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Principles of Macroeconomics, Eco 1020 Assignment #4 Spring 2013 LECTURER: David W.

Nerubucha
Due Date: April 10th 2013 TWO marks/day deducted

after this date

1a. Assume that M is $250 billion and V is 8. If V increases by 15%, what will be the change in nominal GDP? (1 mark) b. If nominal GDP is $1344 billion, and velocity of money is 6, how much is the money supply? If the GDP price index is 160, what is real GDP here? (1 mark) 2a. Suppose an economy's real GDP is $100,000 in year 1 and $110,000 in year 2. What is the growth rate of its GDP? Assume that population was 200 in year 1 and 205 in year 2. What is the growth rate in GDP per capita? (1 mark) b. Calculate the rate of inflation between Year 1 and Year 2. The price index in Year 1 was 124.0. It was 130.7 in Year 2. (1 mark) 3. In the table below are statistics showing the labor force and total employment in month 1 and month 2 of the same year. Make the computations necessary to complete the table. (Number of persons is in thousands.) (2 marks) Month 1 Month 2 Labor force 136,297 137,065 Employed 129,558 129,526 Unemployed _____ _____ Unemployment rate (%) _____ _____ 4. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in billions. (4 marks) Year 1 2 3 4 Nominal income $3,166 3,402 3,774 3,989 CPI 100 104 108 112

(a) Find real income in year 4. (b) What was the percentage rise in prices between years 1 and 3? (c) What was the percentage rise in prices between years 2 and 4? (d) What was the increase in real income from year 3 to year 4 in %?

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5.

Answer the next three questions on the basis of the following production possibilities data for Francia and Galacia. All data are in tons. (3 marks) Francia production possibilities: A B C Soup 60 45 30 Nuts 0 15 30 Galacia production possibilities: A B C Soup 20 15 10 Nuts 0 15 30 D 15 45 D 5 45 E 0 60 E 0 60

(a) If trade occurs between Francia and Galacia, which nation should export what product? Why? (b) What are the limits of the terms of trade between Francia and Galacia? (c) Assume that prior to specialization and trade, Francia and Galacia chose production possibility C. Now each specializes according to comparative advantage. What will be the resulting gains from trade? Explain your answer. 6. Suppose that it takes a minimum of 10 units of food to keep a person alive for a year, that the population can double every 20 years, and that the food supply can increase every 20 years by an amount equal to what it was in the beginning (year 0). ( 6 marks) (a) Assume that both the population and the food supply grow at these rates. Complete the following table by computing the size of the population and the food supply in years 20 through 100. Year 0 20 40 60 80 100 Food supply 400 ______ ______ ______ ______ ______ Population 20 _____ _____ _____ _____ _____

(b) What happens to the relationship between the food supply and the population in the 60th year? (c) What would actually prevent the population from growing at this rate following the 60th year? (d) Assuming that the actual population growth in the years following the 60th does not outrun the food supply, what would be the size of the population in year 80 and year 100? (e) Explain why the standard of living failed to increase in the years following the 60th even though the food supply increased by 75% between years 60 and 100. 7a. The magnitude and nature of the problems faced by the developing countries gives socialism or communism an inside track over capitalism as a model for development. Evaluate. (2 marks) b. The increasing gap between the advanced and the developing nations is not simply a matter of economics; it is also a matter of the political choice between democracy and capitalism or communism and central planning. Evaluate and explain. (2 marks) c. What role can government play in fostering economic growth in developing countries? (2 marks)

dnerubucha@usiu.ac.ke