Carleton ECON 2102 – If output is described by the production

CARLETON UNIVERSITYDepartment of EconomicsIntermediate Macroeconomics IEconomics 2102 – Winter 2017Problem Set 1Lecture 1 Multiple Choice [30 points]. Choose the one alternative that best completes the statement oranswers the question (3 points per question)1. If output is described by the production function Y = L? K ? , with ? + ? < 1 then the production functionhas:(a) diminishing returns to scale(b) increasing returns to scale(c) constant returns to scale(d) degree of returns to scale that cannot be determined from the information given.(e) None of the above2. All of the following are a stock variables except:(a) a consumer’s wealth.(b) the government budget deficit.(c) the number of unemployed people.(d) the amount of capital in the economy.variables influence 3. Macroeconomic models are used to explain how variables. (a) endogenous; exogenous(b) exogenous; endogenous(c) microeconomic; macroeconomic(d) macroeconomic; microeconomic4. If output is described by the production function Y = L? K ? , then the production function has:(a) diminishing returns to scale(b) increasing returns to scale(c) constant returns to scale(d) degree of returns to scale that cannot be determined from the information given.(e) None of the above5. Nominal GDP means the value of goods and services is measured in(a) current(b) average(c) constant(d) actual 1 prices. 6. GDP is the market value of alltime. goods and services produced within an economy in a given period of (a) used(b) intermediate(c) consumer(d) final7. If nominal GDP grew by 10 percent and real GDP grew by 5 percent, then the GDP deflator grew by approxpercent.imately(a) 8(b) 5(c) 3(d) 28. The CPI is determined by computing:(a) an average of prices of all goods and services.(b) the price of a fixed basket of goods and services, relative to the price of the same basket in a base year.(c) the price of a basket of goods and services that changes every year, relative to the same basket in a baseyear.(d) nominal GDP relative to real GDP.9. The marginal product of labor is:(a) output divided by capital input.(b) additional output produced when one additional unit of labor is added.(c) additional output produced when one additional unit of capital is added.(d) additional output produced when one additional unit of capital and one additional unit of labor are added.10. Endogenous variables are:(a) fixed at the moment they enter the model.(b) determined within the model.(c) the outputs of the model.(d) explained by the model.(e) None of the above.2 GNP and Real and Nominal GDP [8 point] (a) (4 points) Explain carefully the difference between real GDP and nominal GDP and why it is useful for economiststo have information on both.(b) (4 points) Explain the difference between GNI and GDP. 2 Table 1: GDP and Prices Price of a liter of milkNumber of milks producedPrice of a carNumber of cars produced 3 Year 2000$1500$50100 Year 2016$2400$100120 GDP and Prices [28 points] Consider an economy that produces and consumes milk and cars. In table 1 are data from two different years.(a) Using the year 2000 as the base year, compute for 2000 and 2016 the following statistics for each year: nominalGDP, real GDP, the price deflator and the CPI. [15 points](b) How much have prices risen between year 2000 and 2016 using the CPI.[3 points](c) How much have prices risen between year 2000 and 2016 using the GDP deflator.[3 points](d) In general, the inflation computed with the GDP deflator differs from the inflation derived from the CPI. Is thistrue in this problem? Explain why? [7 points]4 Prices [10 points] Imagine two countries, A and B, with consumer price indexes in 2015 equal to 160 (in country X) and to 120 (incountry Y). The base year is 2000. (a) (3 points) Which of the countries has experienced a higher inflation rate between the years 2000 and 2015?(b) (7 points) Suppose the Consumer Price Index of country Y (with base year 2000) in the year 2016 is equal to 130and that of country X (also in 2016) is 170. What can we say about the rate of inflation and the price level inthe two countries? Which country has experienced a higher inflation rate and which country has a higher pricelevel? Explain carefully your answer and, if you think that these questions cannot be answered without furtherinformation, explain what kind of information you would need in order to be able to answer these questions.5 Components of the GDP [10 points] Place each of the following transactions in one of the four components of expenditure (consumption, investment,government expenditure, or net exports). Do not forget to justify your answer:(a) A domestic airline manufacturer sells an airplane to a domestic airline operator [2 points].(b) A domestic car manufacturer sells a car to a domestic soccer player (i.e. private individual) [2 points].(c) A domestic airline manufacturer sells an airplane to a foreign airline operator [2 points].(d) A domestic airline manufacturer sells an airplane to the Air Force (i.e. government) [2 points].(e) A domestic car manufacturer builds a car to be sold next year [2 points].6 Investment. True, False or Uncertain. [5 points] If you pay $10000 Canadian dollars for a used computer for your business, then the aggregate investment of theeconomy is increasing by $10000 Canadian dollars. Justify your answer. 3 7 National Income Accounting. [9 points] The income identity for a closed economy says thatY =C +I +GAssume that in the Economy of Berkeley GDP (Y) is equal to 6,000 and consumption (C) is given by the equationC = 600 + 0.6(Y ? T ).In addition, investment (I) is given by the equationI = 2, 000 ? 100rwhere r is the real of interest rate in percent. Taxes (T) are 500 and government spending (G) is also 500. What arethe equilibrium values of C, I, and r? 4