Historical analysis of real interest rates in the

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59. Historical analysis of real interest rates in the United States shows that (a) real interest rates were unusually low in both the 1970s and 1980s. (b) real interest rates were unusually high in both the 1970s and 1980s. (c) real interest rates were unusually low in the 1970s and unusually high in the 1980s. (d) real interest rates were unusually low in the 1980s, spurring the economic growth that occurred during the Reagan administration. Answer: C Level of difficulty: 2 Section: 2.5 T Essay Questions 1. Carl’s Computer Center sells computers to business firms. Businesses then use the computers to produce other goods and services. Over the past year, sales representatives were paid $3.5 million, $.5 million went for rent on the building, $.5 million went for taxes, $.5 million was profit for Carl, and $10 million was paid for computers at the wholesale level. What was the firm’s total contribution to GDP? Answer: $5 million. Note that the $10 million paid for computers is not part of value added. Note also that the fact that the firm produces an intermediate good doesn’t mean that it doesn’t contribute to GDP. Level of difficulty: 2 Section: 2.2
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28 Abel/Bernanke • Macroeconomics, Fifth Edition 2. What is the main conceptual difference between GDP and GNP? How different are GDP and GNP for the United States? For countries with many citizens who work abroad? Answers: GDP represents output produced within a country, while GNP represents output produced by a country’s factors of production; the difference is net factor payments from abroad. For the United States there’s little difference, but for countries that have many citizens working abroad, there may be a big difference. Level of difficulty: 1 Section: 2.2 3. Citizens of the country of Heehaw produce hay and provide entertainment services (banjo playing). In 1993 they produced $15 million worth of hay, with $11 million consumed domestically and the other $4 million sold to neighboring countries. They provided $7 million worth of banjo-playing services, $5 million in Heehaw, and $2 million in neighboring countries. They purchased $6 million worth of soda pop from neighboring countries. Calculate the magnitudes of GNP, GDP, net factor payments from abroad, net exports, and the current account balance. Answers: GNP is output by citizens, which equals $15 million + $7 million = $22 million. GDP is output produced in the country, which equals $15 million (hay) + $5 million (domestic banjo playing) = $20 million. Net factor payments from abroad represent the difference between GNP and GDP; this is the $2 million paid for banjo playing in other countries. Net exports are $4 million (hay sold abroad) minus $6 million (soda pop imports) = –$2 million. (Note that banjo playing abroad is not part of GDP, so it is not part of net exports either.) The current account balance is net exports + net factor payments = –$2 million + $2 million = 0.
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  • Spring '11
  • carlitos
  • Inflation, gross domestic product, Fifth Edition, Difficulty

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