GDP Inflator and a couple other quick questions?

Question

A couple quick questions:

Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $1.50 in 2007. If 4 apples were produced in 2002 and 5 in 2007, whereas 3 oranges were produced in 2002 and 5 in 2007, then the GDP deflator in 2007, using a base year of 2002, was approximately:

A. 1.5.

B. 1.7.

C. 1.9.

D. 2.0.

Assume that the production function is Cobb-Douglas with parameter p = 0.3. In the neoclassical model, if the labor force increases by 10 percent, then output:

A. increases by about 10 percent.

B. increases by about 7 percent.

C. increases by about 3 percent.

D. does not increase since the new workers are unemployed.

Consider an economy described by the following equations:

Y = C+ I +G, Y = 5,000, G = 1,000, T = 1,000

C = 250 + 0.75(Y-T)

I= 1,000 - 50r

-Compute private, public, and national saving.

-Find the equilibrium interest rate.

-Suppose G rises to 1,250. Compute private, public, and national saving.

-Find the new equilibrium I.R.

Answer 1

1 - "C" is right one.

2 - "B" should be right. Though depends on how they define model and parameters in your book/lectures, sometimes they are different.

3-

a)

Y=250+0.75Y-750+1000-50r+1000

0.25*5000=1500-50r

250=50r

r=5

National saving=I=1000-50*5= 1000-250=750

Private saving= -250+0.25(Y-T)=

=-250+0.25(5000-1000)=1000 -250=750

Public saving=National saving - Private saving =750-750=0

b)

250+250=50r

500/50=r

r=10

National saving=I=1000-50*10= 1000-500=500

Private saving= -250+0.25(Y-T)=

=-250+0.25(5000-1000)=1000 -250=750

Public saving=National saving - Private saving =500-750= -250 (deficit)