1. examples of problems

3. GDP = C + G + I + (EX - IM) In this case: C = $10.003 G = $2.798 I = $2.056 (EX - IM) = -$706 Therefore: GDP = $ 10.003 + $ 2.798 + $ 2.056+(-$ 706) GDP = $14.151 Personal consumption expenditures10.003 Gross private domestic investment2.056 Depreciation1.778 Government expenditure2.798 Net exports-706 Compensation of employees8.037 Proprietors' income1.072 Net Interest915 Rental Income39 Corporate profits1.195 Indirect taxes less subsidies1.071 Statistical discperancy44 Net Factor Income from Abroad145

4. Compensations of employees + Rental income + Interest income + Profits +Indirect Business Taxes + Depreciation GDP = $14.151 Therefore: GDP = $8.037 + $1.072 + $915 + $39 + $1.195 + $1.071+ $1.778 + $44 Personal consumption expenditures10.003 Gross private domestic investment2.056 Depreciation1.778 Government expenditure2.798 Net exports-706 Compensation of employees8.037 Proprietors' income1.072 Net Interest915 Rental Income39 Corporate profits1.195 Indirect taxes less subsidies1.071 Statistical discperancy44 Net Factor Income from Abroad145

5. Net Domestic Product = GDP – Depreciation NDP= $ 14.151 - $1.778 = $ 12.373 Gross National Product = GDP + NFIA Net Factor Income from Abroad = Receipts of factor income from the rest of the World – Payments of factor income to the rest of the World GNP = $ 14.151 + $145 = $ 14.296 Net National Product = GNP – Depreciation NNP = $ 14.296 – $1.778 = $ 12.518 National Income = NNP - indirect taxes NI = $ 12.518 - $ 1.071 = $11.447 Personal consumption expenditures 10.003 Gross private domestic investment 2.056 Depreciation 1.778 Government expenditure 2.798 Net exports -706 Compensation of employees 8.037 Proprietors' income 1.072 Net Interest 915 Rental Income 39 Corporate profits 1.195 Indirect taxes less subsidies 1.071 Statistical discperancy 44 Net Factor Income from Abroad 145

6. Calculating Real GDP  Table (a) shows the quantities produced and the prices in 2000 (the base year).  Nominal GDP in 2000 is $100 million.  Because 2000 is the base year, real GDP and nominal GDP both are $100 million.

7.  Table (b) shows the quantities produced and the prices in 2009.  Nominal GDP in 2009 is $300 million.  Nominal GDP in 2009 is three times its value in 2000.

8.  In Table (c), we calculate real GDP in 2009.  The quantities are those of 2009, as in part (b).  The prices are those in the base year (2000) as in part (a).  The sum of these expenditures is real GDP in 2009, which is $160 million. GDP Deflator = (Nominal GDP/Real GDP)100 GDP Deflator = ($ 300/ $ 160)100 = %187.5

10. The Bureau of Statistics conducts a monthly survey to estimate the unemployment rate. Respondents’ answers are used to estimate the number of people who are employed, unemployed, and in the labor force. a. Calculate the unemployment rate. b. Calculate the unemployment rate taking into account discouraged workers. a. Unemployment rate = 12,036 / (99,093 + 12,036) = 10.83% b. (12,036 + 1,849) / (99,093 + 12,036 + 1,849) = 12.29%

11. Use the information in the figure to calculate the unemployment rate and the labor force participation rate.

12. Suppose that the velocity of money V is constant, the money supply M is growing 5% per year, real GDP Y is growing at 2% per year, and the real interest rate is r = 4%. Assume that π=π e, meaning the ex-post inflation rate is always equal to the expected inflation rate. a) Find the value of the nominal interest rate i in this economy; b) If the central bank increases the money growth rate by 2% per year, find the change in the nominal interest rate ∆ i; c) Suppose the growth rate of Y falls to 1% per year. What will happen to  ? What must the Central Bank do if it wishes to keep  constant?

13. a. First, find .  = 5  2 = 3 %. Then, find i = r +  = 4 + 3 = 7 %.   i = 2, because, according to the quantity theory, changes in the money growth rate will translate in a one-to-one change in the inflation rate. Therefore, a change of 2% in the growth rate will simply change the inflation rate by 2%, leaving the real interest rate unchanged. Therefore, the change in the nominal interest rate is the same as the change in inflation, therefore ∆ i = 2%. c. If the Central Bank does nothing,  = 1. Because, If the Y falls by 1% (so it grows a -1%) a year, while everything else is constant, the inflation rate will increase by 1% every year. To prevent inflation from rising, Central Bank must reduce the money growth rate by 1 percentage point per year.

14. Suppose that the money demand in an economy is given by the following linear function: a)Suppose that P=100, Y=1000 and i=0.1. Determine the demand for real balances and the velocity of money in this economy; b)Suppose that now P=200 while everything else remains unchanged. Determine the new demand for real balances and the new velocity in this economy.

15. a) Given the data in the problem we have: and total money supply is: M = 600 x 100 = 60000 The velocity of money according the quantity theory is given by: b) Now the price doubles. However, we assume that everything else remains unchanged, meaning that the real Income and the nominal interest rate do not change. In this case the demand for real balance must be the same since nothing has changed apart the prices: In this case the total money supply simply has double as well: M = 600 x 200 = 120 000, and

16. Consider the Keynesian cross model and assume that the consumption function is given by: C = 200 + 0.75 (Y - T) I=100, G=100; T=100. 1.Graph planned expenditure as a function of income; 2.Find the equilibrium level of income; 3.If government purchases increase to 125, find the new equilibrium level of income; 4.Calculate multiplier of G.

17. 1. The planned expenditure is: E=C+I+G E = 200 + 0.75Y - 75 +100 +100 = 325 + 0.75Y

18. 2. Y=E Y=325+0.75 Y Y=1300 3. Now the planned expenditure is given by: E = 350 + 0.75Y The new equilibrium level: Y=350+0.75 Y Y=1400 4. The multiplier of G is defined as, where MPC=marginal propensity to consume. G has increased by 25 and this leads to an increase in Y of 100. This is the essence of the government expenditure multiplier effect. In particular this implies that the multiplier of G is equal to 4.

19. Consider the following IS-LM model: C = 100 + 0.5(Y - T), I = 100 -10r, G = T = 50 M/P=100Y – 50r, where M = 1000 and P = 5; a) Find the IS curve and the LM curve and solve for the equilibrium levels of real income and the interest rate; b) Suppose that government expenditure increases by 50, find the new equilibrium values for Y and r. Calculate the level of Crowding Out.

20. a) The IS curve: Y=C+I+G Y=100+0,5 (Y-T)+100-10r+50 Y=100+0,5 Y-(0,5x50)+100-10r+50 Y=100+0,5 Y-25+100-10r+50 10r=225-0,5Y R=22,5-0,05Y The LM curve: M/P=(M/P) d 1000/5=100Y-50r 200-100Y=-50r 50r=100Y-200 r= 100Y/50-200/50 r = 2Y – 4 Equilibrium: 22,5-0,05Y=2Y-4 22,5+4=2Y+0,05Y 26,5=2,05Y Y=12,9 ; r=2x12,9-4=21,8

21. b) G=100 Y=C+I+G Y=100+0,5 (Y-T)+100-10r+100 10r=275-0,5Y R=27,5-0,05Y The LM curve: M/P=(M/P) d 1000/5=100Y-50r 200-100Y=-50r 50r=100Y-200 r= 100Y/50-200/50 r = 2Y – 4 Equilibrium: 27,5-0,05Y=2Y-4 27,5+4=2Y+0,05Y 31,5=2,05Y Y=15,4 ; r=2x15,4-4=26,8

22. The Crowding out is measured as the difference between the level of income we obtain after the change in G if there was no increase in the interest rate. In practice is the level of income implied by the government expenditure multiplier in the Keynesian Cross. ∆Y=(1/1-MPC) ∆G= ∆G/1-MPC G1=50 G2=100 ∆Y=50/1-0,5=100 The initial equilibrium (before the change in G) was Y = 12.9. After the change in G, if there is not interest rate effect, the new income should be Y = 12.9 +100 = 112.9 The new equilibrium however, when there is an interest rate effect is Y=15.4. Meaning that the level of Crowding out is: CO = 112.9 -15.4 = 97.5 This means that given our model specification, most of the change in G will crowding out private investment through the increase in the real interest rate and so fiscal policy is not really effective in this case.

23. Suppose that an economy has the Phillips curve a. What is the natural rate of unemployment? b. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points?

24. To solve for the natural rate of unemployment, we look for the unemployment rate where inflation remains constant. Thus: Solve for natural rate of unemployment = 0.06 or 6%. b. To figure this out, set the change in inflation to 0.05 and solve for the gap between unemployment and the natural rate: 0.10 = [u – 0.06] Thus, we need 10 percentage points of cyclical unemployment to reduce inflation by 5 percentage points.

25. Suppose the Phillips curve is given by where 1. What is the natural rate of unemployment in this economy? 2. For now assume that θ=0. (What does that mean?) Suppose that the government decides to lower unemployment to 3% and keep it there forever. What is the rate of inflation for t=100? 3. Assume that only for the first three periods (t=1, t=2, and t=3) people form their expectations using θ=0. After the third period, from t=4 on, they start using θ=1 forever. Also, the government still wants to keep unemployment at 3%. What is the rate of inflation for t = 4, 5, and 6? What is the expected rate of inflation for t=4, 5, and 6?

27. The city of Hope has a labor force of 1000. Twenty people lose their jobs each month and remain unemployed for exactly one month before finding jobs. On January 1, May 1, and September 1 of each year 50 people lose their jobs for a period of four months before finding new jobs. (a)What is the unemployment rate in any given month? 70/1000 = 7% (b) How many unemployment spells are there in a year? Short spells: 20 each month × 12 months = 240. Long spells: 50 each × 3 times a year = 150. Total spells: 240 + 150 = 390. (c) What is the average duration of an unemployment spell? The total duration of all spells is (240 spells ×1 month) + (150 spells × 4 months) = 240 + 600 = 840 months. Average duration = total duration/total spells = 840/390 = 2.15 months.