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PS1-solutions

# PS1-solutions - ECON1312 Section 3 and 4 Problem Set 1 Due...

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ECON1312, Section 3 and 4 01/23/08 Problem Set 1 Due Tuesday 01/29/08 NOTE: You have the option to work in groups of up to three people and hand in one problem set per group. Question 1 For the following transactions determine which component/s of GDP (C, I, G, NX) is/are going to be affected and whether current GDP will rise or fall: a) You buy a car that was produced in Japan. C and M both increase. GDP is unchanged. b) You buy a new house. I increases. GDP increases (remember purchases of new homes are counted as investment not consumption). c) The national defense budget is cut by \$20 billion. G decreases, GDP falls d) Microsoft sells \$50 million worth of computers from its inventories (the stock of computers that they keep in their warehouse). Changes in inventories are counted in investment. I goes down, C increases. GDP is unchanged. e) You purchase Hungarian hazelnuts to bake a plate of cookie for the macro study group. C and M both increase. GDP is unchanged. f) The Pentagon buys flour to bake cookies for the soldiers.

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