Econ 2010: Assignment 1

1. Consider the following table:

Period Nominal GDP(PY) % Change in PY P %Change in P Y %Change in Y

1 100 1.00 100

2 1.02 103

(a) Calculate the % changes in Y and P between periods 1 and 2. Also complete columns 3 and 7 above.

(b) Using the formula in the text, calculate the % Change in PY (in the second period).

(c) Calculate the nominal GDP in Period 2. Use the formula for % Change in PY to calculate the % Change in P.

2. In the national income accounts, educational expenditures are treated as part of C. Why do some economists argue that it should be treated as investment? Explain.

3. For each of the following transactions, indicate whether it represents an increase in the Canadian GDP. Also state whether they represent C, I, G or NX (net exports):

• You buy a used computer.

• You buy 100 shares of GM stock.

• GM’s inventories rise by 2000 cars.

• Jim receives a cheque from the CPP.

4. According to Okun’s Law the unemployment rate falls by about 1 percentage point when GDP rises by about 2 percentage points. Why does unemployment respond less than one-for-one with GDP increases?

5. Say John buys a new home for $300,000 and borrows the entire amount from the bank. He pays $15,000 in interest on the mortgage in the first year. The house would rent for $1000 a month. How are these transactions included in the national accounts?

6. If you had to choose only one measure to represent the level of economic well-being in a country, which of the following would you chose? Why?

• Real GDP per capita

• Literacy rate

• Infant mortality rate

• Life expectancy

• Degree of income inequality.

7. Say the economy is described by the following equations:

C = 80 + 0.8Yd; I = 100 – 10r (where I is investment and r is the rate of interest); G = 200;

Md = 20 – 2r (money demand) and Ms = 10 (money supply); T (taxes) = 5

• Calculate the level of investment in the economy.

• Calculate the equilibrium GDP

8. Why does the discouraged worker effect influence the unemployment rate more than the employment rate? Explain briefly.

9. Consider the Cobb-Douglas production function:

Y = 60K1/3 L2/3

• What is the level of Y when K=64 and L=8?

• Find the numerical value of MPk for the above values of K and L.

• Find the numerical value MPL .

• Show that this production function satisfies Euler’s theorem.