Macro Eco Problem SET - Coursework Example

Topic: MACRO ECONOMIC PROBLEM SET Q1) Gross domestic product (GDP) is a flow. The measurement of a flow is after everyone year, which represents the total value of transactions during an accounting period and so is gross domestic product. Q2) Various components will affect the gross domestic product. Examples of such include; payment of tuition as it will add on the GDP as payment for a service. Payment of a teen to mow lawn will also affect the GDP, as it is a service offered. Spending of the pharmaceutical companies in search of Ebola vaccine will also add affect the GDP, as it is a new service offered hence will contribute to the GDP.

The government hiring more police officers will bring a new service in the industry, which will translate to increase in GDP. Finally, increase in monetary transfers to the poor by the government was never accounted in the previous year hence will affect the GDP. Q3a) Nominal GDP = Value of final goods and services evaluated in the current year NGDP= quantity*price 2010 = (5000*1) + (5000*1.5) =$12500 2011= (10000*1) + (10000*1.5) =$25000 2012= (15000*1) + (5000*2.25) =$26250 2013= (10000*1.5) + (10000*2.25) =$37500b) Real GDP = Value of final goods and services evaluated at base year prices.

2013= (10000*1.5) + (10000*2.25) =$37500GDP deflator = NGDPt / RGDPt *100 2010= 12500 / ((5000×1.5) + (5000×2.25)) ×100 = 66.67% 2011= 25000 / ((10000×1.5) + (10000 × 2.25)) ×100 = 66.67% 2012= 26250 / ((15000 ×1.5) + (5000 × 2.25)) × 100 =77.78% 2013= 37500 /37500 × 100 =100%ci) NGDP: 2013= (5*1.5) +(5*2.25) =$18.75 RGDP: 2013= (5*1.5) + (5*2.25) =$18.75 GDP deflator = 18.75 / 18.75 * 100 =100%ii) Inflation 2011-2012 = ((GDP def.

2012 – GDP def.2011)/ GDP def.2011) * 100 = (100 -100) * 100 = 0%Gross domestic product deflator understates the cost of living as assumes the cost of goods to be constant while the customer price index takes into consideration the change in prices of commodities.Q4)Q5)Q6)Q7)Q8)Q9) Credits cards cannot be referred to as money. One can have a credit card but if the account has no cash, the holder cannot access cash. They cannot therefore be referred to as money hence the name plastic money.

Checks on the other hand are also not money. Money can be used any time the holder wishes to do so. For checks, they can only be usable during maturity and after confirmation by the bank of their validity. Q10) By the bank keeping five percent in reserves and lending out money, the bank creates money. Through the interest rates charged to the borrower, the bank creates money. Assuming interest charged on borrowers is twelve percent, the bank will gain as shown below. 5/100 *3000 =$150: Amount of money kept as reserveMoney lend =3000 – 150 =$285012 / 100 * 2850 =$342 Amount of money gained by the bankThe second bank will also create money through the interest charged to the borrower.

The amount of cash gained will be as below.Money deposited= $2850Reserves=0.05 * 2850 =$142.5Profit= 0.12 * (2850 – 142.50) =$324.9Total amount of cash in the economy: 3000 + 342 + 2850 + 324.9 =$6516.9Works Cited