Economics 101: Intermediate Macroeconomics
University of California at Davis
Instructor: Jason Lee August 2, 2010
Problem Set #1
Due before class Monday August 9
Question 1: Components of GDP
For each of the following transactions, indicate whether it represents an increase in the U.S.
gross domestic product (GDP), and, if so, state whether it represents U.S. consumption,
investment, government purchases of goods or services, or net exports. If the transaction does
not change U.S. GDP explain why not.
(a) You buy a new Ford Fusion automobile.
(b) U.S. Steel Inc. sells steel to Boeing (a U.S. company) to produce an airplane.
(c) Your grandmother receives food stamps after your grandfather divorces her
(d) The San Francisco 49ers football franchise builds a new stadium in Santa Clara
(e) Jeff buys $500 worth of Amazon.com stock
(f) Mr. Dunn buys an antique lamp at a yard sale.
(g) Boeing (a U.S. company) sells an 787 airplane to Singapore Airlines
(h) Sophie, a French citizen, is hired to be a nanny to a snotty rich family in Davis
Question 2: Data of Macroeconomics
Consider a simple economy that only produces apples and oranges. The economy also imports
pears from Japan.
Use the data below:
Price in 2009 Quantity in 2009 Price in 2010 Quantity in 2010
Apples $1 120 $2 130
Oranges $1.50 200 $2 220
Japanese pears $2 220 $2 200
(a) Using 2009 as the base year, calculate the nominal and real GDP in 2009
(b) Using 2009 as the base year, calculate the nominal and real GDP in 2010
(c) What is the growth rate of real GDP between 2009 and 2010?
(d) Calculate the GDP deflator for 2010.
(e) Using 2009 as the base year, calculate the CPI in 2010
(g) Calculate the inflation rate between 2009-2010 using the GDP deflator
(h) Calculate the inflation rate between 2009-2010 using the CPI
Question 3: Classical Economy
Consider the following Cobb-Douglas Production Function:
1/ 3 2 / 3
Y = 60K L
(a) Compute the value of Y for K=64 and L=8
(b) Prove that this production function has constant returns to scale.
(c) If K = 64 and L = 8, calculate the MPL. What is the equilibrium real wage in the economy?
(d) If K = 64 and L = 8, calculate the MPK. What is the equilibrium real rental price of capital
in the economy?
(e) Calculate the total income earned by labor.
(f) Calculate the total income earned by owners of capital.
(g) Does this production function satisfy Euler’s Theorem? Explain.
Question 4: Saving and Investment
Consider an economy described by the following equations
Y=C+I+G
Y = 5,000
G = 1,000
T = 1,000
C = 250 + 0.75(Y – T)
I = 1,000 – 50r
(a) For this economy, compute the following:
1. Private Savings
2. Public Savings
3. National Savings
4. Equilibrium interest rate
(b) Is this economy running a budget surplus, budget deficit or a balanced budget? Explain.
(c) Suppose that there is an increase in consumer confidence about the future of the economy.
As a result consumers increase the amount they want to consume today.
The consumption function changes to C = 500 + 0.75(Y – T). Assume all other variables are
held constant.
Compute the following variables after this increase in consumer confidence:
1. Private Savings
2. Public Savings
3. National Savings
4. Equilibrium interest rate
(d) Graphically illustrate the increase of consumer confidence on the Savings-Investment
diagram. Be sure to clearly label your curves and the axis. In your graph, clearly indicate any
shifts of curves and equilibrium points.
