Created: 2000-08-30
Last Modified: 2000-09-21
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Economics 101b: Fall 2000: Problem Set 1

J. Bradford DeLong

Pawel Dyczewski

1. 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

2. Why do you calculate real GDP by dividing nominal GDP by the price level, but calculate the real interest rate by subtracting the inflation rate from the nominal interest rate. Since both sets of calculation aim to transform a real into a nominal quantity, shouldn't they be calculated in a parallel fashion? So why divide in one case, and subtract in the other?

3. 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?

4. 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?

5. 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. What was the level of net exports?

6. What do you think a "science" is? Write down five characteristics that you think that a science must have. Which of these does economics satisfy?

7. What do economists mean when they say that it is time to "build a model" of a situation or a problem?

8. Write down four metaphors that you have heard people use in talking about the economy that are now--or were at the time--obscure to you.

9. In what sense can a line on a graph "be" an equation?

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Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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