# PT questions answered - ECN 1B-0A March 8 2010 Lucas...

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ECN 1B-0A March 8, 2010 Lucas Herrenbrueck Answers to various practice problems Chapters 1,4, and 5 1. What is the relationship between stocks and its effects on GDP? What do you mean by "effects"? If you mean whether stock sales are included in GDP, the answer is no. No asset transfers (stocks are assets, just like cash, real estate, bank deposits) are included in GDP, because GDP is a measure of what is produced in an economy. If you have to pay a transfer fee to the stockbroker, on the other hand, that represents a newly produced service. The fee would then be included. 2. What is total expenditure and its relationship to GDP? Total expenditure is identical to nominal GDP. Read the chapter 7 replacement, pp 1-2. 3. What is the definition of 'stock variable'? Flow variables are defined over a time period; stock variables make sense without reference to time. Example: capital is a stock, investment (capital increase) and depreciation (capital decrease) are flow variables. National debt is a stock, deficit (debt increase) and surplus (debt decrease) are the corresponding flows. It has nothing to do with stocks or the stock market. 4. Given a chart with the revenue and costs of a firm, how do we calculate the firm's value added and contribution to that year's GDP? What do they mean by the - "firm's value added"? VA = revenue - cost of parts. Alternatively, VA = wages + interest + rent + tax + profits (don't forget profits!). GDP = VA of all the firms in the economy = total revenue of the economy, because one firm's parts are another firm's product. "Firm's VA" = "Firm's contribution to GDP." 5. What is a 'fiscal policy'? Fiscal policy: direct spending (such as military, infrastructure, etc), taxes, or transfers (e.g. welfare). More narrowly, changes in the above when they are meant to raise or lower GDP. Read the replacement of chapter 7. 6. What is an annualized inflation rate and how can we calculate it when we are given the price levels of two different months in a hypothetical country?

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To be precise, annualized inflation rate = (1 + monthly inflation rate) 12 – 1. For small rates (less than 1% monthly), you can just multiply the monthly rate with 12. To get the monthly rate, use as always: Inflation = (Price level this period – Price level last period)/Price level last period. Commonly, the annualized rate is also adjusted for seasonal trends. For example, prices are always higher during Christmas shopping season. Chapter 7-8 Question 46 doesn't make sense because if government spending increased by 100 units, AD would increase, however, the government increased taxes by 100 units which lowers the disposable income by 100 units. So shouldn't the graph stay the same without shifting since the aggregate demand increased by 100 (because of government spending), then decreased by 100 units (because of higher taxes which cause lower disposable income)? This is a
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## This note was uploaded on 03/24/2010 for the course ECON Econ1B taught by Professor Baghermodjtahedi during the Winter '09 term at UC Davis.

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PT questions answered - ECN 1B-0A March 8 2010 Lucas...

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