ASSIGNMENT-2 CHAPTER 8: PROBLEMS

1. Suppose an economy’s real GDP is $30,000 in year 1 and $31,200 in year

2. What is the growth rate of its real GDP? Assume that population is 100
in year 1 and 102 in year 2. What is the growth rate of real GDP per capita?
31200-30,000/30,000 x 100=4%
Real gdp/population= 305.88- 300/300 x 100 =1.96%
year 1 30,000/100=$300 , year 2 312,200/202=$305.88
2. What annual growth rate is needed for a country to double its output in 7
years? In 35 years? In 70 years? In 140 years?
Years to double =70/ rate of growth Years to double output= 70/7= 10%
Rate of growth= 70/years to double 70/35= 2% 70/70= 1%
70/140=0.5%
3. Assume that a “leader country” has real GDP per capita of $40,000, whereas
a “follower country” has real GDP per capita of $20,000. Next suppose that the
growth of real GDP per capita falls to zero percent in the leader country and
rises to 7 percent in the follower country. If these rates continue for long
periods of time, how many years will it take for the follower country to catch
up to the living standard of the leader country?
Since rate of growth for real gdp per capita is 7% in follower country the
country gdp per capita will double every 10 yrs. So in 10 yrs the follower
country real gdp per capital will be $40, 0000 given that we currently have
$20,000. (70/7%)= 10 years 20,000 +20,000= $40,000 leader country

4. Refer to Figure 8.2 and assume that the values for points a, b, and c are $10
billion, $20 billion, and $18 billion respectively. If the economy moves from
point a to point b over a 10-year period, what must have been its annual rate of
economic growth? If, instead, the economy was at point c at the end of the 10-
year period, by what percentage did it fall short of its production capacity?
Since economy doubles in output, in 10 yers the rate of growth over this period
is 70/10=7%. If actual production is at POINT C , $18 b inside production
possibilities curve output is falling short by $2 billion (20-18/20)= 10%.
5. Suppose that work hours in New Zombie are 200 in year 1 and productivity
is $8 per hour worked. What is New Zombie’s real GDP? If work hours
increase to 210 in year 2 and productivity rises to $10 per hour, what is New
Zombie’s rate of economic growth?
Real GDP Year 1 = 200 x 8= $1600
Real GDP Year 2= 210 x 10= $2100 2100-1600/1000 x 100= 31.25%

CHAPTER 9: PROBLEMS
1. Suppose that a country’s annual growth rates were 5, 3, 4, -1, -2, 2, 3, 4, 6,
and 3 in yearly sequence over a 10-year period. What was the country’s
trend rate of growth over this period? Which set of years most clearly
demonstrates an expansionary phase of the business cycle? Which set of
years best illustrates a recessionary phase of the business cycle?
The trend rate of growth = to the avg for a 10 yr period. 5+3+4 ……./10
=2.7%
Expansory phase 6 through 9 years
Recessionary phase is 4 and 5 years. (negative)
2. Assume the following data for a country: total population, 500; population
under 15 years of age or institutionalized, 120; not in labour force, 150;
unemployed, 23; part-time workers looking for full-time jobs, 10. What is the
size of the labour force? What is the official unemployment rate?
500-120-150=250 labour force ***(total pop- pop under 16 - not in labour
force)
unemployment rate = unemployed/labour force x 100
23/230 x 100= 10%
3. Suppose that the natural rate of unemployment in a particular year is 5
percent and the actual rate of unemployment is 9 percent. Use Okun’s law to
determine the size of the GDP gap in percentage-point terms. If the potential
GDP is $500 billion in that year, how much output is being forgone because of
cyclical unemployment?
Okons’s law that for every 1% point by which actual unemployment rate
increases natural rate, a negative GDP gap of 2% occurs. Therefore actual
unemployment rate exceeds natural rate of unemployment by 4%. 9%-5%=
4%. 2 x 4%= 8% GDP gap which gives us an output of 40 billion cause 0.08 x
500 billion.
4. If the CPI was 110 last year and is 121 this year, what is this year’s rate of
inflation? In contrast, suppose that the CPI was 110 last year and is 108 this
year. What is this year’s rate of inflation? What term do economists use to
describe this second outcome?
121-110/110 x 100 =10% inflation rate 108-110/100 x 100= -1.8%
(deflation)
5. How long would it take for the price level to double if inflation persisted at
(a) 2, (b) 5, and (c) 10 percent per year?
70/inflation rate 70/2= 35 years 70/5= 14 years 70/10= 7 years
6. If your nominal income rose by 5.3 percent and the price level rose by 3.8
percent in some year, by what percentage would your real income
(approximately) increase? If your nominal income rose by 2.8 percent and your
real income rose by 1.1 percent in some year, what must have been the
(approximate) rate of inflation?
Percentage change in real income = % in nominal income - inflation rates
5.3%- 3.8%= 1.5%.
Inflation rates = % change nominal income - % change real income
7. Suppose that the nominal rate of inflation is 4 percent and the inflation
premium is 2 percent. What is the real interest rate? Alternatively, assume that
the real interest rate is 1 percent and the nominal interest rate is 6 percent.
What is the inflation premium?
Nominal interest rate - inflation premium = 4%-2%= 2%

6%- 1%= 5%

CHAPTER 10:

PROBLEMS

1. Refer to the incomplete table below.
a. Fill in the missing numbers in the table.

b. What is the break-even level of income in the table? What is the term
that economists use for the saving situation shown at the $240 level of
income?

c. For each of the following items indicate whether the value in the table is
either constant or variable as income changes: the MPS, the APC, the
MPC, the APS.
Y= C+S, C=Y-S
Consumption 244, 260, 276……
APC= C/Y
Y= 244/240=1.0167 do for each year
MPC= Change in c/Change in Y, for each year
260-244/260-240= 0.8
MPS= Change in S/ Change in Y, for each year
0- (-4) / 260-240= 0.2
APS= S/Y
-4/240= -0.0167 do for each year
2. Suppose that disposable income, consumption, and saving in some country
are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that
disposable income increases by $20 billion, consumption rises by $18 billion
and saving goes up by $2 billion. What is the economy’s MPC? Its MPS? What
was the APC before the increase in disposable income? After the increase?
MPC= 18/20=0.9
MPS= 2/20= 0.1
APC= 150/200= 0.75
(200+20)= $220 Consumption after change 150+18= $168 MPC= 0.9
APC= 168/220= 0.7636

3. ADVANCED ANALYSIS Suppose that the linear equation for consumption

in a hypothetical economy is C = 40 + .8Y. Also suppose that income (Y) is
$400. Determine (a) the marginal propensity to consume, (b) the marginal
propensity to save, (c) the level of consumption, (d) the average propensity to
consume, (e) the level of saving, and (f) the average propensity to save.

MPC= 0.8 GIVEN

MPS= 1- 0.8 = 0.2
LEVEL of consumption = 40+ 0.8(400)= $300 APC= 360/400 = 0.9
level of saving 400-360= $40 APC = 40/400= 0.1

4. ADVANCED ANALYSIS Linear equations for the consumption and saving

schedules take the general form C = a + bY and S= -a + (1-b)Y where C, S, and
Y are consumption, saving, and national income, respectively. The constant a
represents the vertical intercept, and b represents the slope of the consumption
schedule.

a. Use the following data to substitute numerical values for a and b in the
consumption and saving equations.
C= a +bY
c = 80+ 0.6y
MPC= 60/100= 0.6
S= -80+0.4Y
1-0.6=0.4

b. What is the economic meaning of b? Of (1 - b)?

Slope of consumption. (1- B) is the slope of savings or MPS. This implies that
0.60 of every additional $ of disposal income will be consumed. This says that
0.4 will be saved S= -80+ 0.4Y


c. Suppose that the amount of saving that occurs at each level of national
income falls by $20 but that the values of b and (1 - b) remain unchanged.
Restate the saving and consumption equations inserting the new numerical
values, and cite a factor that might have caused the change.
Our new consumption = 100+ 0.6Y c goes up by $20
S= -100+0.4Y s goes down by $20
5. Use your completed table for Problem 1 to solve this problem. Suppose the
wealth effect is such that $10 changes in wealth produce $1 changes in
consumption at each level of income. If real estate prices tumble such that
wealth declines by $80, what will be the new level of consumption at the $340
billion level of disposable income? The new level of saving?
(0.1 x $80)= 8 dollar change
1/10=0.1 $340(Y) - $316 (C)
BEFORE c=324
new c = 316
S= $24