Principles of Macroeconomics Chap 10

EC132 Principles of Macroeconomics, Fall 2010

PROBLEM SET #2

DUE in class Sept 27th 2010

I- Mankiw Principle of Macroeconomics Exercise 10.1 (pag. 221)

GDP is the market value of all final goods and services produced within a country in a given period of time.

GDP: Y= C + I + G + NX

In all this exercise, we suppose that we are studying the GDP of the United States.

a- A family buys a new refrigerator

As it is not specified, we suppose that the refrigerator has been made in the US. As a result, the consumption (C) will increase and the GDP (Y) as well.

b- Investment in structures includes expenditure on new housing. By convention, the purchase of a new house is one form of household spending categorized as investment rather than consumption. As a result, the purchase (a new house) of aunt Jane will increase the investment (I) and the GDP (Y) as well.

c- Ford sells the Mustang out of inventory. Ford’s inventory investment will then be negative, offsetting the positive expenditure of the buyer. As a result, investment (I) will decrease and the GDP (Y) as well.

d- Pizza is a nondurable goods but is considered as consumption. As a result, the consumption (C) will increase and the GDP (Y) as well.

e- Repave the highway is a public work which is a government purchase. As a result, the government purchases (G) will increase and the GDP (Y) as well.

f- Because the bottle of French wine is not a good produced in the US, it does not enter in the GDP so Y stays the same. The purchase of the bottle reduces net exports (NX), but it also raises consumption (C), it does not affect GDP (Y).

g- Honda expands its factory in Marysvill, Ohio, so it means there will be more imports, therefore NX decreases but the consumption (C) increases. As Honda is from Japan, the goods are not produced in the US so it does not affect GDP (Y).

II- Mankiw Principle of Macroeconomics Exercise 10.6 (pag.222)

a- Growth rate of nominal GDP between 1999 and 2000:...