Chapter 23 questions:

1. What components of GDP (if any) would each of the following transactions affect? Explain.

a. A family buys a new refrigerator.

b. Aunt Jane buys a new house.

c. Ford sells a Mustang from its inventory.

d. You buy a pizza.

e. California repaves Highway 101.

f. Your parents buy a bottle of French wine.

g. Honda expands its factory in Marysville, Ohio.

2. The government purchases component of GDP does not include spending on transfer

payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.

3. Below are some data from the land of milk and honey.

a. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2010 as the year.

b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2011 and 2012 from the preceding year. For each year, identify the variable that does not change. Explain in words why your answer makes sense.

c. Did economic well-being rise more in 2011 or 2012? Explain.

4. Consider the following data on U.S. GDP:

a. What was the growth rate of nominal GDP between 1998 and 2018? (Hint: The growth rate of a variable X over a N-year period is calculated as 100 × [(Xfinal/Xinitial)1/N – 1].)

b. What was the growth rate of the GDP deflator between 1998 and 2018?

c. What was real GDP in 1998 measured in 2009 prices?

d. What was real GDP in 2018 measured in 2009 prices?

e. What was the growth rate of real GDP between 1998 and 2018?

f. Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain.

5. A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into

flour, which he sells to a baker for $150. The baker turns the wheat into bread, which he sells to consumers for $180. Consumerseat the bread.

a. What is GDP in this economy? Explain.

b. Value added is defined as the value of a producer’s output minus the value of the

intermediate goods that the producer buys to make the output. Assuming there are no

intermediate goods beyond those described above, calculate the value added of each of the three producers.

c. What is total value added of the three producers in this economy? How does it compare to the economy’s GDP? Does this example suggest another way of calculating GDP?

6. The participation of women in the U.S. labor force has risen dramatically since 1970.

a. How do you think this rise affected GDP?

b. Now imagine a measure of well-being that includes time spent working in the home and

taking leisure. How would the change in this measure of well-being compare to the change in GDP?

c. Can you think of other aspects of well-being that are associated with the rise in women’s labor-force participation? Would it be practical to construct a measure of well-being that includes these aspects?

Chapter 24 questions:

1. The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2010, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2011,they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100.

a. Calculate the price of each vegetable in each year.

b. Using 2010 as the base year, calculate the CPI for each year.

c. What is the inflation rate in 2011?

2. Suppose that people consume only three goods, as shown in this table:

a. What is the percentage change in the price of each of the three goods?

b. Using a method similar to the consumer price index, compute the percentage change in the overall price level.

c. If you were to learn that a bottle of Gatorade increased in size from 2011 to 2012, should that information affect your calculation of the inflation rate? If so, how?

d. If you were to learn that Gatorade introduced new flavors in 2012, should that information affect your calculation of the inflation rate? If so, how?

3. The New York Times cost $0.15 in 1970 and $2.00 in 2009. The average wage in manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.

a. By what percentage did the price of a newspaper rise?

b. By what percentage did the wage rise?

c. In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?

d. Did workers’ purchasing power in terms of newspapers rise or fall?

4. Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.

a. Is the real interest rate on this loan higher or lower than expected?

b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?

c. Inflation during the 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?

Chapter 25 questions: