Macroeconomics Assignment 1

Group Members

 Rameez Muhammad Ahsan

 Hamza Omar Iqbal

1: GDP factors in the total income produced domestically whereas GNP measures the
total income earned by residents of a nation regardless of where they are located in the
world. Suppose a French resident owns a bakery in Berlin, the income he earns from the
bakery is part of German GDP because it is earned in Germany. This income is also a
factor payment to abroad which would make it not part of the German GNP.

2: Growth rate of money supply + growth rate of velocity = growth rate of inflation rate
+ growth rate of ouput

15 + 0 = (nominal rate/4) + 8

Nominal interest rate = 28%

3:
(28/4) x 100

GDP deflator = 700%

4:
a) 3 million people in the labor force
b) 66.7% unemployment rate
c) 100% participation rate

5:
ΔS = ΔY – ΔC – ΔG
 ΔS = ΔY – MPC(ΔY-ΔT) – ΔG
ΔS = ΔY –0.8(ΔY-ΔT) – ΔG
ΔS = 0.2ΔY + 0.8ΔT – ΔG
a) -100 = ΔS
b) 30 = ΔS
c) 50 x 10 = 500
0.2 x 500 = 100
100 = ΔS
d) 0.8 x 50 =
40 = ΔS

6:

a) F ( K , L )=K 2 L does not depict decreasing marginal product of labor (MPL = K2)
b) F ( K , L )=2 K +4 L does not depict decreasing marginal product of labor (MPL = 4)
c) F ( K , L )=K α Lβ , β >1 does not depict decreasing marginal product of labor (MPL =
βKαLβ-1 β>1)
d) F ( K , L )=K 3 L0.5 depicts decreasing marginal product of labor (MPL = 0.5K3L-0.5)
L 1
e) F ( K , L )= does not depict decreasing marginal product of labor (MPL = )
K K

7: a)
b)
Year Cost of basket($) CPI Inflation rate
2010 800 100 N/A
2011 850 106.25 6.25%
c) 2012 750 93.75 -11.76%
d) 2013 1050 131.25 40%
e) 2014 1350 168.75 28.57%
f)

Year Nominal GDP ($) Real GDP($) GDP deflator Inflation Rate
2010 800 800 100 N/A
2011 1625 1600 101.6 1.6%
2012 645 740 114.7 12.9%
2013 1890 1440 131.25 14.4%
 2014 2400 1440 166.7 27%

g) Both of the sets of inflation rates are vastly different from each other and the
inflation rates of CPI being overstated which will cause problems for authorities who
monitor the CPI index in making monetary policies

8) An increase in MPC would result from consumption of a particular good having

been increased and a higher average income.

9) ΔS = ΔY – ΔC – ΔG
ΔS = ΔY – MPC(ΔY-ΔT) – ΔG
ΔS = ΔY –0.9(ΔY-ΔT) – ΔG
ΔS = 0.1ΔY + 0.9ΔT – ΔG

a) 90 = ΔS
b) -50 = ΔS
c) -15 = ΔS
d) Y = (MPL × L) + (MPK × K ) + Economic Profit.
Y = (MPL × L) + (20 × 15 ) + Economic Profit.
300 x 0.1 = 30
30 = ΔS
e) Y = (MPL × L)
= ( 5 x -20)
= 0.1 x -100
= -10 = ΔS