## GDP Problems

Group 1 : Mrs Hopeful arrived to Smithia with some gold , which she immediatly exchanged for $ 7,000 .

[Assumptions : Discount Rate = Inflation Rate = Taxes = waste = 0 , Bank = Costless Robot , All trade Via loans .]

Let Y = Income , S = Saving ‘ under mattress ‘ = 10 % , D = Deposit , R = Reserve Ratio = 4 % , L = Loan , C = Cash , Sm = money supply , MB = Monetary Base .

(A) Compute the multiplier that drives Smithia’s economy .

(B) Compute all of the above ( Y , S , etc ) within a year assuming the velocity ( V ) of money ( V = the number of times money changes hands ) is 6 .

(C) Compute all of the above ( Y , S etc ) within a year assuming that V = 12 .

(D) Redo (b) or (c) above assuming the V = infinity .

Group 2 : Smithians want to build a River Dam subject to the following Cost / Benefit idea :

Initial cost ( i . e . , engineering services services and materials ) = $ 700 .

Annual operating cost ( i . e general maintenance ) = $ 50 .

Annual benefits : $ 60 , Inflation Rate = 3% , Discount rate : 10 % , Useful economic life : 40 years .

Would you advise or against the investment and why ?

‘

Group 3 : Output ( Q ) and price ( P ) date for four goods produced and sold in smithians given in the table below ( 2007 = Base year ) .

(A) Compute the inflation rate based on the Deflator Index ( DI ) and the consumer Price Index ( CPI ) .

(B) Graph , inthe same time diagram , nominal GDP ( NGDP) and real GDP ( RGDP ) .

t | Q1 | P1 | Q2 | P2 | Q3 | P3 | Q4 | P4 |

2005 | 87 | 35 | 47 | 18 | 48 | 25 | 68 | 13 |

2006 | 88 | 34 | 50 | 19 | 53 | 27 | 69 | 12 |

2007(B) | 92 | 34 | 51 | 21 | 53 | 26 | 73 | 11 |

2008 | 95 | 30 | 52 | 24 | 54 | 23 | 76 | 10 |

2009 | 99 | 29 | 57 | 25 | 58 | 29 | 79 | 10 |

Group 4 : An economy’s macroeconomy is described by the following model :

Y = C + I + G+ X -M , C = 500 + 0.97 (YD) , YD = Y – T , T = 300 + 0.25Y , I = 600 , G = 1000 , X – M = 0

(A) Derive the G multiplier .

(B) The Federal Budget ( F.B ) is as shown below ; the economy needs AY – 12,000 . What should be the impact of the “G” policy on the budget ?

F.B.

T = 900 | `G = 800 |

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