__172.20.40.61_Materials_hjackson-0011_Krug2e_Macro_PS_CH07

__172.20.40.61_Materials_hjackson-0011_Krug2e_Macro_PS_CH07...

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Solution S-95 chapter: Tracking the Macroeconomy 1. Below is a simplified circular-flow diagram for the economy of Micronia. a. What is the value of GDP in Micronia? b. What is the value of net exports? c. What is the value of disposable income? d. Does the total flow of money out of households—the sum of taxes paid and con- sumer spending—equal the total flow of money into households? e. How does the government of Micronia finance its purchases of goods and services? 1. a. We can measure GDP in Micronia as the sum of all spending on domestically produced final goods and services. Spending consists of consumer spending, government purchases of goods and services, and exports less imports, or $750 ($650 + $100 + $20 - $20). Net exports are exports less imports. In Micronia, net exports equal zero ($20 - $20). c. Disposable income is income received by households less taxes plus government transfers. In Micronia, disposable income equals $650 ($750 - $100). d. Yes. Consumer spending plus taxes equals $750—the same as the wages, profit, interest, and rent received by households. The government finances its purchases of goods and services with tax revenue. Government purchases of goods and services = $100 Consumer spending = $650 Imports = $20 Exports = $20 Wages, profit, interest, rent = $750 Gross domestic product Wages, profit, interest, rent = $750 Government Households Taxes = $100 Markets for goods and services Factor markets Firms Rest of world 7 23 ECONOMICS MACROECONOMICS S95-S106_Krug2e_Macro_PS_Ch07.qxp 2/25/09 8:00 PM Page S-95
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Solution S-96 MACROECONOMICS, CHAPTER 7 ECONOMICS, CHAPTER 23 2. A more complex circular-flow diagram for the economy of Macronia is shown below. a. What is the value of GDP in Macronia? b. What is the value of net exports? c. What is the value of disposable income? d. Does the total flow of money out of households—the sum of taxes paid, consumer spending, and private savings—equal the total flow of money into households? e. How does the government finance its spending? 2. a. We can measure GDP in Macronia as the sum of all spending on domestically pro- duced final goods and services. Spending consists of consumer spending, invest- ment spending, government purchases of goods and services, and exports less imports, or $800 ($510 + $110 + $150 + $50 - $20). Net exports are exports less imports. In Macronia, net exports equal $30 ($50 - $20). c. Disposable income is income received by households less taxes plus government transfers. In Macronia, disposable income equals $710 ($800 - $100 + $10). d. Yes. Consumer spending plus taxes plus private savings equals $810—the same as the wages, profit, interest, rent, and government transfers received by households. In Macronia, the government needs to finance $160 in spending ($150 on pur- chases of goods and services and $10 in government transfers). The government finances $100 of its spending with tax revenue and the other $60 through borrow- ing in financial markets.
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