Question

7. Quantity Product Chocolate Chip Cookies Chocolate Chips Price Market Value 2.00 1,000 2,000 100 0.75 Televisions 200,00 Microwaves 90 50,00 are chocolate chip cookies, Refer to the table above. This simple economy only produces 4 goods which chocolate chips, televisions, and microwaves. Assume all of the chocolate chips are in used in the production of chocolate chip cookies. Using the information above what is the nominal GDP for this economy? 8) Suppose that Congress allocates S1 billion to clean up after the hurricanes of 2005. It also raises taxes by $1 billion to keep the deficit from growing. If the marginal propensity to consume is 0.9, what is the effect on equilibrium GDP (Sp)?

Answer 1

7)

Product	Quantity (Q)	Price (P)	Market Value = (P*Q)
Chocolate Chip Cookies	1000	2	2000
Chocolate Chips	2000	0.75	1500
Televisions	100	200	20000
Microwaves	90	50	4500

GDP is the market value for all final goods and services produced by a country in a calender year. In this simplified economy, not that chocolate chips are not final products since they are used in the production of chocolate chip cookies. Therefore, the value for chocolate chips gets accounted in the value for chocolate chip cookies. The market value is obtained by the product of price and quantity, We add up the values in the market value column to get the total amount of money = 28000. Since the value of chocolate chips is included here, it leads to double counting. We eliminate it to obtain the final nominal GDP as = 28000 - 1500 = 26500.

8) The Government increases Government expenditure (G) and Taxes (T) by the same amount, The GDP of the country is given by - Y = C(Y-T) + I + G + NX

Now, differentiating the above equation we get,

dY = c' (dY-dT) + dI + dG + dNX, where d = change. So, dI = dNX = 0 and dG = dT

Or, dY = c'dY - c'dG + dG

Or, (1-c')dY = (1-c')dG

Or, dY = dG

So, the GDP will increase by $1 billion irrespective of the MPC.