1. State whether the following transactions is included in GDP.  If the transaction is included, determine which component of final expenditure it represents.  If the transaction is excluded, explain why.

a.  Your local ice cream store buys peaches to make peach ice cream.

b.  Your local ice cream store buys a new and improved ice cream maker.

c.  You buy peach ice cream from your local ice cream store.

d.  Your local ice cream store sells peach ice cream to a restaurant that makes peach smoothies.

e.  Your cousin in Canada buys peach ice cream from your local ice cream store.

f.  You buy a used book to learn how to make peach ice cream.

g.  You buy a new ice cream maker to make peach ice cream for yourself.

h.  You give some of your peach ice cream to your cousin when she visits from Canada.

2.  Use the following information to calculate GDP.  You may calculate GDP from either the expenditure side or the income side of the accounts.

Government purchases of goods and services     3,200

Consumption              11,500

Compensation of employees    9,100

Business structures and equipment investment       1,500

Residential investment              500

Corporate profits                             1,500

Rent                                                  300

Interest                                             1,000

Proprietors income                            200

Change in business inventories    -100

Indirect business taxes                   2,000

Government transfer payments       1,800

Exports                                       1,500

Imports                                       2,000

Depreciation                              2,000

3.  Use the information below to answer question 3.

                                           Year 1                              Year  2

                                  Quantity    Price                Quantity       Price

Automobiles                 1          20,000                     1         22,000

PCs                              10           3,000                    20           2,000

a.  Calculate nominal GDP in years one and two.

b.  Calculate real GDP in years one and two assuming that year one is the base year.

c.  Calculate the GDP deflator in years one and two, using year one as the base year.

d.  Use the above information to calculate a consumer price index.  Assume year one is the base year and that year one quantities are the market basket.

e.  Extra credit.  Which index - the CPI or the GDP deflator - is higher?  Why?

4.  Babe Ruth was the highest paid baseball player in 1930.  His salary was $80,000 per year.  Zach Greinke was the highest paid baseball player in 2014.  His salary was $26,000,000 per year.  The consumer price index is

1930          16.7

1982-84     100

2014           236.7

a.  How much did Zach Greinke earn compared to Babe Ruth in terms of their real salary?  Calculate both salaries in terms of 1982-84 dollars.

b.  Extra credit.  How much was Babe Ruth's salary worth in terms of 2014 dollars?

5.  Explain the effect of the following events on the real wage and the real rental price of capital according to classical theory.  Use a graph in your answer.

a. A major earthquake destroys some of the capital stock.

b. A technological advance improves the production function.

6.  Consider an economy described by the following equations:

Y  =  C + I + G

Y = 5,000

G = 1,200

T = 1,000 

C = 350 + .75(Y - T)

I = 600 - 50r

a.  Calculate private saving, public saving and national saving

b.  Calculate the equilibrium interest rate

Point values:

1a-f          4 points each

2              8 points

3a-e          5 points each

4a.            8 points

b.              4 points

5a-b          8 points each

6a.             12 points

b.               4 points