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Macroeconomics Homework 1 Essay

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Principles of Macroeconomics Homework 1 Please write down your answers as clearly as possible. 1. Below are some data from the land of milk and honey. Year 2008 2009 2010 Price of Milk $1 $1 $2 Quantity of Milk 100 quarts 200 200 Price of Honey $2 $2 $4 Quantity of Honey 50 quarts 100 100 a. Compute the nominal GDP, real GDP, and the GDP deflator for each year, using 2008 as the base year. Calculating nominal GDP: 2008: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts. honey) = $200 2009: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400 2010: ($2 per qt. of milk  200 qts. milk) + ($4 per qt. of honey  100 qts. honey) = $800 Calculating real GDP (base year 2008): 2008: ($1…show more content…
This means that the percentage change in real GDP is zero. c. Did economic well-being rise more in 2009 or 2010? Explain. Economic well-being rose more in 2009 than in 2010, since real GDP rose in 2009 but not in 2010. In 2009, real GDP rose but prices did not. In 2010, real GDP did not rise but prices did. 2. What components of GDP in this year (if any) would each of the following transactions affects? How about total GDP in this year? Explain. a. A family buys a new refrigerator Consumption increases because a refrigerator is a good purchased by a household. Total GDP increases by the same amount. b. Aunt Jane buys a new house Investment increases because a new house is an investment good. Total GDP increases by the same amount. c. Ford sells a Mustang from its inventory 2 Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold. The increase in consumption cancels the decrease in investment, so there is no change to the total GDP (recall that GDP does not include the value from sale of used good) d. You buy a pizza from a local Pizza place. Consumption increases because pizza is a good purchased by a household. Total GDP increases by the same amount. e. California repaves Highway 101 Government purchases increase because the government spent money to provide a good to
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