Problem Set

(1) A stock or a flow?

a. Private saving
b. Labor-force participation rate

(2) Which component(s) if any of U.S. GDP would be affected and how (in- crease or decrease) if:

a. A German national buys a new house in Miami Beach
b. GM sells some cars that entered its inventory last year
c. You rent an old house in Miami
d. Miami-Dade County builds a new public school
e. You clean your apartment
f. The movie "Star Wars: Episode VII - The Force Awakens" is just released
g. You go diving in the Bahamas
h. You buy some Apple stock from a broker who charges you a $10 fee
i. You buy an old computer for your business
j. United Airlines buy a new Airbus airplane produced in Europe

(3) An economy is producing just oranges and apples. The table below contains information about the quantity and prices of both goods from 2011 to 2014.

a. Calculate the nominal GDP for each year.
b. Assume 2014 is the base year and find the real GDP and the GDP deflator for each year.
c. Assume the typical consumer buys 2,000 oranges, 1,000 apples, and nothing else.

i. Let 2014 be the base year. Estimate the CPI for each year.
ii. What was the inflation in 2015 (the percentage change in CPI from 2014 to 2015)? What is the percentage change in the GDP deflator in 2015 relative to 2014? Why may using the GDP deflator (in this case) understate the increase in the cost of living, while using the CPI (in this case) may overstate the increase in the cost of living?

(4) A country's population (age 16 or older) is 200 million. Moreover, we know that 120 million people are employed and 8 million are unemployed.

a. Find the unemployment rate and the labor force participation rate.
b. Imagine that a recession hits the economy and 3 million people are fired. 2 million of them look for jobs for some time, but could not find any; they get desperate and decide to wait for better economic conditions. The other 1 million people are still looking for a job, but are not successful yet. Find the unemployment rate and the labor force participation rate.

(5) The production function of an isolated island economy is

F(K,L) = 4K^1/4L^3/4.

a. Assume the supply of labor is 1,296

i. How much is the supply of capital if the market clears at a real rental rate of 8?
ii. A hurricane hits the island in question. There are no casualties, but some capital stock has been destroyed. Would the equilibrium rental rate increase or decrease? Explain.

b. Assume the supply of labor is 1,000. How much is the supply of capital if the market for LABOR clears at a real wage of 6?

(6) Consider a closed-economy market-clearing model with the following production function: F(K,L) = 4K^1/5L^4/5, where K denotes capital, L denotes labor, and A is a positive constant.

a. Assume the supply of labor increases by 30%. Calculate the resulting percentage change in output, the real wage, and the real rental rate.
b. Assume that the total factor productivity, A, increases by 30%. Compute the resulting percentage change in the output, the real wage, and the real rental rate.

(7) Consider a closed-economy market-clearing model where:

K‾ = ?? (??, ??) = 2 √????

??‾ = 100

??‾ = 2,500

??‾ = 200

T‾ = 100

?? = 50 + 0.8 ?? - ??

?? = 200 - 10,000??

a. Please find private saving, public saving, and national saving. Compute the equilibrium real interest rate.

b. Imagine the government achieves a balanced budget by raising taxes. Please find the resulting private saving, public saving, and national saving. Compute the new equilibrium interest rate.

(8) Consider a closed-economy market-clearing model where the marginal propensity to consume (MPC) equals 0.6, MPL = 20, and MPK = 10.

a. Please find the change in private saving, public saving, and national saving if:

i. ?G = -5 and ?T = -5, i.e., both government spending and taxes decrease by 5
ii. ?K = 1

b. Use graphical analysis to demonstrate whether the equilibrium real interest rate increases or decreases in (i) and (ii) respectively.