EP607: Ekonomika Makro III

Problem Set 1
Due: February 26, 2020; 01:30 pm

1. (30 points) Listed below are the events or transactions occured in the US, in 2004. For
each event/transaction, indicate whether or not it contributes to the macroeconomic variables
C, I, G, EX, IM and if yes, which one (or ones). Write down your answer by writing ”none” or
”Variable=transaction”, for example ”C=+$1,000” or ”I=–$1,000”.
a. George buys a jar of cookies for $10.
b. George bakes his own cookies using the ingredients he has in his kitchen.
c. Boeing manufactures a new airplane and sells it to Air France for $1,200,000.
d. Boeing manufactures a new airplane and sells it to Jet Blue (a US airline) for $1,200,000.
e. The US government pays $840 in retirement benefits to George’s father, who lives in New York.
f. Nicholas buys a Nintendo Wii for his niece, spending $150 at Walmart, which sells the console to him
out of its inventory.
g. Nicholas buys another Nintendo Wii for $200 directly from a store in Japan.
h. A new teacher, Stephanie, purchases a house from a departing colleague for $220,000.
i. Brian, an electrician, is paid $300 for installing a security system in house in Los Angeles, California.
j. The same Brian is paid $300 for installing a security system in a grocery store in Dallas, Texas.
k. Brian, again, is paid CA$500 for installing a security system in a house in Toronto, Canada.
l. Milton is paid $1,500 by the US government for giving 3 lectures in economics in the US Congress.
m. The Flying Saucer pub uses $2 of materials from its inventory to make a sandwich that it sells for $6.
n. David pays $3,000 for leaving his dog at a boarding kennel for 30 days.
o. The same David, stays at home and take care of his dog himself on Thanksgiving day.
p. General Motors manufactures a Chevrolet Camaro during 2004, and sells it to David for $33,000 on
January 31, 2005.
q. Amazon and the US Government Trade Agencies build two new identical warehouse which each costs
$180,000 to build.
r. Michael Jackson, not his real name, buys a pack of marijuana for $100.
s. Michael Jackson, still not his real name, pays $1,000 to the City of Baltimore in bail.
t. Glenn, an attorney and a resident of the City of Baltimore, collects a fee of $10,000 for defending
Michael Jackson.

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 u. Peter is unemployed. He lives in his house and drives his car, which he own. Renting a similar house
would have cost him $14,000/year and renting a similar car would have cost him $1,800.

2. (10 points) What would be the 2004 US GDP, if all of the events/transactions in Question 1 happened in
2004? What would be the GNP?

3. (20 points) Assume that all of the goods mentioned below are the only goods produced and consumed in
the economy. Let the base year be 2000, calculate the various economic indicator below:

Good 2000 2000 2001 2001 2002 2002 2003 2003

Quantity Price Quantity Price Quantity Price Quantity Price
Soda 8 $4 9 $5 9 $5 10 $6
Ice cream 10 $2 14 $2 18 $3 20 $5
Burger 12 $3 12 $3 12 $4 15 $5
Fridge - - - - 2 $8 8 $4

a. The cost of consumption basket from 2000 through 2003, the CPI for each year, and the inflation rate
based on the CPI for all years.
b. The nominal GDP for each year, the real GDP for each year using the 2000 prices–take 2002 as the
base year for fridge, the GDP deflator for all years, and the inflation rate based on the GDP deflator
for all years.
c. How do you explain the differences on the inflation rate calculated using CPI (question 3.a.) and GDP
deflator (question 3.b.)?
d. The table below shows the aggregate nominal income of middle class citizen in the economy.
2000 2001 2002 2003
$110 $115 $145 $190
In what year, did they have the highest well-being. Hint: you need to convert all income to some
year’s constant dollars or find how much consumption a middle class citizen could afford in a year
using the answers from question 3.a.

4. (20 points) The table below shows the labor force and the level of civilian employment in December 2002
and December 2003 in the US.
December 2002 December 2003
Labor force 145.157 million 146.878 million
Employment 136.459 million 138.479 million
a. Calculate level of unemployment and the actual employment rate for the two months.
b. Calculate the percentage changes in the labor force and unemployment from December 2002 to
December 2003.
c. Estimate, using one of the Mankiw’s tricks, the percentage change in the unemployment rate, and
from that, the December 2003 unemployment rate.
d. By how much has using Mankiw’s trick missed the actual employment rate?

5. (20 points) Suppose that there is only one good produced and consumed in an economy–California roll
sushi. Each sushi roll costs $5. You earned $200 from working on your last job. You can: (1) indulge in
sushi and because you love sushi too much, you cannot stop until you have no more money, or (2) hold off
your craving for sushi and deposit the money to a bank for which you receive 12% interest on your deposits.

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 a. How many extra dollars will you have available after 1 year? Calculate the extra amount of sushi rolls
you can buy if the price remains constant at $5/roll. What is your real return (i.e., the percentage
increase in the number of sushi rolls you will be able to consume)?
Imagine that in the economy, global warming ruins the ocean ecosystem and crabs are more difficult to find.
The price of a sushi roll goes up to $5.6/roll.
b. What is your nominal return from saving your money for one year? Calculate the additional amount
of sushi rolls you can buy after one year of waiting. In this case, what is the percentage increase in
the number of sushi rolls you will be able to consume?
c. Use your calculations to verify that
r ≈ i − π.
That is, the real rate of return (r) on your savings is the nominal rate (i) adjusted for the inflation
(π)