1. (Supply-Side Economics) One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use and aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve? 

2. (1. Income Approach to GDP) How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value added and its importance in the income approach. Consider the following data for the selling price at each stage in the production of a 5-pound bag of flour sold by your local grocer. Calculate the final market value of the flour.

Stage of Production                            Sale Price

Farmer                                              $0.30

Miller                                                  0.50

Wholesaler                                          1.00

Grocer                                                1.50

3.  Expenditure Approach to GDP) Given the following annual information about hypothetical country, answer questions a through d.

Billions of Dollars

            Personal consumption expenditures                                                              $200

            Personal taxes                                                                                                 50

            Exports                                                                                                           30

            Depreciation                                                                                                    10

            Government purchases                                                                                   50

            Gross private domestic investment                                                                  40

            Imports                                                                                                           40

            Governments transfer payments                                                                     20

a.      What is the value of GDP?

b.     What is the value of net domestic product?

c.      What is the value of net investment?

d.     What is the value of net exports?

4. (Consumer Price Index) Calculate a new consumer price index for the data in the follow exhibit. Assume that current-year prices of Twinkies, fuel oil, and cable TV are $0.95/package, $1.25/gallon, and $15.00/month, respectively. Calculate the current year’s cost of the market basket and the value of the current year’s price index. What is this year’s percentage change in the price level compared to the base year?

5. (Consumer Price Index) Given the following data, what was the value of the consumer price index in the base year? Calculate the annual rate of the consumer price inflation in 2013 in each of the following situations:

a. The CPI equals 200 in 2012 and 240 in 2013.

b. The CPI equals 150 in 2012 and 175 in 2013.

c. The CPI equals 325 in 2012 and 340 in 2013.

d. The CPI equals 325 in 2012 and 315 in 2013.

References

McEachern, W. A. (2015). ECON macroeconomics (4th ed.). Stamford, CT: Cengage Learning