HW 6 Solution - Econ 201 HW 6 85 1 Consider the graph...

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Econ 201 HW 6 85 1. Consider the graph below (8): Match each part of the business cycle with the appropriate letter from the graph. i. Recession: A; real GDP is declining . ii. Expansion: D, real GDP is increasing. iii. Peak: B, real GDP is at its temporary maximum before it falls again, iv. Trough: C, real GDP is at its lowest level. a) In what year is GDP greatest? 2008 b) In what year is GDP lowest? 2005 c) Between 2007-2009, trough GDP is approximately: \$4.7 billion d) Between 2007-2009, peak GDP is approximately: \$6 billion 2. Why don’t we include the value of intermediate goods in calculating GDP? (2) This would result in significant over counting. We only want to count production once. If we counted the same capital good as both consumption and production, we would get it twice. 3. State whether each of the following counts as Consumption, Investment, Government Purchases, Net Exports, or None. Explain your answers. (12) a. Rhonda buys a television made in China. Net Exports – The good is produced abroad. It is imported. a. The government sends out checks to low income families. None; this is a transfer payment, it is not counted directly as part of GDP. b. ABC Co. expands its factory. Investment; this is business spending on capital. c. The government buys a new military aircraft. Government Purchases; in this case, the government is buying a good. d. Hackneyed Films sells the rights to its new movie to a European theater chain.

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Net Exports; the product is being exported abroad. e. Alfred buys a domestically produced guitar. Consumption; this is for personal use and domestically produced. 4. State whether the following will increase, decrease, or have no effect on measured GDP. Explain your answers: (12) a. Humbert decides to shovel the snow as a favor for his elderly neighbor. No effect; since no money changes hands, this is not considered a service for the purposes of calculating GDP. b. The government increases spending without increasing taxes. Increase; this is an increase in government purchases. c. Marijuana sales are legalized. Cheech begins selling pot openly and reporting his income.
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