# Essay on Macroeconomics

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.

Answer:

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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 =