Macroeconomics 1 - Seminar 4
10.03.2015
Miroslava Federičová
HW1 – Problem 1
Consider an economy that produces and consumes bread and automobiles. In the
following table are data for two different years.
– Using 2000 as the base year, compute the following statistics for each year:
nominal GDP, real GDP, the price deflator for GDP, and a fixed-weight price
index (CPI).
nominal GDP2000=10 millions; nominal GDP2010=15,2 millions
real GDP2000=10 millions; real GDP2010=10 millions
GDP def2000=100 ; GDP def2010=152; CPI2000=100; CPI2010=160
– How much did prices rise between 2000 and 2010? Compare the answers
given by the GDP deflator and the CPI. Explain the difference.
Using GDP deflator, prices raised by 52% and using CPI by 60%.
– Suppose you are a senator writing a bill to index Social Security and federal
pensions. That is, your bill will adjust these benefits to offset changes in
the cost of living. Will you use the GDP deflator or the CPI? Why? CPI
2000 2010
Good Quantity Price Quantity Price
Automobiles 100 $ 50,000 120 $ 60,000
Bread 500,000 $10 400,000 $ 20
Suppose that the GDP of the Czech Republic is
60% of the GDP of Eurozone. By how many
percent should the Czech economy growth rate
exceed the growth rate in Eurozone to reach the
GDP of Eurozone in 10 ten years?
The Czech Republic should grow by 5.2% more than Eurozone to reach the
GDP in Eurozone in 10 years.
HW1 – Problem 2
Economies in country A and B started at the same level of real
GDP. After 50 years, the real GDP in the country A rose with
average annual rate of growth 2% and in the country B 4%.
– How much did the real GDP rise in country A and country B?
GDP raise in country A 2.69 times and in country B 7.11 times.
– How many times is the real GDP higher in country A than in country
B?
GDP in country B is 2.64 times higher than the GDP in country A.
– Suppose that at the beginning the size of the population in country
A was the same as in country B. Population growth during the 50
years was in country A 3% and in country B 1%. How much did the
real GDP per person rise in country A and country B?
GDP per person raise in country A 0.61 times (i.e. decreased) and in country B
4.34 times.
– How many times is the real GDP per person higher in country A than
in country B?
GDP per person in country B is 7.11 times higher than in country A.
HW1 – Problem 3
Suppose that a country experiences a reduction in
productivity – that is, an adverse shock to the
production function.
– What happens to the labor demand curve? Use a diagram
of the labor market.
Labor demand curve shifts to the left.
– How would this change in productivity affect the labor
market – that is, employment, unemployment, and real
wages – if the labor market is always in equilibrium?
Employment would decrease, unemployment increased and real wages would
go down.
– How would this change in productivity affect the labor
market if unions prevent real wages from falling?
Quantity of the labor would decrease even more.
HW1 – Problem 4
• Define the two categories of financial
institutions.
• What is stock? What is bond? How are they
different? How are they similar?
• Define public saving, private saving, national
saving and investment. How are they related?
Financial institutions through which savers can
directly provide funds to borrowers are called:
a. banks.
b. financial markets.
c. mutual funds.
d. saving and loan associations.
Which of the following are characteristics of bonds?
i. Bonds are certificates of indebtedness.
ii. Bonds are purchased through auctions.
iii. Bonds can be resold in secondary bond markets.
iv. Bonds represent ownership of a corporation.
a. only ii, iii, and iv
b. only i, ii, and iii
c. only i, iii, and iv
d. all four
Which of the following are true, regarding bonds?
a. From the holder's point of view, bonds are riskier
than stocks.
b. Bonds do not have a specified date of maturity.
c. For tax purposes, government bonds are treated
differently than corporate bonds.
d. Bond buyers are protected from corporate
bankruptcy through the FDIC.
Which of the following statements is true, regarding
stocks?
a. Stocks specify the benefits the holder will have in
the future.
b. The act of buying stock of a corporation amounts
to buying a part of that corporation.
c. Stocks have maturity dates.
d. Stocks pay interest to the stockholder.
Which of the following are true?
a. Prices of stocks are determined by the
corporations that issue them.
b. Stocks are riskier than bonds for the holder.
c. The profits of a corporation do not belong to the
stockholders.
d. The value of the stock will be repaid to the
stockholder by the corporation on the maturity
date.
Which of the following is true about banks?
a. The interest rate banks charge when they lend is
the same they pay for the deposits they receive.
b. Typically, banks receive few but big deposits,
which they then use to make many small loans.
c. Through the checking accounts they facilitate,
banks provide a medium of exchange.
d. Banks are financial institutions through which
savers can directly provide funds to borrowers.
Which of the following is NOT true about mutual funds?
a. Mutual funds typically hold a wide assortment of
stocks and/or bonds.
b. Mutual funds pool together the money of many
different savers.
c. Mutual funds typically accept deposits and allow
depositors to write checks on their deposits.
d. Mutual funds allow people with limited funds to
diversify.
Assuming a closed economy, which of the following
is true?
a. National saving must equal domestic investment.
b. National saving must be greater than domestic
investment.
c. National saving is what remains out of income
after households consume.
d. National saving must be less than domestic
investment.
Assuming a closed economy, which of the following
is FALSE in the market for loanable funds?
a. National saving provides the supply of loanable
funds.
b. Domestic investment provides the demand for
loanable funds.
c. The loanable funds market determines the
interest rate in the economy.
d. The amount of funds loaned depends on national
saving alone.
If the government changes the tax code in a way that
encourages households to save more:
a. the supply of loans will shift to the right, leading to a
lower interest rate.
b. the demand for loans will shift to the right leading to a
higher interest rate.
c. the supply of loans will shift to the left, leading to a
higher interest rate.
d. the demand for loans will shift to the left leading to a
lower interest rate.
Explain the difference between saving and investment as
defined by macroeconomist.
Which of the following situations represent investment?
Saving? Explain.
a) Your family takes out mortgage and buys a new
house. Investment
b) You use your $200 paycheck to buy stock in AT&T.
Saving
c) Your roommate earns $100 and deposits it in her
account at a bank. Saving
d) You borrow $1,000 from a bank to buy a car to use in
your pizza delivery business. Investment
Economists in Funlandia, a closed economy, have collected the following
information about the economy for a particular year:
Y=10,000
C=6,000
T=1,500
G=1,700
The economists also estimate that the investment function is:
I=3,300 – 100 r
where r is the country’s real interest rate, expressed as a percentage.
Calculate private saving, public saving, national saving, investment, and the
equilibrium real interest rate.
Private saving= 10,000-1,500-6,000=2,500
Public saving=1,500-1,700=-200
National saving=2,300
Investment=2,300
Real interest rate=10%