Homework 1 solution
1. Government budget balance = Taxes – government purchases
G = Taxes – Government Budget Balance = 200-(-500)=700
NX = Export – Import = 300 – 450 = -150
Gross Domestic Investment = I = Net Domestic Investment + depreciation = 800+150 = 950
GDP = C+I+G+NX = 400 + 950 + 700 -150 = 1900
GNP= GDP + Factor incomes of domestic factors of production used abroad - Factor
incomes of foreing factors of production used in the given country = 1900 + 200 -300 =1800
NNP = GNP – depreciation =1800 – 150 =1650
NI = NNP – indirect taxes + subsidies = 1650 - 50 + 30 = 1630
PI = NI – retained earnings – income taxes and social insurance + government social and
interest payments to households = 1630 – 100 – 120 + 45 = 1455
2. a)
b)
c) The growth rate of nominal GDP was higher than the growth rate of real GDP because of
the existing inflation which is evident from the growth of GDP deflator between 1996 and 1997 .
3. Nominal GDP 2010 = 7*4+6*5=58
Nominal GDP 2009 = 6*5 + 5*7 = 65
Real GDP 2010 = 4*5 + 6.5*5 = 52.5
Real GDP 2009 = 5*5 + 6.5 *7 = 70.5
GDP deflator =
Nominal GDP
Real GDP
100
Inflation considerably accelerated in 2010 compared to 2009.
4.
a) %
b)
c) Since the worker has to work more minutes in 1999 to buy one newspaper than he had to
work in 1970, the worker’s purchasing power fell.
5. a)
Increase in government borrowing decreases public saving thus decreasing national
saving and decreasing the supply of loanable funds. This shifts the loanable supply curve to
the left and raises the interest rate.
Int. rate
Supply
Demand
Loanable funds
b ) Because of the higher interest rate private investment becomes more expensive and
decreases. Public saving (which is the difference between taxes and government expenditures)
decreases. Private saving increases because of the higher interest rate. The changes are equivalent
to 20 billion.
c) The possibility if increase in taxes discourages private saving decreases the supply of loanable
funds and leads to bigger increase in the interest rates. Thus the effects in a) and b) increase.