Homework 2 (2)

Homework 2 (2) - ECONOMICS 002 Name: _ Fall Semester 2009...

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ECONOMICS 002 Name: ____________________________________________ Fall Semester 2009 Homework Assignment 2 TA Time: _______________________________________ Due September 24, 2009, in class Please write your name, the TA’s name, and the meeting time of your recitation section on your homework. As room is provided for your answers, you can, if you would like, write your answers directly on these sheets after you print them. For multiple choice questions, circle the correct answer. 1. [10 points] Explain how each of the following transactions would affect GDP for the current year. Which spending categories are affected? a) You take a trip to Costa Rica over holiday break. b) General Motors has 15,000 newly produced cars left over at the end of the year and adds them to its inventory. c) The federal government decides to significantly increase welfare payments. d) The state of Nevada repaves part of the highway to Las Vegas. 2. [20 points] Assume a simple economy with no government, no foreign trade. (i.e., exports and imports are zero), and only two firms. Each firm produces 75 units of output. The first firm sells 75 to consumers for a price of $1. The second firm sells 50 units to consumers for a price of $1, and adds the remaining 25 to its inventory at a price of $0.50. Each unit costs $0.50 to produce, which is equal to the labor cost. There are no other costs associated with production. Show how you would calculate the value of GDP using the spending approach. Then show how you would calculate the value of GDP using the income approach. Are the two approaches equal?
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3. [20 points] Suppose an economy’s GDP consists only of beer and stereos, with the
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Homework 2 (2) - ECONOMICS 002 Name: _ Fall Semester 2009...

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