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Macro Econ 1 Assignment UCM

Macro Econ 1 Assignment UCM

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25 views3 pages

Macro Econ 1 Assignment UCM

Macro Econ 1 Assignment UCM

Uploaded by

ppbqbvztfx
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University of California Merced

ECON 101 – Intermediate Macroeconomic Theory


Instructor: Jesus Sandoval-Hernandez

Homework 1
Due on Wednesday, September 18 at 11:59 (upload it into Catcourses)

1. For each of the following transactions, indicate whether it represents an increase in the U.S.
gross domestic product (GDP), and, if so, state whether it represents U.S. consumption,
investment, government purchases of goods or services, or net exports. If the transaction does
not change U.S. GDP explain why not.
(a) Ms. Scott buys a used Honda Accord from her friend Danielle for $7,500.
(b) You spent $12,500 on college tuition this year.
(c) Pizza Hut buys 100 pounds of cheese from Wisconsin to make pizzas.
(d) Mr. Luong is a Chinese citizen who works as a Chemistry teaching assistant at UC Merced
and earns $16,000 a year in salary.
(e) A candy store buys $500 worth of chocolates made in Belgium.
(f) Boeing produces 5 airplanes but are unable to sell them.

2. An economy produces three goods: cars, computers, and oranges. Quantities and prices for
years 2017 and 2018 are as follows:
2017 2018

Quantity Price Quantity Price

Cars 10 $2000 12 $3000

Computers 4 $1000 6 $500

Oranges 1000 $1 1000 $1

a. What is the nominal GDP in 2017 and in 2018? By what percentage does nominal GDP
change from 2017 to 2018?
b. Using the prices for 2017 as the set of common prices, what is the real GDP in 2017 and in
2018? By what percentage does real GDP change from 2017 to 2018?
c. Using the prices for 2018 as the set of common prices, what is the real GDP in 2017 and 2018?
By what percentage does real GDP change from 2017 to 2018?
d. Why are the two output growth rates constructed in (b) and (c) different? Which one is
correct? Explain your answer.

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3. Consider the economy described in problem 2.
a. Use the prices for 2017 as the set of common prices to compute real GDP in 2017 and 2018.
Compute the GDP deflator for 2017 and 2018, and compute the rate of inflation from 2017 to
2018.
b. Use the prices for 2018 as the set of common prices to compute real GDP in 2017 and 2018.
Compute the GDP deflator for 2017 and 2018, and compute the rate of inflation from 2017 to
2018.

4. An economy has 100 people divided among the following groups: 25 have full-time jobs, 20
have one part-time job, 5 have two part-time jobs, 10 would like to work and are looking for
jobs, 10 would like to work but are so discouraged they have given up looking, 10 are running
their own businesses, 10 are retired, and 10 are small children.
a. Calculate the labor force and the labor-force participation rate.
b. Calculate the number of unemployed and the unemployment rate.
c. Calculate total employment in two ways: as measured by the household survey and as
measured by the establishment survey.

5. Suppose the production function in medieval Europe is Y=K0.5 L0.5, where K is the amount of
land and L is the amount of labor. The economy begins with 100 units of land and 100 units of
labor. Use a calculator and equations in the chapter to find a numerical answer to each of the
following questions.

a. How much output does the economy produce?


b. What are the wage and the rental price of land?
c. What share of output does labor receive?
d. If a plague kills half the population, what is the new level of output?
e. What are the new wage and rental price of land?
f. What share of output does labor receive now?

6. Consider the following Cobb-Douglas Production Function: Y = 120 K3/4 L1/4


(a) Compute the value of Y for K = 125 and L = 50. Round your answer to two decimal
places.
(b) Prove that this production function has constant returns to scale.
(c) If K = 125 and L = 50, calculate the MPL. What is the equilibrium real wage in the economy?
Round your answer to two decimal places.
(d) If K = 125 and L = 50, calculate the MPK. What is the equilibrium real rental price of capital
in the economy? Round your answer to two decimal places.
(e) Calculate the total income earned by labor.

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(f) Calculate the total income earned by owners of capital.

7. Consider an economy described by the following equations

Y=C+I+G

Y = 8,500

G = 1,250

T = 950

C = 400 + 0.65(Y – T)

I = 2,125 – 50r

(a) For this economy, compute the following:

a.1. Private Savings

a.2. Public Savings

a.3. National Savings

a.4. Equilibrium interest rate

(b) Is this economy running a budget surplus, budget deficit or a balanced budget? Explain.

(c) Suppose that Republicans in Congress pass a large tax cut. As a result of the tax cut taxes

falls to T = 750. Assume that all other variables remain constant

Compute the following variables after this decrease in taxes

c.1. Private Savings

c.2. Public Savings

c.3. National Savings

c.4. Equilibrium interest rate

(d) Graphically illustrate the decrease in taxes on the Savings-Investment diagram. Be sure to
clearly label your curves and the axis. In your graph, clearly indicate any shifts of curves and

equilibrium points. Label the initial equilibrium as Point “A” and the new equilibrium as Point

“B”

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