## What kind of expenditure gap exists if full employment is 120 million workers? What is its size?

Extra Credit 2
1. Suppose the government’s national income and product accounts reveal the following information (in millions of dollars). Show work to receive full credit.
Consumption 525 Investment 110 Government spending 72 Exports 50 Imports 65 Employee compensation 462 Interest 59 Rents 29 Profits 142 Depreciation 70 Net foreign factor income 10
a. Using the data in the table, verify that the income approach and the expenditure approach yield the same measure of GDP.

b. Find GNP, NDP and NNP.

2. There are three firms in an economy: X, Y, and Z. Firm X buys \$200 worth of goods from firm Y and \$300 worth goods from firm Z; and produces 250 units of output at \$4 per unit. Firm Y buys \$150 worth goods from firm X, and \$250 worth goods form firm Z; and produces 300 units of output at \$6 per unit. Firm Z buys \$75 worth goods from X, and \$50 worth goods from firm Y; and produces 500 units at \$2 per unit. Given this information, what is the economy’s GDP? Show work to receive full credit.

3. Recent data for the country Krypton reveal the following (all figures in millions). Show work to receive full credit.
Total population 100 Under 16 or institutionalized 20 Employed 50 Unemployed 10
a. The size of the labor force.

b. The size of “not in the labor force.”

c. The unemployment rate.

d. Labor force participation rate

e. Employment-population ratio

4. Suppose the natural rate of unemployment is 4.5% and the current unemployment rate is 6%. Show work to receive full credit.
a. According to Okun’s law, what is the size of the GDP gap?

b. If potential GDP is \$1,000 billion, how much output is being lost as a result of the economy being below its potential?

5. Nominal GDPt = quantityt * pricet. Real GDPt = quantityt * pricebase year. Growth rate of Xt = [(Xt-Xt-1)/Xt-1]*100. GDP deflator = (nominal GDPt /real GDPt)*100. Inflation rate = [(Pt-Pt-1)/Pt-1]*100. Show work to receive full credit.
a. Calculate nominal GDP, Real GDP in 2012 and in 2015 dollars:
Year Quantity Price Nominal GDP
Real GDP 2012\$
Real GDP 2015\$
2012 1000.00 \$10

2013 1100.00 \$11

2014 1000.00 \$13

2015 1200.00 \$16

b. Find the growth rates of nominal GDP for 2013, 2014, and 2015.

c. Find the growth rates of real GDP (using 2012\$) for 2013, 2014, and 2015.

d. Find the growth rates of real GDP (using 2015\$) for 2013, 2014, and 2015.
e. Calculate GDP deflator (using 2012\$) and inflation rates for 2013, 2014, and 2015.

f. Calculate GDP deflator (using 2015\$) and inflation rates for 2013, 2014, and 2015.

6. Consider the following data for a hypothetical economy. Show work to receive full credit.
Year Real GDP
Population
1 \$50,000 200 2 \$51,400 202
a. Calculate the growth rate of real GDP over the year.

b. At this rate of growth, approximately how many years will pass before real GDP doubles?

c. Find real GDP per capita in each of the two years. Using these two values, calculate the growth rate of real GDP per capita over the year.

d. At this rate of growth, approximately how many years will pass before real GDP per capita doubles?

7. A hypothetical economy’s consumption schedule is given in the table below. Show work to receive full credit.
GDP=DI C 6600 6680 6800 6840 7000 7000 7200 7160 7400 7320 7600 7480 7800 7640 8000 7800
Use the information to answer the following:
a. If disposable income were \$7400, how much would be saved?

b. What is the “break-even” level of disposable income?

c. What is this economy’s marginal propensity to consume?

d. What is the average propensity to consume when disposable income is \$7000? When disposable income is \$8000?

8. Multiplier effect. Show work to receive full credit.
a. Suppose a \$100 increase in desired investment spending ultimately results in a \$300 increase in real GDP. What is the size of the multiplier?

b. If the MPS is .4, what is the multiplier?

c. If the MPC is .75, what is the multiplier?

d. Suppose investment spending initially increases by \$50 billion in an economy whose MPC is 2/3. By how much will this ultimately change real GDP?

9. The consumption and investment schedules for a private closed economy are given in the following table. Show work to receive full credit.
GDP=DI C I 6600 6680 80 6800 6840 80 7000 7000 80 7200 7160 80 7400 7320 80 7600 7480 80 7800 7640 80 8000 7800 80
Use the values in the table to answer the following:
a. What is the equilibrium level of GDP?

b. What is the level of saving at the equilibrium level of GDP?

c. Suppose actual GDP is \$7600. How much unplanned inventory change will occur? What will likely happen to GDP as a result?

10. Suppose a private closed economy has an MPC of .8 and a current equilibrium GDP of \$7400 billion. Show work to receive full credit.
a. What is the multiplier in this economy?

b. Now suppose the economy opens up trade with the rest of the world and experiences net exports of \$20 billion. What impact will this have on equilibrium real GDP?
c. Next suppose a government is introduced, and plans to spend \$100 billion. By how much will this change in spending ultimately cause GDP to change, and in what direction? d. In order to finance this expansion of government spending, suppose the government decides to levy a lump-sum tax of \$100 billion. By how much will GDP change, and in what direction?

11. Suppose an economy can be represented by the following table, in which employment is in millions of workers and GDP and AE are expressed in billions of dollars. Show work to receive full credit.
Employment Real GDP
Aggregate Expenditures 100 1200 1275 105 1300 1350 110 1400 1425 115 1500 1500 120 1600 1575 125 1700 1650
Use the table to answer the following:
a. What is the equilibrium level of GDP?

b. What kind of expenditure gap exists if full employment is 120 million workers? What is its size?
c. Suppose government spending, taxes, and net exports are all independent of the level of real GDP. What is the multiplier in this economy?

d. Suppose instead that the economy is producing at equilibrium GDP. If this GDP is \$200 billion below the economy’s potential, what is the size of the recessionary expenditure gap?

12. The following table shows the average retail price of butter and the Consumer Price Index (CPI) from 1980 to 2000, scaled so that the CPI = 100 in 1980. Inflation = [(CPI2000/CPI1980) – 1] *100. Real price of butter in year t = (CPIbase year/CPIt) *(nominal price of butter in year t). Percentage change = [(final – beginning) / beginning] *100. Show work to receive full credit.

a. Calculate the inflation from 1980 to 2000.

b. Calculate the real price of butter in 1980 dollars. What is the percentage change in the real price (1980 dollars) from 1980 to 2000? Hint: the base year is 1980.
1980 1985 1990 1995 2000
Real price of butter (1980 \$)

c. Calculate the real price of butter in 2000 dollars. What is the percentage change in the real price (2000 dollars) from 1980 to 2000? Hints: the base year is 2000.
1980 1985 1990 1995 2000
Real price of butter (2000 \$)

d. Does it matter which year is chosen as the base year when calculating percentage changes in real prices