ECONOMICS 5050 -- Second Homework Assignment      DUE: April 25, 2005

Please explain each of the following:

1.      a) What is GDP ?

b) In examining the well being of people in a country and making comparisons over time and across countries what kinds of things would you want to look at besides GDP and what kinds of biases would you want to be aware of when considering the GDP data?

2. Who benefits from inflation? Who benefits from deflation?

3. Briefly describe the phases of the business cycle.

4. What are the different types of unemployment, discuss their relative importance and alternative policies that might be undertaken to try to reduce each.

5. Compare and contrast discretionary fiscal policy with non-discretionary (“automatic”) fiscal policy.

6. Assume that X, Y, and Z are goods which constitute a "market basket" of goods and services used to compute a GDP price deflator and that 1983 is the base year.

 Good Quantity in 1983 Quantity in 1996 Price in 1983 Price in 1996 X 6 7 1 3 Y 3 2 6 7 Z 8 10 4 9

What is the GDP price deflator in 1996?

7. Explain the relationships between the numbers in the table below and fill in the missing entries:

 Year Nominal GDP billions \$ Real GDP in 1992 billions \$ GDP Deflator (1992 base) 1971 1,125 3,505 32.1 1982 3,242 70.2 1993 6,468 103.4

8. What’s the difference between the Federal Deficit and the Federal Debt?

 A)    What is the marginal propensity to consume (MPC)?   B)     What is the marginal propensity to save (MPS)?   C)    Suppose savings is the only leakage in this simple model, what is the multiplier?

9. Given the following Consumption schedule:

 Disposable Income Consumption 500 495 530 520 560 545 590 570 620 595

10. Considering the business cycle model and the concept of crowding out explain under which circumstances many economists would advocate a deficit and under which circumstances they would be likely to oppose a deficit.

10 point Bonus:
Suppose the year is 1933. GDP is approximately \$56 billion and unemployment is approximately 25%. You examine some earlier data and know that the economy was near full employment in 1929 with GDP of \$103 billion. You estimate the marginal propensity to consume as 9/10.  Suppose savings is the main leakage at present in this economy. Use John Maynard Keynes multiplier concept to advise the President.