ECRU 1100-006/007 Mid-Term I Answer Key

Give brief answer to the following questions. The answers must be brief, to the point and grammatically correct. Write clearly and legibly. There will be penalty for unreadable handwriting. (Time Allowed: 50 min.)

  1. Fill in the blanks in the following table of GDP statistics. (Show the procedure of how you got the answers.) (10 points)

    2. In billion $

    1992

    1993

    1994

    Nominal GDP

    6,244

    6,931

    Real GDP

    6,244

    6,384

    GDP Deflator

    102.6

    105.0
  2. The demand and supply curves for Nike tennis shoes are given by the following equations.

Q = 24,000 - 500p Q = 6,000 + 1,000p, where p is price in $ and Q is the # of pairs per month.
  1. Find the eqm price and quantity.

  2. If consumers’ taste change and don’t look for Nike brand as much , which of the following will be the new demand curve?

    3. i) Q = 22,000 – 500p * ii) Q = 22,000 + 500p

    iii) Q = 27,000 – 500p iv) Q = 27,000 + 500p

    Since changes in price will cause movement along the Qd-skdl, and any factors other than price will shift the Qd-skdl in, this will be reflected by the lower intercept of the Qd-skdl on the Q-axis.

  3. Find the equilibrium price and quantity after the shift of the demand curve.

  4. If, instead, two new shoe stores open up in town, which of the following will be the new supply curve?

i) Q = 3,000 + 1,000p ii) Q = 3,000 – 1,000p

iii) Q = 9,000 + 1,000p * iv) Q = 9,000 – 1,000p

Since changes in any factor other than price will cause the shift of the curve, and the ­ # of shops means ­ size of the industry, the basic Qs intercept must have ­ .

e. Find the eqm price and quantity after the shift of the supply curve. (20 points)

*Note that by "instead" the question changes Qs.

3. From the following data, construct an expenditure skdl. Then, use the income-expenditure (45° line) diagram to determine the eqm level of GDP. (30 points)

Y

C

I

G

X- M

3,600

3,100

240

120

40

3,700

3,200

240

120

40

3,800

3,400

240

120

40

3,900

3,600

240

120

40

4,000

3,700

240

120

40

Y=C+I+G+(X- M) only when Y=3,800. So, that’s where the Y (Income) and C+I+G+(X- M) (Expenditure) are in eqm, and thus, where Expenditure skdl and 45° line intersect.

 

Expenditure

C+I+G+(X- M)

3,800

45°

Y

3,800

 

4. Consider an economy that has a consumption function : C = 100 + 0.8Yd

The gov't budget is balanced w/ gov't purchases and taxes both fixed at 500. Net exports

are 100. Investment is 400.

  1. Find Eqm GDP and compute the consumption multiplier for this economy.

b. How much saving is there in eqm? (Hint: Income not consumed must be saved.) Is saving

equal to investment in this case? What is the implication of this in/equality?

  1. If Investment increases to 500, what is the new eqm GDP? Compute the investment multiplier.

  2. If the full-employment level of income is 4,000, is there a recessionary gap or inflationary gap? (40 points)
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