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# Problem Set 1_Answers - Deskins Principles of...

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Deskins, Principles of Macroeconomics Problem Set 1 - Answers Chapter 5 - Questions 1. Every transaction has a buyer and a seller. Thus every dollar spent is a dollar earned for someone else. 2. A luxury car. GDP is simply calculated based on market value. Since a luxury car has a higher market value, it contributes more to GDP. 3. GDP increases by \$3 from this transaction. The intermediate good (the wheat) is not counted in GDP. 4. The sale does not affect GDP. GDP only counts the production of new goods. 5. Consumption (tomato juice), Investment (house), Government (road), Net Exports (exports computers sold to Mexico, imports - French wine imported to the U.S). 8. GDP measures total production. Higher production usually means we produce more of the goods that we use to satisfy our wants, thus a higher standard of living. An industrial facility that emits a tremendous amount of pollution into the air and water would raise GDP but might result in an overall reduction in overall societal well-being. Chapter 5 - Problems 1. a) consumption increases. b) investment increases. c) consumption increases but investment decreases (no change in GDP overall since car was produced earlier) d) consumption increases. e) government increases. f) consumption increases and net exports decrease (no change in GDP overall). g) investment increases. 2. Transfer payments simply represent a transfer of funds from one person to another. They do not represent a good that is being produced. 4. a) 2010 2011 2012 Nominal GDP 200 400 800 Real GDP 200 400 400 GDP deflator 100 100 200 b) Nominal GDP: 2011 growth rate = 100 percent. 2012 rate = 50 percent. Real GDP: 2011 growth rate = 100 percent. 2012 rate = 0 percent. For 2011, the change over the previous year was entirely driven by changes in actual production. For 2012, the change was entirely price driven, thus there was no change in Real GDP. c) Economic well-being rose more in 2011, indicated by the growth in Real GDP.

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Deskins, Solutions 1 9. If people in India tend to produce more goods at home rather than trading for the good they consume in markets, the difference between U.S. and Indian GDP will be overstated. 10. a) The increase in female labor force participation increased GDP. b) There would still be an increase in the broader measure of well-being, but not by as much as with GDP. c) Omit.
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