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UIUC ECON 103 - Macro501 Problem Set 1-15-Sol

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Name Score 100 Macroeconomics Problem Set 1 Due Friday February 6 by 10 00 am Please type your answers to multiple choice questions in the following table For the short answer questions please type the answers in the spaces provided below each question Save the file with the name aaa bbb PS1 doc where aaa is your first name and bbb is your last name Submit the file by emailing it to MSPEMacro gmail com Please include Problem Set 1 in the subject line of your email Late submissions will lose all points for the problem set Answer Form for Multiple Choice Questions Question 1 2 3 4 5 6 7 8 9 10 11 12 Answer d b e a b c e c d b c d 13 14 15 16 Part A Multiple Choice Questions Choose only one most satisfactory answer for each question 3 points each 1 The purchase of a b c d a used house does enter GDP new material for improving a used house does not enter GDP both a used house and the new material for improving a used house enter GDP a used house does not enter GDP but the purchase of new material for improving a used house does e none of the above 2 A country s gross national product GNP is a the market value of all final goods and services produced in the country during a given period f the market value of all final goods and services produced by the factors of production owned by the county s nationals during a given period g the market value of all intermediate goods and services produced by the factors of production owned by the county s nationals during a given period h the market value of all final goods and services minus intermediate goods and services produced by the factors of production owned by the county s nationals during a given period i the market value of all final goods produced in the country during a given period 3 Households in India tend to produce the goods and services that they need mostly at home Suppose that in the coming couple of years a group of ingenious entrepreneurs make an economic revolution by establishing new firms and employing most of the household members who work at home The entrepreneurs manage to get their employees to produce the same products that they used to produce at home and to satisfy their economic needs by spending their resulting incomes on the goods and services offered by the new firms So the households end up having the same products that they are Macroeconomics Problem Set 1 1 consuming now but buy them in the market rather than having them at home If this change takes place a j k l m India s GDP will rise India s GDP will decline India s GDP will remain unchanged India is likely to become a better place to do business Both a and d 4 Economists have argued that when the consumer price index is calculated based on a fixed basket of consumption goods it overestimates the cost of living increases One reason for this upward bias is that the fixed basket method does not take into account a the fact that consumers substitute toward goods that become relatively less expensive n the fact that consumers replace worn out goods with new ones o the substitution of new prices for old prices of the goods in the consumption basket from one year to the next p the substitution of quantity for quality in consumer purchases over time 5 A Texas freight company buys a new truck made in Illinois by a Japanese company The truck is made entirely with American labor and American made parts As a result a U S investment and Japanese GDP increase but U S GDP is unaffected q U S investment and GDP increase but Japanese GDP is unaffected r U S investment U S GDP and Japanese GDP are unaffected because trucks are intermediate goods s U S investment U S GDP and Japanese GDP all increase 6 Over the past three decades the real GDP of the United States has increased at an average the rate of 3 percent per year The average growth rate of population in the country has been 1 percent per year What has been the average growth rate of real per capita GDP in the US during the past three decades a t u v w 0 percent 1 percent 2 percent 3 percent 4 percent 7 GDP deflator is a x y z aa a special needle used by the Fed the ratio of consumption to investment expenditure the ratio of real to nominal GDP the ratio of nominal GDP to CPI the ratio of nominal to real GDP Macroeconomics Problem Set 1 2 8 The Bureau of Economic Analysis has calculated the constant price and chain rule GDP values for 2007 using 2006 as the base year From what you know about the constant price and chain rule calculations you expect that for 2007 a bb cc dd ee the constant price GDP figure to be higher than the chain rule GDP figure the constant price GDP figure to be lower than the chain rule GDP figure the constant price GDP figure to be the same as the chain rule GDP figure the constant price figure to be lower than the chain rule one if 2007 were a boom year the constant price figure to be lower than the chain rule one if 2007 were a recession year 9 Which one of the following approaches to national accounts calculation cannot yield a correct measure of a country s GDP a ff gg hh Adding up the total market value of all final goods and service produced in the country Adding up the total income of all residents of the country from domestic production Adding up the total value added of all production units in the country Adding up the total income of all nationals from all sources 10 This question is based on the article Calculating European GDP Changing the scales published by The Economist on Aug 23 2014 It can be viewed through UIUC Library Online Resources For your convenience the article is copied below According to this article the new treatment of expenditures for R D raises the measured GDP in the European Union because now these items a b c d are measured while they were not measured before are treated as final goods while they were treated as intermediate goods before are considered as marketed products while they were viewed as non market activities before are considered as legal products while they were viewed as illegal activities before 11 According to the above mentioned the article Calculating European GDP Changing the scales the recent revisions to GDP calculation in Europe require the inclusion of proceeds from prostitution drug peddling and cigarette and alcohol smuggling The reason for this revision is that these activities a b c d are now considered as legal by the European Union are now considered as legal by some European countries …


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