1. Suppose you are a staff economist at Bureau of Labor Statistics. Your task

is to make necessary calculations about national output and price level based on the information below.

2010 price 2011 price 2012 price

Lenovo laptops Imported French Wines ￥10 ￥9 ￥12 ￥20 ￥15 ￥35 Lenovo laptops 100 120 135 Imported French Wines 20 35 40 Domestically produced submarine ￥20 ￥25 ￥30 Domestically produced submarine 50 55 70 2010 quantity 2011 quantity 2012 quantity

a. What is the Nominal and Real GDP for 2010, 2011, and 2012, with 2010 as base year. (show your work in detail)

Nominal GDP:

2010:10×100＋20×50=2000 2011:12×120＋25×55=2815 2012:15×135＋30×70=4125 Real GDP

2010: 10×100＋20×50 = 2000 2011: 10×120＋20×55＝2300 2012: 10×135＋20×70＝2750

b. What is the GDP deflator for 2010, 2011, and 2012?

2010 GDP deflator：2000/2000*100=100 2011 GDP deflator：2815/2300*100=122.4 2012 GDP deflator：4125/2750*100=150

c. What is the percentage change of GDP deflator from 2010 to 2011, and from

2011 to 2012?

Percentage change of GDP deflator from 2010 to 2011: 22.4% Percentage change of GDP deflator from 2011 to 2012: 22.5%

d. What is the Consumer Price Index for 2010, 2011, and 2012, with 2010 as base

year? (show your work in detail)

2010: 10*100+9*20=1180; 1180/1180*100=100

e. What is the rate of inflation for 2011 and 2012?

2010-2011: 35.6%

2011-2012: (186.4-135.6)/135.6=37.5%

2011: 12*100+20*20=1600; 1600/1180*100=135.6 2012: 15*100+35*20=2200; 2200/1180*100=186.4

2. Suppose the government increases taxes and government purchases by equal amounts. What happens to the interest rate and investment in response to this balanced budget change? Does your answer depend on the marginal propensity to consume?

△T = △G

S = [Y – T – C(Y – T)] + (T – G)

△S = [-△T – MPC (-△T)] + (△T - △G) (△C = MPC*△(Y-T) = MPC (-△T))

= [-△T + MPC*△T] + 0 = (MPC – 1)* △T ≤ 0

The above expression tells us that the impact on saving of an equal increase in T and G depends on the size of the marginal propensity to consume. The closer the MPC is to 1, the smaller is the fall in saving. For example, if the MPC equals 1, then the fall in consumption equals the rise in government purchases, so national saving [Y – C(Y –T) – G] is unchanged. The closer the MPC is to 0 (and therefore the larger is the amount saved rather than spent for a one-dollar change in disposable income), the greater is the impact on saving. Because we assume that the MPC is less than 1, we expect that national saving falls in response to an equal increase in taxes and government spending.

The reduction in saving means that the supply of loanable funds curve shifts to the left in Figure 3-3. The real interest rate rises, and investment falls.

3. If consumption relies on interest rate, what does saving curve look like? What’s the impact of an increase in investment demand on the equilibrium interest rate and investment? What’s the impact of an increase in government spending on interest rate, C, and I? Use graphs to explain your answers.

If consumption depends on the interest rate, then these conclusions about fiscal policy are modified somewhat. If consumption depends on the interest rate, then so does saving. The higher the interest rate, the greater the return to saving. Hence, it seems reasonable to think that an increase in the interest rate might increase saving and reduce consumption.

Consider what happens when government purchases increase. At any given level of the interest rate, national saving falls by the change in government purchases, as shown in Figure 3-7. The figure shows that if the saving function slopes upward, investment falls by less than the amount that government purchases rises by; this happens because consumption falls and saving increases in response to the higher interest rate. Hence, the more responsive consumption is to the interest rate, the less government purchases crowd out investment.

Consider what happens when investment demand increases. At any given level of the interest rate, investment demand increases, the investment curve shifts to the right, as shown in Figure 3–9. The figure shows that if the saving function slopes upward, investment increases and the interest rate increases.

4. Consider a Cobb-Douglas production function with three inputs. K is capital (the

number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among the workers). The production function is :

a) Derive an expression for the marginal product of labor. How does an

increase in the amount of human capital affect the marginal product of labor?

b) Derive an expression for the marginal product of human capital. How does

an increase in the amount of human capital affect the marginal product of human capital?

c) What is the income share paid to labor? What is the income share paid to

human capital? In the national income accounts of this economy, what