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7% B A 5% 2.05 2.25 H F I P Trillions of Dollars per Year Interest Rate I P +G –T 1 I P +G –T 2 AH=Transfers ↑ I 2 Funds Interest Rate r 2 ∆G SF 2 r 1 SF 1 I 1 S 1 B A 5% Trillions of Dollars per Year Interest Rate D 1 S 2 D 2 Trillions of Dollars Interest Rate A S [ I P + (G – T) + (X – IM) ] Production of Consumption Goods Production of Capital Goods PPF H N S H J Interest Rate M d 1 M s 1 M d 2 A 6% 8% B Rate M d 1 M s 1 M d 2 A 6% 8% B M s 2 C Money Interest Rate M s 2 M s 1 r E′ r 1 E Chapter 5: PRODUCTION, INCOME, AND EMPLOYMENT PROBLEM SET 1. a. Counted in GDP as an increase in inventories; “I” b. Counted in GDP; “C” c. Not counted. This is an intermediate good whose value will be included in the value of the restaurant meals. d. Not counted. Stock is not a final good or service. (The broker’s commission, however, would be counted in GDP, as “C” if a household paid the commission.) e. Not counted. The property itself was not produced. f. Counted in GDP. The service provided by the real estate agent is counted as part of “C.” (Notice that the purchase price of the property is not counted, since it is just represents an exchange of an existing good, not something newly produced.) g. Not counted. Not a transaction for the marketplace. h Counted in GDP; “NX” i. Not counted. Social Security payments are transfer payments, not government purchases. 2. a. The $700 per month in imputed rent on the home and the $500 in imputed rent on the condo are irrelevant to computing the change in GDP. While these housing units are changing hands, they are continuing to provide the same services as before. Similarly, the sales price of the home and the condo do not affect GDP, since these housing units were presumably produced (and counted in GDP) in some previous year. The sales commission on the condo—6% of $200,000 = $12,000—is the value of a currently produced service. Thus, GDP rises by $12,000. b. Using the expenditure approach, GDP rises by $75 million—the value of final sales. (Alternately, we could also use the factor payments approach, noting that the intermediate goods cost of $10 million will create an equal amount of factor payments elsewhere in the economy. GE’s profit is its revenue minus its costs, or $75 million – ($10 + $40 + $15) = $10 million. Finally, wages and salaries and interest paid by GE total $40 + $15 = $55. Adding together all of these factor payments, we have $10 + $10 + $55 = $75 million.) c. As a result of your decision, you will buy $50 less in nachos for the next 9 months. Assuming that nacho producers respond by cutting back production of nachos, GDP will fall by $50 × 9 = $450. However, you also spend $200 on goods to make your own nachos. Since you are not a firm, but a household, all of your purchases— including the raw materials—are considered final consumption goods. Thus, the net effect on GDP is –$450 + $200 = –$250.
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d. The lottery winnings are a transfer payment by the government; they are not included
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