Deniz Taha Kenger- 2021302045

EC 205 Macroeconomics-Problem Set 1

1. Data of Macroeconomics
a. Define nominal gross domestic product (GDP) and real GDP. Briefly explain how the two differ.
Is GDP a stock or a flow variable? Which of the two is a better indicator for measuring
economic performance? Is any of the two a good indicators for comparing the standard of
living across countries? Why?

Answer:

Nominal GDP is something that measures nominal values for all of the goods and services produced
in a country. Real GDP is something that measures all of the goods and services produced in a
country. They are different because all goods and s ervices have changing prices over the years. In
base year, nominal GDP equals real GDP. Two graphs intersect just one time if there is no deflation.
GDP is a flow variable because it demonstrates us only certain period of time such as one year. Real
GPD is a better indicator for measuring economic performance. Real GDP is a good indicators for
comparing the standard of living across countries because the more you produce, the more you
consume. Consuming is good because it makes you happy and better.

b. What does “per capita” mean? Define nominal GDP per capita and real GDP per capita. Which
of the two is a better indicator for measuring economic performance? Is any of the two a good
indicators for comparing the standard of living across countries? Why?

When a statistic or measurement is labeled "per capita," it signifies the data has been normalized or
modified to account for population size. Nominal GDP (Gross Domestic Product) is a country's total
economic output in current market prices. It does not take into account inflation or price increases.
Nominal GDP per capita is computed by taking a country's nominal GDP and dividing it by its total
population. Real GDP is a country's total economic output adjusted for inflation or price fluctuations.
It is the monetary value of products and services generated at fixed prices during a given time
period. Real GDP per capita is computed by taking a country's real GDP and dividing it by its total
population. Real GDP per capita is a better indicator for measuring economic performance. Real GDP
per capita is a good indicator for comparing the standard of living across countries. Real GDP per
capita is increasing with Real GDP. We can see that if real GDP increases, the well being of society
increases because of consumption of more and more goods and services.

c. What is “purchasing power parity” (PPP)? What is PPP-adjusted GDP per capita? Is it a good
indicator for comparing the standard of living across countries? Why? Are there other good
indicators for comparing the standard of living across countries? If so, give an example and
briefly explain how it differs from PPP-adjusted GDP per capita.

Purchasing Power Parity (PPP) is an economic theory and approach used to assess the relative value
of currencies across countries in terms of their ability to purchase a standard basket of goods and
services. PPP-adjusted GDP per capita is a measure of a country's economic production per person
that accounts for differences in living costs and pricing levels between countries.
d. For Turkey and five other countries of your choice:
1. Real GDP

2. Nominal GDP
3. Real GDP per capita

4. Nominal GDP per capita

2. Commanding Heights

Episode 1

Q.1) What are the commanding heights of the economy, according to Lenin?

a) Steel, railroads, coal, and heavy industries.

b) The central bank, commercial banks, and financial institutions.

c) Governments, firms, households.

d) All of the above

e) None of the above.

Q.2) Which is/are the emphasis(es) of the Chicago School of Economics?

a) Strong belief in minimal government. An emphasis on the free market as a way to control the
economy.

b) Strong belief in central planning and government interference in the market to control the economy.

c) Strong belief in mixed economies and government regulation on the market to control the economy.

d) Strong belief in continuously imitating the best economic performance in the world.

e) None of the above

Q.3) Which event was the best demonstration of the Keynesian ideas?

a) World War 1 and the aftermath of WW1

b) World War 2 and the aftermath of WW2

c) The collapse of the USSR

d) First years of the Reagan and Thatcher governments

e) None of the above

Q.4) According to Margaret Thatcher, “How the spirit of enterprise had been sat apart for years”?

a) By too-high taxes

b) By too-high regulations

c) By too-high public expenditure

d) All of the above

e) None of the above

Q.5) What are the reasons for 364 economists writing to the “Times Magazine” and blaming Margaret
Thatcher as saying, “This is outrageous. Will you put us into a deep depression from a recession?
a) Squeezing government spending

b) Cutting subsidies to business

c) Causing thousands of bankruptcies and higher unemployment

d) Not following conventional Keynesian politics by using government money to lessen the pain of
unemployed people and small businessmen.

e) All of the above

Q.6) What are the components of Reaganomics?

a) (The concept of) sound money, deregulation, modest tax rates, and limited government spending.

b) Government interference, social security benefits, high government spending, and high tax rates.

c) Minimal government, tax cuts, moderate government spending, regulation.

d) Central planning, highest tax rates, regulation, no private property.

e) None of the above.

Episode 2

Q.7) In the 1980s Soviet Union’s government deficit was covered with the help of

a) Direct taxes

b) Indirect taxes 4

c) Oil revenues

d) All of the above

e) None of the above

Q.8) Why did Russia not implement the Chinese model of “market socialism”?

a) Unlike China, Russia was urbanized and heavily industrialized

b) Unlike Russia, China had a non-state sector of 1%

c) Russia had greater political uncertainty.

d) All of the above

e) None of the above

Q.9) What are the main problems of the countries that switched from centrally-planned economies into
free market economies?

a) Very high inflation rates

b) High unemployment
c) The increasing gap between poor and rich

d) Stagflation

e) All of the above

Q.10) Which country in South America had hyperinflation because its government used to spend 30
times more than the tax revenues?

a) Chile

b) Argentina

c) Bolivia

d) Peru

e) Paraguay

My Questions

Q1)Which year Lenin declared that free market is abolished?

a-1919

b-1920

c-1921

d-1922

e-1923

Q2) What does Hayek think about government planning?

a- He thinks government planning would reduce inflation rate.

b- He thinks government planning would increase GDP.
c- He thinks government planning would give power to government. Thus, they can be
authoritarian.
d- He thinks government planning would end poverty.
e- None of the above

Q3) Which leader launch an economic program called Perestroika?

a- Lenin
b- Stalin
c- Gorbachev
d- Putin
e- Yeltsin
3. The 1920-21 Depression, Narrative Economics and Animal Spirits (20 points) The United States
economy experienced a volatile episode between 1920 and 1921. This depression of 1920– 1921 is not
a well-known one, and there has been only limited research in understanding its causes. Milton
Friedman argues that the Federal Reserve is to be blamed for it. Robert Shiller (2017) disagrees with
this view and argues otherwise in his article: Narrative Economics. According to Shiller (2017), what
caused this depression? What is “narrative economics,” as Shiller refers to it? How does it relate to the
notion of “animal spirits” (coined by John Maynard Keynes and discussed in detail by George Akerlof
and Robert Shiller in their book “Animal Spirits”)?

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