
Public savings decrease by exact $20 billion (2)
We have: National savings = Public savings + private savings (3)
(1),(2),(3) => Private savings increases by less than $20 billion
c) The more elastic the supply curve is, the responding interest rate changes will be smaller
based on changes in Q. If the supply curve is more ineplastic, the responding interest rate
changes will be larger.
d) If the demand curve is more eplastic, the changes in Q will lead to smaller changes in
interest rate. And If the demand curve is more ineplastic, the changes in Q will lead to
larger changes in interest rate.
e) If people are worried about paying higher taxes in the future, they will start to save more
money instead of using it for consumption. The belief will increase public savings and
the increase in public savings increase the supply of loanable funds.
 The increase in the supply of loanable funds will reduce the interest rate rising, reduce
Problem 9:
a) It is difficult to implement both of these policies at the same time because the
government usually needs to increase taxes to reduce the budget deficit. In order to pay
all the money the government has borrowed, it is the easiest way of generating revenue
for a government in a democracy.
b) In order to determine which policy is better for raising investment, you would want to
know how responsive private saving is to tax cuts. A reduction in taxes on pricate saving
increases the ability of saved income to invest. But how much amount of private savings
will be available for investment after tax reduction depends on the elasticity of private
saving with respect to after-tax interest rates. If it is more elastic, more savings will be
available for investment. So, private savings will be more effective if it is more elastic.
Moreover, on should also consideer the responsiveness of private savings to any change
in government budget deficit. If budget deficit is reduced and private savings respond by
a simultaneous decline – national savings will fall; thus affecting the investment level.

Chapter 15:
Problem 8:
a) If workers in auto and aircraft industries require the same amount of training, the
workers can choose either of two industries. It is expected that the wages beteween
the two industries would be same . It would continue as long as the equal number
of workers go these industries and as long as the right demand for this workers
type is satisfied.
b) If the economy opens to international trade and begins importing autos, the
demand for labor in the auto manufacturing would fall.
If the economy opens to international trade and begins to export aircraft, there
would be an increase in the demand for labor in the aircraft industry.
c) If the workers of one industry could not be quickly retrained for the other, the the
shift in the demand would result in the increase in the aircraft industry and the
wages in the auto industry would fall in the short run. In the long run, due to the
high wages, more and more new workers join the aircraft industry and hence the
wages would fall until wages are equal across the two industries.
d) If for some reaon, the wages fail to adjust to the new euqilibrium, the there would
be a deficit or shortage of workers in aircraft industry and surplus of workers in
auto industry resulting in unemployment.
Problem 9:
S
Wage S1
W

W1
D

D1
Quantity

a) This new mandatory employee benefit will decrease the demand for labor essentially by
the $4 it costs for the new benefit. W1 is the new wage which is going to be W - $4
b) The value of this benefit to the employee will be $4 which means that wages can decrease
by $4 and employees will still be willing to work. This means that the supply will
increase for labor and the supply curve will shift to the right (S1)
c) If the wage can freely adjust to balance supply and demand, we can that the quantity of
labor will not change, but the wage does decrease, the new wage can be represented as W
- $4. The demand curve shifts to the left whild the supply curve shifts to the right. Both
the employer and employees would be better off as a result of these changes.
d) If the wage in this market was only $3 above minimum wage,then the employers won’t
be able to substract $4 from the wages of the workers to adjust for the new health benefit.
This would decrease the demand for labor which would reduce the level of employment
and increase the level of unemployment.
e) The supply curve will not shift right if the employees do not value the mandated benefit
because employees will not be more incentivized to join this workforce. The result of this
will not be a lower equilibirum quantity of workers, and wage rate that will decline by
less than 4. Employees will be worse off because of the lower wages, while the
employers will be worse off because of the necessay benefits that workers don’t value
and lower supply of workers.

Chap 16:
Problem 8:
1
a) The money multiplier is = 10. The excess reserve ratio cannot charge.
0,10
 The Fed sells $1 million of bons, reserves will be decreased by $1 million and the money
supply will contract by 10 x $1 million = $10 million.
b) Banks might wish to hold other addditional reserves if they need to hold the reserves for
their day-to-day operations, such as paying other banks for customers’transactions,
making charge, cashing paychecks,..
If banks increase excess reserves such that there is no overall change in the total reserve
ratio, then the money multiplier does not change and there is no effect on the money
supply.
Problem 11:
a) If people hold all money as currency, the banks will have no money to loan out. The
quantity of money will be exactly $2000.
b) If people hold all money as demand deposits and banks maintain 100 percent
reserves, that means no money is being used to loan out. If this is the case, then the
quantity of money is exactly $2000.
c) If people hold equal amounts of currency and demand deposits and banks maintain
100 percent reserves, no new money is being created so the quantity of money is still
exactly $2000.
1
d) Money supply = money multiplier x reserves = x $2000 = $20000
0,1
e) Deposits = money multiplier x ($2000 – Currency)
But Deposits = Currency
So Deposits = 10 x ($2000 – Deposits)
Deposits = $20000 x 10Deposits => Deposits = $1818 = Currency
Total quantity of money is Deposit + currency =$3636