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(Solved) University of Oregon EC 313: Macroeconomics Due: January 26th , 2017 in Class Problem Set 1: Chapters 1-3 Please answer each of the exercises below....

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University of Oregon
EC 313: Macroeconomics
Due: January 26th , 2017 in Class Problem Set 1: Chapters 1-3
Please answer each of the exercises below. You may work with other students on the homework, but you
must turn in your own work, in your own words. Homework must be handed in at the beginning of class on
Thursday January 26th. No late assignments will be accepted.
Chapter 1 & 2
Question 1:
Consider the following information about the country Westeros and the country Essos. The currency shared
by Westeros and Essos is named the Gold Dragon (GD) and each country’s GDP is quoted for the same year. Westeros has a nominal GDP of 10,000 GD.
Esso has a nominal GDP of 20,000 GD.
Can I conclude that the standard of living in Westeros is lower than the standard of living in Essos? Why
or why not? Hint: This has nothing to do with real vs nominal GDP. Question 2:
Nominal GDP in Chile was $11.5 billion (b) in 1972 and nGDP in Chile was $16.4 b in 1973.
(a) Calculate nominal GDP growth from 1972 to 1973 in Chile.
(b) If 10% real growth is exceptional, can we conclude that Chile had an incredible growth spurt in 1973?
If not, explain why. Question 3:
The three factors economists care about when analyzing the health of an economy are Output Growth,
the Unemployment Rate, and the Inflation Rate. Define all 3 of these terms and explain (in one to
two sentences) why economists care about these terms. 1 Question 4:
True, False, or Indeterminate: The European Union and the Euro Area are NOT the same thing.
Explain your answer. Question 5:
True, False, or Indeterminate: If a country has real GDP growth of 4%, we can conclude that the
country is not in a recession. Explain your answer. Question 6:
(a) Find the value of the Consumer Price Index (CPI) for:
• December 2015 (CPI2015 )
• December 2014 (CPI2014 )
• December 2013 (CPI2013 )
Hint: You can simply try googling these values or go to and type in CPI in the
search window. (b) Calculate inflation for 2014 and 2015. Hint: π2014 = CP I2014 −CP I2013
CP I2013 (c) Calculate total inflation from 1983 until December 2015. Hint: Remember how we index the CPI! Optional: Define the CPI and GDP deflator. Explain why the CPI and GDP deflator might differ. Optional: Is fiscal policy more or less effective when the MPC is 0.2 or when the MPC is 0.8? 2 Chapter 3
Question 1:
Explain the difference between exogenous and endogenous variables. Give an example of each type of
variable from the models we have covered in class thus far. Question 2:
True, False, or Indeterminate: We assume that the MPC is constant because in the real world, we
expect rich and poor people to behave in the same way when given additional income. Question 3:
Consider a typical goods market set-up with one change- Investment (I) is no longer exogenous: Y = C +I +G Z ≡ C +I +G C = c0 + c1 YD YD
I = Y −T
= bo + b1 (Y − T ) Where G, T , c0 , c1 , b0 > 0 and b1 ∈ (0, 1) are exogenous.
(a) Solve for equilibrium output, Y .
(b) What is the multiplier? Is it higher when b1 is 0 or positive? Why?
(c) Assume that c1 + b1 < 1. Draw the goods market equilibrium and (1) label each curve, (2) label the
slope of each curve, (3) label the equilibrium point, and (4) explain the role of autonomous spending in this
graph. Question 4:
Why do we assume c1 is between 0 and 1? Is it simply for mathematical convenience, or is there a real world
reason for this assumption? 3 Question 5: This question is not hard mathematically, but it will test your intuition.
The typical goods market we outlined in class yields the following equilibrium output: Y = 

co + I + G − c1 T
1 − c1 Assume that c1 = 0.5.
(a) If G increases by 1 unit to G0 , what is the increase in equilibrium output from Y to Y 0 ?
(b) If instead of a G increase, T increases by 1 unit to T 0 , what is the decrease in equilibrium output from
Y to Y 0 ?
(c) Suppose the government wants to run a balanced budget. This means government spending (G) must
always equal taxes (T ) so if G increases by 1 unit, then T must also increase by 1 unit. What is the balanced
budget multiplier when c1 = 0.5 and G increases by 1 unit? Hint: If you increase G by 1 unit and T by 1
unit, what is the net effect on equilibrium output?
(d)Optional: What is the relationship between the MPC and the multiplier. Explain this relationship using
the goods market equilibrium graph. Note: This part of the question is entirely separate from the previous
portions of the question. 4


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