Econ 101b Problem Set 1 Fall 1999

Due in class Thursday September 9

Question 1

In 1979 the (short-term) nominal interest rate on three-month Treasury bills averaged 10.0%, and the GDP deflator rose from 50.88 to 55.22. What was the annual rate of inflation in 1979? What was the real interest rate in 1979?

a. Were real interest rates higher in 1979, or in 1998 (when the (short-term) nominal interest rate on three-month Treasury bills was 4.8%, and the inflation rate was 2.6%?

b. Which interest rate concept--the nominal interest rate or the real interest rate--do lenders and borrowers care more about? Why?


Question 2

In 1992 the components of nominal (and real) GDP were as follows:

By 1993 these four components of spending had risen:

Moreover, prices had also risen: the price index for consumption rose from 100 to 102.8; the price index for investment rose from 100 to 107.6; the price index for government purchases fell from 100 to 99.1; the price index for exports rose from 100 to 102.9; and the price index for imports rose from 100 to 108.9.

a. What was real GDP (measured at 1992 prices) in 1993? How much was real GDP growth between 1992 and 1993?

b. Which is the more important measure for assessing an economy's performance, real GDP or nominal GDP? Why?


Question 3

a. Are capital goods--large turbine generators, jet airliners, bay-spanning bridges--intermediate goods or final goods?

b. How are they included in GDP?

c. Why are so-called "intermediate" goods treated differently than "final" goods in the National Income and Product Accounts [NIPA]?

d. By what means does the labor and other factors of production that go into producing intermediate goods get ultimately counted in GDP?


Question 4

 

In 1997 nominal GDP was equal to $8.1109 trillion; consumption spending was $5.4937 trillion; gross investment spending was $1.256 trillion; and government purchases were $1.4546 trillion.

a. What was the level of net exports?

b. Why are imports subtracted from the sum of consumption, government purchases, investment, and exports to get to GDP?


Question 5

Suppose that the appliance store buys a refrigerator from the manufacturer on December 15, 2003 for $600, and that you then buy that refrigerator on January 15, 2004 for $750.

a. What is the contribution to GDP in 2003?

b. How is the refrigerator accounted for in the NIPA in 2003?

c. What is the contribution to GDP in 2004?

d. How is the refrigerator accounted for in the NIPA in 2004?


Question 6

Explain whether or not and why the following items are included in the calculation of GDP:

a. Increases in business inventories

b. Sales of existing homes

c. The fees earned by real estate agents on selling existing homes

d. Income earned by Americans living and working abroad

e. Purchases of IBM stock by your brother

f. Purchase of a new tank by the Department of Defense

g. Rent that you pay to your landlord


Question 7

Consider an economy made out of a single consumer (or a "representative agents" as economists like to say.) There only two goods in this economy (good 1 and good 2). You are given the following partial information about expenditure:

  Year 1 Year 2

 

 

Quantity Price Quantity Price
Good 1 100 100 120 100
Good 2 100 100 Q 80

where Q is an unknown (and potentially variable) quantity.

Microeconomists will say that what a bundle of goods consumed in year 2 is "revealed preferred" to the bundle consumed in year 1 if the consumer has chosen for a different bundle in both years although the bundle chosen in year 1 was affordable in year 2.

Over what range of quantities of good 2 consumed in year 2 would you conclude that the following assertions are correct:

a. The bundle consumed in the first period is revealed preferred to the one consumed in the second period, in other words, our representative agent was better of in year 1.

b. The bundle consumed in second period is revealed preferred to the one consumed in the first period, in other words, our representative agent was better of in year 2.

c. Our representative consumer is acting inconsistently.

Now, let's form three index measures of the quantities consumed in this economy.

Without any further reference to the above table (i.e. in general), answer the following questions:

d. Explain why if LQ<1 the consumer is worse off in year 2. What about the case where LQ>1?

e. Explain why if PQ>1 the consumer is better off in year 2. What about the case where PQ<1?

f. Explain why we cannot say anything when EQ<1 or EQ>1.

g. What kind of macroeconomic indicator that is often used without caveats in newspapers does EQ make you think of?