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ps4ans - For Super Duper profits are sales minus the value...

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Economics 205: Principles of Macroeconomics Mark Moore Spring 2006 Problem Set 4: Solutions 1. a. Consumption increases by $18,000. b. Consumption increases by $18,000, but net exports fall by $18,000, so there is no effect on total GDP. c. No effect. d. Investment increases by $100 million. e. No effect. f. Investment (inventory investment) increases by $12,000,000. g. Consumption (of legal services) increases by $6,000. h. No effect. 2. Consumption 800 cars * $6000 = $4,800,000 food purchases = $14,000,000 $18,800,000 Investment 100 trucks * $8000 = $800,000 Net Exports 200*$6000 = $1,200,000 GDP = $18,800,000 + $800,000 + $1,200,000 = $20,800,000. You can arrive at the same answer by adding up the factor payments, but you have to remember to add profits to wages, interest, and rent. For Specific Motors and the Farmers, profits are simply sales minus the other factor payments.
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Unformatted text preview: For Super Duper, profits are sales minus the value of food (an intermediate good) and minus the factor payments. Value added is simply sales for Specific Motors and the Farmers. Value added for Super Duper is sales minus the value of food. Clearly, adding value added across the industries will also produce the same value of GDP. 3. G does not include transfer payments (e.g., unemployment insurance, Medicare). 4. An increase in P reduces real wealth, which tends to reduce consumption, and therefore to reduce Y (from the demand side of the economy). Hence, as P increases Y falls, so the AD curve slopes down. Note that an increase in P leads to a decrease in real wealth because some wealth has a fixed nominal value (i.e., makes fixed nominal payments in the future.)...
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