Assignment

Answer the following questions.

1. Suppose police become more efficient and we hire fewer police officers. What will happen to GDP?

2. Assume a product improves in quality from one year to the next year and its price rises to reflect this improvement. What happens to the GDP deflator and real GDP?

3. Do increases in unwanted inventories on firm's shelves count as inventory investment in GDP account?

4. Is buying an air-conditioner an act of consumption or investment in the GDP accounts? What about purchase of a house?

5. What happens to a GDP account when a Pakistani firm decides to build a plant in Dubai rather than in Pakistan?

6. How would an increase in a sales tax affect GDP?

7. Is domestic investment the same as investment done in any other country?

8. What is difference in the National Income accounts if a firm purchases a car for an executive and the firm pays the executive an additional income to purchase a car?

9. State bank of Pakistan has taken contractionary monetary policy by increasinginterest rate from 5.75% to 6%. Show the effect of this policy on GDP and inflation.

10. Explain why intermediate goods and services generally are not includeddirectly in GDP are there any circumstances under which they would be included directly?

A. They are not produced

B. They do not have a market value

C. They are imported and not produced locally

D. To do so would result in their market value being included more than once.

11. Assume an economy produced only two goods, computer and television sets in2008 and 2009. It produces 100 computers in 2008 at a price of $1000 and 200computers in 2009 at a price of $500. It produces 1000 television sets in 2008 at a price of $500and 800 television sets in 2009 at a price of $600. Compare nominal GDP, Real GDP, GDP deflator, CPI and Inflation.