Student’s Name: Nguyễn Ngọc Ngân

Student’s ID: BABAWE18107

Assignment 1 of Macroeconomics
Chapter 10: Measuring a Nation’s Income
Problem 6:
Year Nominal GDP (in billions of GDP Deflator (base year 2005)
dollars)
2009 14,256 109.8
1999 9,353 86.8

a. The growth rate of nominal GDP between 1999 and 2009 = 100 x [ ($14,256 / $9,353)0.10 – 1] =
4.3 %
b. The growth rate of the GDP deflator between 1999 and 2009 = 100 x [ (109.8 / 86.8)0.10 – 1] =
2.38 %
c. Real GDP in 1999 (in 2005 prices) = $9,353/ (86.8/100) = $10,775
d. Real GDP in 2009 (in 2005 prices) = $14,256/ (109.8/100) = $12,984
e. The growth rate of real GDP between 1999 and 2009 = 100 x [ ($12,984 / $10,775)0.10 – 1] = 1.88
%
f. The growth rate of nominal GDP was higher than the growth rate of real GDP due to inflation.

Problem 8:
a. In this economy, GDP is the market value of the final good sold, $180.
b. Value added for the farmer: $100.
Value added for the miller: $150 – $100 = $50.
Value added for the baker: $180 – $150 = $30.
c. Total value added of the three producers in this economy is $100 + $50 + $30 = $180.
 This is the value of GDP. This example suggests that GDP could be calculated as the sum of
the value added by all producers.

Chapter 11: Measuring the Cost of Living

Problem 5:
Karaoke Machines CDs
Quantity Price Quantity Price
2011 10 $40 30 $10
2012 12 $60 50 $12

 Fix the basket at 1 karaoke machine and 3 CDs.

a. The cost of the market basket in 2011 = (1 × $40) + (3 × $10) = $70.
The cost of the market basket in 2012 = (1 × $60) + (3 × $12) = $96.
Using 2011 as the base year, we can compute the CPI in each year:
 2011: $70/$70 × 100 = 100 %
2012: $96/$70 × 100 = 137.14 %
- We can use the CPI to compute the inflation rate for 2012 = (137.14 – 100)/100 × 100 =
37.14%
b.
- Nominal GDP for 2011 = (10 × $40) + (30 × $10) = $400 + $300 = $700.
Nominal GDP for 2012 = (12 × $60) + (50 × $12) = $720 + $600 = $1,320.
- Real GDP for 2011 = (10 × $40) + (30 × $10) = $400 + $300 = $700.
Real GDP for 2012 = (12 × $40) + (50 × $10) = $480 + $500 = $980.
- The GDP deflator for 2011 = ($700/$700) × 100 = 100.
The GDP deflator for 2012 = ($1,320/$980) × 100 = 134.69.
 The rate of inflation for 2012 = (134.69 – 100)/100 × 100 = 34.69%.
c. No, it is not the same. The first rate of inflation which is calculated by the CPI holds the basket of
goods and services constant, while the second rate of inflation which is the GDP deflator allowing
it to change and holds the prices constant.

Problem 8:
The chapter explains that Social Security benefits are increased each year in proportion to the increase in
the CPI, even though most economists believe that the CPI overstates actual inflation
a. If the elderly consume the same market basket as other people, Social Security would provide the
elderly with an improvement in their standard of living each year because the CPI overstates
inflation and Social Security payments are tied to the CPI.
b. Due to the consumption for healthcare of older people is more than younger people, and the costs
of healthcare have risen faster than overall inflation, it is believed that the elderly are worse off.
To investigate this, you would need to put together a market basket for the elderly, which would
have a higher weight on healthcare. You would then compare the rise in the cost of the "elderly"
basket with that of the general basket for CPI.

Chapter 12: Production and Growth

Problem 6:
In the 1990s and the first decade of the 2000s, investors from the Asian economies of Japan and China
made significant direct and portfolio investments in the United States. At the time, many Americans were
unhappy that this investment was occurring.
a. The Unite States can gain benefits from the Chinese and Japanese investment because the
investment made the capital stock of US larger and increasing the economic growth of US.
b. By making this investment, it would be better for Americans because they would have received
all of the returns on the investments, instead of the returns going to China and Japan.

Problem 10:
From 1950 to 2000, manufacturing employment as a percentage of total employment in the U.S. economy
fell from 28 percent to 13 percent. At the same time, manufacturing output experienced slightly more
rapid growth than the overall economy.
 a. these facts say about growth in labor productivity (defined as output per worker) in
manufacturing: If output is rising and the number of workers is declining, then output per worker
must be rising.
b. Policymakers should not be concerned if output in the manufacturing sector is not declining.
Because the reduction in manufacturing jobs will allow labor resources to move to other
industries, increasing total output in the economy. An increase in productivity of workers (as
measured by output per worker) is beneficial to the economy.

Chapter 13: Saving, Investment, and the Financial System

Problem 8:
Suppose the government borrows $20 billion more next year than this year.
a. The effect of the $20 billion increase in government borrowing:

 Supply of loanable funds: S1

 The equilibrium real interest rate: i1
 Quantity of loanable funds: L1
- Government borrowing increases $20
billion then reduces the supply of loanable
funds at each interest rate by $20 billion
 Shift to the left of S1 by exactly $20
billion (a new supple curve: S2). This leads to
the appearance of the new equilibrium real
interest rate is i2.
 As can be seen in the diagram, the interest
rate rises.

b. Due to an increase of the interest rate:

- Investment: falls
- Private saving: rises
- Public saving: falls
- National saving: falls
- As can be shown in the diagram, total loanable funds (and thus both investment and national
saving) decline by less than $20 billion, while public saving declines by $20 billion and
private saving rises by less than $20 billion.
c. The more elastic is the supply of loanable funds, the flatter the supply curve would be
 the interest rate would rise by less  national saving would fall by less.

d. The more elastic the demand for loanable funds, the flatter the demand curve would be
 the interest rate would rise by less  national saving would fall by more.

e. If households believe that greater government borrowing today implies higher taxes to pay off the
government debt in the future, they will try their best to save more money to pay the higher future
taxes. Therefore, private saving and the supply of loanable funds will increase. This will offset
the reduction in public saving, thus reducing the amount by which the equilibrium quantity of
investment and national saving decline and reducing the amount that the interest rate rises.

Problem 9:
In the summer of 2010, Congress passed a far-reaching financial reform to prevent another financial
crisis like the one experienced in 2008–2009.
a. Suppose that, by requiring firms to comply with strict regulations, the bill increases the costs of
investment. On a well-labeled graph, show the consequences of the bill on the market for
 loanable funds. Be sure to specify changes in the equilibrium interest rate and level of saving and
investment.
- The saving and investments will decrease, the demand of loanable funds would decline along
with the equilibrium  Giving the economy a lower rate for the long-run growth.
b. Suppose, on the other hand, that by effectively regulating the financial system, the bill increases
savers’ confidence in the financial system. Show the consequences of the policy in this situation
on a new graph, again noting changes in the equilibrium interest rate and level of saving and
investment.
- The savings and investments will rise while the interest rate will fall, the supply of loanable
funds would increase  Help the economy grow in the future.
Chapter 15: Unemployment
Problem 8:
Structural unemployment is sometimes said to result from a mismatch between the job skills that
employers want and the job skills that workers have. To explore this idea, consider an economy with two
industries: auto manufacturing and aircraft manufacturing.
a. If workers in these two industries require similar amounts of training, and if workers at the
beginning of their careers could choose which industry to train for, I would expect the wages of
two industries should be equal because if not, new workers will choose the industry with higher
wage and then pushing that industry’s wage down.
b. Suppose that one day the economy opens itself to international trade and, as a result, starts
importing autos and exporting aircraft:
- If the country begins importing autos, the demand for domestic auto workers would fall.
- If the country begins exporting aircraft, the demand for workers in the aircraft industry would
increase.
c. Suppose that workers in one industry cannot be quickly retrained for the other.
- At first, in the short run, wages in the auto industry would decrease, while wages in the
aircraft industry would increase. After that, over the time, new workers would move into the
aircraft industry bringing its wage down until wages were equal across the two industries.
d. If for some reason wages fail to adjust to the new equilibrium levels, there would be a shortage of
workers in the aircraft industry and a surplus of labor (unemployment) in the auto industry.

Problem 9:
Suppose that Congress passes a law requiring employers to provide employees some benefit (such as
healthcare) that raises the cost of an employee by $4 per hour.
a. If a firm was not providing such benefits prior like in this law, the demand for labor would shift
to the left by exactly $4 at each quantity of labor, because the firm would not be willing to pay as
high a wage given the increased cost of the benefits.
b. If employees place a value on this benefit exactly equal to its cost, they would be willing to work
the same amount for a wage that is $4 less per hour.
 the supply curve of labor shifts to the right by exactly $4.
 c. The diagram illustrates
the equilibrium in the labor
market. The demand and
supply curves of labor both
shift by $4 so the
equilibrium quantity of
labor is unchanged and the
wage declines by $4 
Both employees and
employers are just as well
off as before.

d. Suppose that, before the mandate, the wage in this market was $3 above the minimum wage.
- If the minimum wage prevents the wage from falling to the new equilibrium level, the result
will be increased unemployment.
 The equilibrium quantity of labor is L1 and
 The equilibrium wage is w1, which is $3 higher
 The minimum wage wm
- After the mandate is passed, Demand falls to D2
and Supply rises to S2. Because of the minimum
wage, the quantity of labor demanded (LD,2) will be
lower than the quantity supplied (LS,2). Thus, there
will be unemployment equal.

e. Now suppose that workers do not value the

mandated benefit at all.
- If the workers do not value the
mandated benefit at all, the supply curve of labor
does not shift.
 the wage rate will decline by less than $4 and
the equilibrium quantity of labor will decline.
- Employers are worse off, because now
they pay a greater total wage plus benefits for
fewer workers. Employees are worse off, because
they get lower wage and fewer are employed.
 Chapter 16: The Monetary System
Problem 8:
Suppose that the T-account for First National Bank is as follows
Assets Liabilities
Reserves $100,000 Deposits $500,000
Loans $400,000
a. If the Fed requires banks to hold 5 percent of deposits as reserves:
 Reserve ratio = 5%
- Required reserves = $500,000 x 5% = $25,000
 The total reserves from bank: $100,000
- Excess reserves = Total reserves – Required reserves = $100,000 - $25,000 = $75,000
a. Assume that all other banks hold only the required amount of reserves. If First National decides
to reduce its reserves to only the required amount:
 Required reserve ratio = 5%
- Money multiplier = 1/0.05 = 20
- Increasing in money supple (Deposit) = Money multiplier x Loans
= 20 x $75,000 = $1,500,000

Problem 12:
The economy of Elmendyn contains 2,000 $1 bills
a. If people hold all money as currency, the quantity of money is $2,000
b. If people hold all money as demand deposits and banks maintain 100 percent reserves, the
quantity of money is $2,000
c. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent
reserves:
- People have $1,000 in currency
- People have $1,000 in demand deposits
 The quantity of money is $2,000
d. If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent:
 Reserve ratio: 10%
- Money multiplier = 1/0.10 = 10
 The quantity of money = 10 x $2,000 = $20,000
e. If people hold equal amounts of currency (C) and demand deposits (D) and banks maintain a
reserve ratio of 10 percent:
 Case 1: D = C
People have equal amounts of currency and demand deposits.
 Case 2: 10 x ($2,000 – C) = D
 From case 1 and case 2 we have:
10 x ($2,000 – D) = D
 $20,000 – 10D = D
 $20,000 = 11D  D = $1,818.18
 Deposits = Currency = $1,818.18
- The quantity of money = C + D = $1,818.18 + $1,818.18 = $3,636.36