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Economics 295: Introduction to Macroeconomic Policy

Assignment 1 Due: Thursday February 14 in class (no later)

Question 1 Suppose we have a dataset from a Labour Force Survey conducted by Statistics Canada with the following information. Total Population 30 million Total Adult Population 21 million Currently Working 15 million Not Working but Actively Searching 3 million Not Working and No Longer Searching 3 million (a) What is the unemployment rate? (b) Explain how the unemployment rate can fall during a month even though the amount of employment might fall. Suppose the following values of the CPI and the GDP deflator were recorded at the following dates: CPI GDP Deflator April 2006 92 95 April 2007 95 99 April 2008 98 97 April 2009 101 100 (c) What is the CPI inflation rate from April 2007 to April 2008? (d) Explain the difference between a rising price level and a rising rate of inflation. (e) Explain why the inflation rate as measured by the CPI could be different from the inflation rate as measured by the GDP Deflator.

Question 2 Below is a list of national income figures for a country in 2013 all in billions of current 2013 dollars. If an item does not appear, assume that it is equal to 0. Consumption of Goods Services Purchased Wages and Salaries Interest Income Government Purchases Business Profit 350 500 800 100 350 350

New Plant and Equipment New Residential Structures Sale of Existing Residential Structures Increase in Inventories Taxes Exports Imports Depreciation Subsidies Net Income from Abroad a) b) c) d)

200 100 200 50 200 600 500 250 50 200

Calculate total GDP using the expenditure approach. Calculate GDP using the income approach. Explain why the answers in (a) and (b) must be the same. Calculate Real GDP in 2002 dollars, assuming that the GDP Deflator in 2013 is equal to 122. Explain why Real GDP is useful when comparing GDP between two years. e) Calculate nominal GNP in 2013. Explain why it is different from (nominal) GDP in the same year.

Question 3 Consider an economy that produces two final goods D and E. The firm producing good D receives total revenue of $1,500 and the firm producing good E receives total revenue of $2,000. Production of good E requires $1,000 of good D. Production of good D requires $750 of good B and $250 of good C. Production of good B requires $500 of good A. Assume there are no cost of intermediates associated with the production of goods A and C. a) Calculate the Value Added, Revenue and Cost of Intermediate Goods for the production of each good. Show your results in a table like the one below. Firm A Cost of Intermediates Revenue Value Added b) What is the GDP of this economy? Explain using this example why double counting would lead to a mistake when calculating this number. c) Explain and show how the GDP in part (b) could be calculated using the Income Approach and the Expenditure Approach. Firm B Firm C Firm D Firm E

Question 4 Answer the following question with the simple model from chapter 21. You are provided aggregate expenditure functions (AE) on two economies A and B. Y denotes real GDP. All numbers are in billions of dollars.

Economy A: Economy B:

AEA = 105 + 0.8Y AEB = 262.5 + 0.5Y

a) Calculate the equilibrium real GDP for both economies. b) Draw two graphs (to scale) to illustrate simple multipliers in these two economies. Briefly compare and explain how and why their multipliers are different. You do not need to provide any numerical result. c) Consider a new economy that shares the same equilibrium output as economy A and its simple multiplier is 1. Compute its autonomous expenditure.

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