Macroeconomics Exam Review 198

Macroeconomics Exam Review 198 - = real GDP at the...

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Chapter 4: Smooth Functions 4.1 Along the demand curve, price and quantity are related according to the equation ? =10 ± This is called the inverse demand function . Total revenue ² ( ± ) (price times quantity) is given by ² ( ± )= =(10 ± ) ± =10 ± ± 2 = ³ ( ± ) ´ ( ± ) can be rewritten as ´ ( ± )=21+4( ± 3) At ± = 3, the price is 7 but the marginal revenue of an additional unit is only 4. The function ´ decomposes (approximately) the total revenue into two components — the revenue from the sale of 3 units (21 = 3 × 7) plus the marginal revenue from the sale of additional units (4( ± 3)). 4.2 If your answer is 5 per cent, obtained by subtracting the inflation rate from the growth rate of nominal GDP, you are implicitly using a linear approximation. To see this, let ? = price level at the beginning of the year
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Unformatted text preview: = real GDP at the beginning of the year ? = change in prices during year = change in output during year We are told that nominal GDP at the end of the year, ( ? + ? )( + ), equals 1.10 times nominal GDP at the beginning of the year, ? . That is ( ? + ? )( + ) = 1 . 10 ? (4.42) Furthermore, the price level at the end of the year, ? + ? equals 1.05 times the price level of the start of year, ? : ? + ? = 1 . 05 ? Substituting this in equation (4.38) yields 1 . 05 ? ( + ) = 1 . 10 ? which can be solved to give = ( 1 . 10 1 . 05 1) = 0 . 0476 The growth rate of real GDP ( / ) is equal to 4.76 per cent. 207...
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This note was uploaded on 01/16/2012 for the course ECO 2024 taught by Professor Dr.dumond during the Fall '10 term at FSU.

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