Intermediate Macroeconomics assignment
1. Explain whether or not and why the following items are included in the
calculation of GDP:
a. Increases in business inventories
b. Sales of existing homes
c. The fees earned by real estate agents on selling existing homes
d. Income earned by Canadians living and working abroad
e. Purchases of IBM stock by your brother
f. Purchase of a new tank by the Defense Ministry
g. Rent that you pay to your landlord
2. Consider the two definitions of the nominal exchange rate, e and .
(a) Write down the real exchange rates and corresponding to e and and
interpret them.
(b)Using the definitions and in (a) show that:
and
.
Interpret these relations.
(c) The theory of relative
a. Using this data calculate Gross Domestic Product (GDP) at market prices.
b. Calculate GDP at factor cost.
c. Calculate Net Domestic Product (NDP)at factor cost.
5. Suppose the aggregate price level in the Canada suddenly surges, while that in the U.S. remains
unchanged. What do you think will happen to the real and nominal exchange rates between these
two countries? Briefly, why?
6. Suppose that the relevant parameters of the economy are t=0.33, Ir =900 ,Cy =0.75 r =10
X=0.6 suppose that an irrational exuberance causes a stock market boom which leads consumers
to increase their spending by $20 billion at a constant level of disposable income. What would be
the increase in interest rates in response to such an exuberance- driven consumption boom?
7. In recent years foreign exchange speculators have become much more confident in the longrun
value of the dollar. What would you suspect has happened to net exports over the past
decade?
8. Explain qualitatively the direction in which consumption, investment, government purchases,
net exports, the exchange rate, the real interest rate, and potential output move in the flexibleprice
full-employment model if the government raises taxes.
9. Suppose that in the flexible-price full-employment model of this chapter the government
increases taxes and government purchases by equal amounts. The tax increase reduces
consumption spending. What happens qualitatively (tell the direction of change only) to
investment, net exports, the exchange rate, the real interest rate, and potential output?
10. Assume that the economy’s production function is Cobb-Douglas:
,
the capital stock is 80, the total labour force is 100 and .
a. Derive the labour demand function.
b. Derive the equilibrium real wage.
c. What is potential output for this economy?
Bonus Question:
1. Let us incorporate government transfer payments TR explicitly into the model. Suppose
these payments are determined independently of income: they are exogenous and fixed.
These represent payments by the government that augment the disposable income of
individuals; the relevant expression for disposable income thus becomes
YD = TR + (1 – t) Y.
a -a = ´ 1 Y K L
L a = 0.4
´
a) Incorporate this modified definition of YD into the consumption function and graph C
as a function of Y.
b) Consider again the incorporation of transfer payments into the model. Suppose now
that transfer payments depend upon the aggregate level of income:
TR = TR0 – TRy Y.
Characterize in words the relationship between TR and Y characterized by this relationship,
focusing on the interpretation of the parameters TR0 and TRy.
c) Substitute the definition of TR given in exercise 3 into the expression for YD given in
exercise 2, and incorporate this modified definition of YD into the consumption
function. Finally, graph C as a function of Y.
