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ECMB06_Assignment_1_Solutions_(Spring_2008)

# Principles of Macroeconomics (with Xtra!)

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Unformatted text preview: ECMB06 – Assignment 1 - SOLUTIONS Question 1 (25 points; 4, 11, 3, 3, & 4 respectively) – Chapter 2 & 3 A) Year 1 is the base year so nominal = real (for this year) • Nominal GDP (Y = C + I + G + NX) Y = \$ 896,600,000 (1 point) • Nominal private sector consumption (C) C = \$ 560,160,000 (1 point) • Nominal investment (I) I = \$ 226,500,000 (1 point) • Nominal net exports (NX) NX = \$ 74,020,000 (1 point) The most crucial figure on this part of the Asn is Y B) Year 2 Levels Nominal Real GDP \$ 1,064,800,000 \$ 880,000,000 Consumption \$ 606,350,000 \$ 576,650,000 Investment \$ 236,000,000 \$ 209,000,000 Net Exports \$ 170,566,000 \$ 57,642,000 Rates of change Nominal Real GDP 8.25 % 2.94 % Consumption 4.19 %- 7.73 % Investment 130.43 %- 22.13 % Net Exports 18.76 %- 1.85 % Each figure above (0.5 point), for 8 points Nominal GDP has risen while real GDP has fallen between years 1 and 2. This must mean that real physical output has dropped while prices have risen at a faster rate (than real output fell) thus forcing nominal GDP up. (1 point) Both forms of GDP measurement are useful. Nominal GDP measures the value of output in a period in the prices of that period which can be of use. Similarly, real GDP is useful as it constructs the value of output for a period of time in the prices of some base or reference period so that the affect of inflation (i.e. the increase in the average nominal price level) is removed. This allows us to see what output is really being made during that period of time without a distortion due to price change (inflation). Real GDP figures, for different time periods, are thus more comparable and provide a fair(er) picture of what level of output is actually being made. (2 points) ECMB06 Assignment 1 – SOLUTIONS (Spring 2008) 1 C) GDP deflator (PGDP) (1 point) each, for 3 points total 0000 . 1 Re 1 1 1 = = Year Year Year GDP al GDP Nom PGDP 2100 . 1 000 , 000 , 880 00 , 800 , 064 , 1 Re 2 2 2 = = = Year Year Year GDP al GDP Nom PGDP % 21 21 . 00 . 1 00 . 1 21 . 1 1 1 2 or PGDP PGDP PGDP Year Year Year PGDP = - = - = π D) Consumer Price Index (CPI) (1 point) each, for 3 points total 0000 . 1 1 1 1 = = Year Year Year basket cons year base of Cost basket cons year base of Cost CPI 0676 . 1 000 , 160 , 560 000 , 030 , 598 1 2 2 = = = Year Year Year basket cons year base of Cost basket cons year base of Cost CPI % 76 . 6 0676 . 00 . 1 00 . 1 0676 . 1 1 1 2 or CPI CPI CPI Year Year Year CPI = - = - = π E) (real) National Saving & Investment Year 1 Year 2 Real \$ % of GDP Real \$ % of GDP National Saving \$ 300,520,000 33.52 % \$ 266,642,00 30.30 % Investment \$ 226,500,00 25.26% \$ 209,000,00 23.75 % Difference = (S-I) = NX \$ 74,020,000 8.26 % \$ 57,642,000...
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ECMB06_Assignment_1_Solutions_(Spring_2008) - ECMB06 –...

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