macro

DUE: MONDAY NOV. 5. LATE SUBMISSIONS WILL NOT BE ACCEPTED. !!!

1. Using the income identity: Yd = C + S, derive the following two equations: [10 pts.]

a. APC + APS = 1

b. MPC + MPS =1

2. Answer the questions below using the following data.

Disposable Income ($) Consumption ($)

0 500

500 900

1,000 1,300

1,500 1,700

a. Determine the marginal propensity to consume [5 pts.]

b. Assuming that net taxes are equal to $200 regardless of the level of income, draw a graph relating consumption against income (NOT disposable income). [5 pts.] (Hint: income –taxes = disposable income).

3. The lesson we learned from the circular flow model was the fact that the GDP can be measured in two equivalent ways: the expenditure approach and the incomes approach. Use the following data to answer the questions below.

National Income Accounts :

Net investment 110 Income earned but not received 60

Depreciation 30 Income received but not earned 70

Exports 50 Personal income taxes 50

Imports 30 Employee Compensation 455

Government Purchases 150 Corporate profits 60

Consumption 400 Rental income 20

Indirect business taxes 35 Net Interest 30

Proprietors’ income 40 Net earnings of U.S resources abroad 40

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a. Calculate the GDP using both approaches, and verifying that both approaches yield the same GDP value. [10 pts.]

b. Calculate: [20 pts.

i) NNP =

ii) NI =

iii) PI =

iv) DI =

4. The following tables gives the U.S. GDP in 1002 prices ( 1992=100) and the corresponding consumer price indices.

Year GDP Consumer Price Index (1992=100)

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1980 4611.9 82.4

1985 5329.5 107.6

1990 6138.7 130.7

1995 6739.0 152.4

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Convert the base year of the prices indices from 1992 to 1985. Using the converted price indices, recalculate the real GDPs to 1985-based real GDPs. Then calculate the average annual growth rate from 1980 to1985; from 1985 to 1990; and from 1990 to 1995. Then calculate the overall average annual growth rate for 15 –year period. [15 pts.]