MCE2019: Macroeconomics Term 2 - PGP2019-21

Lecture 4: October 3, 2019

Lecturer: Prof. Kalyan Kolukuluri Topic: Sample Numericals

Note: LaTeX template courtesy: UC Berkeley EECS dept.

Disclaimer: These notes may be distributed outside this class only with the permission of the Instructor.

4.1 Sample Questions-Income Accounting

Question 1.
Classify the following economic variables as Stocks or Flow

a) A person’s assets (wealth) b) A person’s annual saving

c) Number of new MBA graduates this year d) Goverment’s budget deficit
e) Government Debt

Question 2.
A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat in to flour
and then sells the flour to a baker for $3.00 . The baker uses the flour to make bread and sells the bread
to an engineer for $6.00. The engineer eats the bread. What is the value added by each person? What is
GDP?

Question 3.
The three approaches to measuring economic activity are the

a) Cost (and thus value added), Income, and ex- b) Product, Income and expenditure approaches
penditure approaches
c) Consumer, business and government approaches d) Private, public and International approaches

Question 4.

Table 4.1:
Base year Current Year
Goods/Services Price Quantity Price Quantity
Apples 2 40 3 60
Oranges 8 90 10 150
Pineapples 80 100 90 110
Guavas 70 120 80 130

Using Table 4.1, answer the following:

4-1
4-2 Lecture 4: October 3, 2019

a) What is the Nominal GDP in the both years?

b) What the Real GDP in the both years, calculated at Base year prices?
c) What is the growth rate in Nominal and real GDP?
d) What is the GDP Deflator?

Question 5.

Table 4.2:
Year Output Price Output Price (Mo-
(Cars) (Cars) (Motorcy- torcycles)
cles)
2014 300 1000 70 200
2015 300 1500 80 250
2016 500 2000 100 300

Using Table 4.2, answer the following:

a) What is the Real GDP in 2015 and 2016, taking 2014 as the base year for prices.?
b) What is the GDP deflator for 2015 and 2016?
c) What is the CPI, if we take 2014 as the base year for consumption basket?
d) Compare the inflation rate between 2015 and 2016 based on GDP deflator and the CPI.

Question 6.

Year Output Price Output Price Output (T- Price (T-

(Video (Video (Milk) (Milk) Shirts) Shirts)
games) games)
2007 320 33 4500 2.5 600 23
2008 315 34 4600 2.8 800 25
2009 300 39 6000 3 900 22

Calculate real GDP for years 2007 through 2009 from the information in the table above. GDP deflator in
2007 equals 100.

Question 7.

a) Calculate the Real GDP for all years with 2005 year prices as base. Further calculate growth rate in
GDP using this information?
b) Calculate the Real GDP for all years with 2006 year prices as base. Further calculate growth rate in
GDP using this information?
c) Compare the growth rates between 2004-2005 and 2005-2006 using the information calculated in part
a and part b. Are they different or same?
Lecture 4: October 3, 2019 4-3

Question 8.
Assume GDP is | 6000, personal disposable income | 5100, the government budget deficit is | 200. Con-
sumption is | 3800 and trade deficit is | 100. Assuming, no transfers and no net labor or capital income
from abroad (TR=0;NIRW=0). Answer the following?

a) What is Saving and Investment?

b) What is the value of Net Exports

c) How large is Govt Spending?

Question 9.
Consider a closed economy operating at full productive capacity (long-run) described by the following equa-
tions: Y = C + I + G
Y = 2, 000; G = 1, 000; T = 800; C = 250 + 0.75(Y − T ); I = 1, 000 − 100(r) Where Y is real GDP, G=Govt.
Expenditure; C=Consumption by HH; I =Investment by firms; T=Net Taxes imposed on HH.

a) In this economy, compute private saving, public saving and national saving.

b) Find the equilibrium interest rate.

c) Now suppose that G (Govt. expenditure) rises to 1,250. Compute private saving, public saving and
national saving.

d) Find the new equilibrium interest rate

Question 10.
Consider a open economy operating at full productive capacity (long-run) described by the following equa-
tions: Y = C + I + G + N X
Y = 8, 000; G = 2, 500; T = 2, 000; C = 500 + (2/3)(Y − T );
I = 900 − 50(r∗); N X = 1, 500 − 250(); where r* = real interest rate = world interest rate =8 &  is real
exchange rate. In this economy, compute the following:

a) Private saving, public saving and national saving; b) Trade position and equilibrium exchange rate.