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Problem Set 3
Econ 101
1. Answer the following questions given the circular flow diagram below. Show all your work and how you got your answers, that is, the formulas you used. 20 90 50 100 - Calculate the following things: a) Aggregate expenditure b) Government budget deficit c) Government saving d) Household saving e) Firm’s borrowing f) Aggregate income g) National saving h) GDP i) Foreign countries' borrowing from the domestic country
2. On the diagram below label clearly in the appropriate place the following: a) the four economic agents b) the three economic markets c) the following economic activities: Investment(I), Consumption Expenditure(C), Household Saving(S), Net Exports (EX-IM), Net Taxes (T), Government Spending (G), Aggregate Income (Y) 3. Which of the following transactions would not be counted in GDP? Explain your answers carefully. a. General Motors issues new shares of stock to finance the construction of a plant. b. General Motors builds a new plant. c. Company A successfully launches a hostile takeover of Company B, in which it purchases all the assets of Company B. d. You buy a new copy of a textbook. e. You buy a used copy of a textbook. f. You rent your copy of a textbook to your roommate for a semester. g. The government pays out social security benefits. h. A public utility installs new antipollution equipment in its smokestacks. i. Papa John's Pizza buys 30 pounds of mozzarella cheese, holds it in inventory for a month, and then uses it to make pizza, which it sells. j. You spend the weekend cleaning your apartment. k. A drug dealer sells $500 worth of illegal drugs. 4. To earn full credit for this question make sure to show all math calculations and formulas. a) Calculate the CPI for 1993, 1994, and 1995 given the following information. Use 1993 as the base year. The basket of goods consists of 5 cans of soda pop, 3 suits dry cleaned, and 1 washing machine. The prices per unit for the years are given in the table below. Good Price in 1993 Price in 1994 Price in 1995 5 sodas 1.00 1.25 1. 3 suits dry cleaned 7.00 6.50 7. 1 washing machine 400.00 405.00 425. b) What is the inflation rate from 1994 to 1995?
TABLE 1
Motherboard $ Hard Drive $ RAM chips $ Modem $ CD-ROM drive $ Misc. $
- Table 1 shows the cost of the intermediate goods used to produce a $1,500 computer. The total value of output that would be recorded in GDP is a. $1,500. b. $900. c. $2,400. d. $600. e. $1,800.
- Which of the following statements is true? a. There are three different ways to measure GDP. Though they are all based on the same way of thinking about GDP, they give different answers to how much GDP is. b. There are three different ways to measure GDP. Though they all provide different ways of thinking about GDP, they give the same answer to how much GDP is. c. There are three different ways to measure GDP. They are all based on the same way of thinking about GDP and they all give the same answer to how much GDP is. d. There are three different ways to measure GDP. They all provide different ways of thinking about GDP as well as different answers to how much GDP is.
- A computer dealer at the beginning of the month has 20 computers and receives and additional 35 computers during the month. If at the end of the month the computer dealer has 15 computers in stock, then inventory investment for this month would be a. minus 5 computers. b. minus 15 computers. c. plus 5 computers. d. plus 15 computers. e. plus 35 computers.
- Transfer payments a. are excluded from government purchases and GDP. b. are included in government purchases but excluded from GDP. c. are included in government purchases and in GDP. d. are excluded from GDP but included in government purchases. e. are excluded from government purchases but included in GDP.
- If IBM manufactures a computer in the United States and sells it to a French business firm in Paris, it will cause an increase in a. government expenditures. b. consumption. c. net exports. d. both investment and net exports. e. imports.
- Which of the following statements is true? a. Depreciation is part of capital income. b. Depreciation is included in profits. c. Net investment includes depreciation. d. Depreciation is part of GDP. e. Gross investment does not include depreciation.
- Value added can be determined by a. summing the market values of all intermediate goods. b. calculating the percentage change in GDP from one year to the next. c. adding the income of all consumers during the year. d. subtracting the cost of the intermediate goods from the price of the product at each stage of production. e. dividing GDP by the GDP price deflator. TABLE 2 1993 1994 Price Quantity Price Quantity Stereo 500 75 600 100 Television 200 100 400 150
- According to Table 2, nominal GDP in 1994 equaled a. $120,000. b. $52,500. c. $80,000. d. $115,000. e. $200,000.
- Using 1993 prices, according to Table 2, production in 1994 equaled a. Production cannot be calculated with the given information. b. $160,000. c. $80,000. d. $57,500. e. $85,000.
- If prices were kept constant at 1993 levels, then according to Table 2, production between 1993 and 1994 changed by a. 41 percent. b. 39 percent. c. cannot be calculated with the given information. d. 28 percent. e. 100 percent.
- Which of the following statements is true? a. The CPI does not hold the quantity of goods and services constant when computing the price level. b. The CPI is a byproduct of computing GDP. c. The CPI is based on a fixed quantity of goods and services in the base-year. d. The CPI measures the price of all goods and services included in GDP. e. Services are excluded from the CPI.
