Principles of Macroeconomics - Principles of Macroeconomics...

Principles of Macroeconomics
Spring 2016
Assignment # 1
Maria Averianova
Due Date: February 23, 2016
Task 1
The information in the table gives the price level and nominal GDP values for ten
years. Use this information to answer the questions below.
Year Price Level Year to Year
Inflation Rate
(%)
Nominal GDP
($ billions in
current year
prices)
Real GDP ($
billions in 1976
prices)
1976 100 198 198
1977 106.4 6.4 218 204.9
1978 112.6 5.8 242 214.9
1979 123.9 10.0 276 222.8
1980 137.2 10.7 310 225.9
1981 152.1 10.9 356 234.1
1982 165.2 8.6 374 226.4
1983 173.5 5.0 406 234.0
1984 178.9 3.1 445 248.7
1985 183.5 2.6 478 260.5
a. Fill in the table above.
b. Explain the difference between inflation, deflation and disinflation.
By definition inflation means the rate (%) at which the general price level of goods
and services in an economy is rising. As a result, the purchasing power of a unit of
currency is falling. Inflation discourages savings and encourages investment.
Deflation is the opposite of inflation. It is a general decline in prices of goods and
services in an economy. It is a fall in real GDP (negative inflation rate) that leads to
unemployment. (example: Japan in 2008)
Disinflation, on the other hand, is a fall in the rate of inflation. It is an occurrence
when the prices are rising at a decreasing rate. It is a common economic situation and
is not considered threatening since the prices are still rising, though on a slower pace.
c. Did this economy experience a recession based on the time path either of
nominal or real GDP?
Recession is a decline in an economic activity that is signaled by a negative
economic growth. The given economy experienced recession in 1982. In that year
there was a fall in an inflation rate (disinflation: from 10.9% to 8.6%) that resulted in

a fall of Real GDP: from 234.1 in 1981 to 226.4 in 1982.
Task 2
Consider the following table of information
a. Calculate GDP via expenditure approach.
GDP = C + I + G + (X - M)
GDP = Personal Consumption Expenditures + Investment + Government Purchases
of Goods and Services + (Exports – Imports) = 454 + 123 + 168 + (249 – 244) = 750
b. Calculate GDP via income approach.
GDP = COE + GOS + GMI + (T – S)
GDP = Farmers’ income + Wages, Salaries and Supplementary
Labor Income + Interest and Miscellaneous Investment
Income + Income of non-farm unincorporated businesses +
Indirect taxes minus subsidies + Corporate Profits Before
Taxes + Depreciation (capital consumption allowance) = 2 +
409 + 56 + 41 + 93 + 57 + 92 = 750
c. Suppose that government taxes were 145, given this
additional information identify and give values for leakages and injections,
are leakages equal to injections?
There are three types of leakages (savings (S), taxes (T) and imports (M)) and
injections (investment expenditures (I), government spending (G) and exports (X)).