# Essay on Macroeconomics

2946 Words Mar 22nd, 2011 12 Pages
Chapter 2: Date of Macroeconomics 1. What components of GDP (if any) would each of the following transactions affect? What will happen to GDP? Explain. a. A family buys a new refrigerator.
Answer: Consumption increases because a refrigerator is a good purchased by a household. GDP increases.

b. Aunt Jane buys a new house. Answer: Investment increases because a house is an investment good. GDP increases. c. Ford sells a Mustang from its inventory.
Answer: Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold. GDP is unaffected. d. You buy a pizza.
of milk × 100 qts. milk) + (\$2 per qt. of honey × 50 qts. honey) = \$200
2006: (\$1 per qt. of milk × 200 qts. milk) + (\$2 per qt. of honey × 100 qts. honey) =\$400
2007: (\$2 per qt. of milk × 200 qts. milk) + (\$4 per qt. of honey × 100 qts. honey) =\$800

Calculating real GDP (base year 2005):
2005: (\$1 per qt. of milk × 100 qts. milk) + (\$2 per qt. of honey × 50 qts. honey) = \$200
2006: (\$1 per qt. of milk × 200 qts. milk) + (\$2 per qt. of honey × 100 qts. honey) =\$400
2007: (\$1 per qt. of milk × 200 qts. milk) + (\$2 per qt. of honey × 100 qts. honey) =\$400
Calculating the GDP deflator:
2005: (\$200/\$200) × 100 = 100
2006: (\$400/\$400) × 100 = 100
2007: (\$800/\$400) × 100 = 200

b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2006 and 2007 from the preceding year. For each year, identify the variable that does not change. Explain in words why your answer makes sense.
Answer : Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2006 = [(\$400 − \$200)/\$200] × 100 = 100%.
Percentage change in nominal GDP in 2007 = [(\$800 − \$400)/\$400] × 100 = 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2006 = [(\$400 − \$200)/\$200] × 100 = 100%.
Percentage change in real GDP in 2007 = [(\$400 − \$400)/\$400] × 100 = 0%.

Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2006 = [(100 − 100)/100] × 100 =

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