# St Marys University Principles of Macroeconomics Discussion

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Principles of Macroeconomics
Assignment 2
Due date: Feb. 25th, 2020
Instruction(s):
 Submit hard copies of the assignment in-class on the due date.
 Late submissions will attract penalties.
 Group work allowed
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Question 1
a. Explain why only final goods are included in GDP.
b. Define transfer payments and explain why they are not included in the government
purchases section of the GDP accounts.
c. Imagine that an economy produces two goods, apples and oranges. In 2018, the economy
produced 100 apples and 50 oranges, and their prices were \$5 and \$11, respectively. In 2019,
the economy produced 120 apples and 60 oranges, and their prices were \$7 and \$14,
respectively. What happened to the nominal GDP from 2018 to 2019? What happened to
real GDP? (Hint: calculate nominal and real GDP and compare)
Question 2
a) In the simple macro model, equilibrium output is the level of output at which the 45-degree
line intersects the planned expenditures line. Explain why this output level is an equilibrium
b) Explain the logic of the multiplier effect
c) How does an increase in the marginal propensity to consume affect the consumption
function? What happens to the equilibrium output? Illustrate your answer with a graph.
Question 3
Use the table below to answer the questions that follow.
C = 400 + 0.75(Y – T)
I = 150
G = 200
T = 160
X = 80
M = 0.15Y
Table 1
a.
b.
c.
d.
e.
f.
What is the value of the marginal propensity to import?
What is the value of the marginal propensity to consume?
What is the value of the marginal propensity to save?
What is the value of the government spending multiplier?
What is the equilibrium level of output, Y*?
At the equilibrium level of output, Y*, what is the level of imports?
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Question 4
2016
Product
Pizzas
Haircuts
Backpacks
Quantity
100
50
200
2017
Price (\$)
10
15
40
Quantity
120
45
210
Price (\$)
12
20
45
Refer to the table above: Suppose that a very simple economy produces three goods: pizzas,
haircuts, and backpacks. Suppose that the quantities produced and their corresponding prices for
2016 and 2017 are shown in the table above.
a) Use the information to compute the nominal GDP for both years
b) Use the information to compute the real GDP in the year 2016 and 2017.
c) Calculate the real GDP in 2017, assuming the base year is 2016.
d) Repeat C assuming the base year is 2017.
e) Are the calculations different? Why?
Question 5
a) Statistics Canada counts as employed people who work part-time but would prefer to work
full-time. Suppose the people who had part-time jobs, but wanted full-time jobs, were
counted as unemployed. Explain how the unemployment rate and the labour force
participation rate would change.
b) The labour force survey does not count discouraged workers as unemployed. Suppose
discouraged workers were counted as unemployed. Explain how the unemployment rate and
the labour force participation rate would change.
c) How would the unemployment rate and the labour force participation rate change if
discouraged workers were counted as unemployed rather than counted as not in the labour
force? Show using the formula for both measurements.
d) Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age
population is 250,000, and 50,000 people are not in the labour force. Calculate the
unemployment rate.
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