Macroeconomics: Exercises - Questions & Answers (Bridging MBA - KUL)
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Course
Macroeconomics (BKULHSA08A)
Institution
Katholieke Universiteit Leuven (KU Leuven)
Book
Macroeconomics
ENGLISH SUMMARY FOR BRIDGING PROGRAM MBA at KUL
Prof.: Dr. Verhaest Dieter
Textbook: Macroeconomics (9781473768567); Mankiw Taylor, fifth edition
This document contains class exercises + additional exercises from the textbook. Both the questions/ exercises as well as the solution are provided
FACULTY OF ECONOMICS AND BUSINESS - CAMPUS BRUSSELS
WARMOESBERG 26 – B 1000 BRUSSELS BELGIUM
, Exercise 1 (CH4)
What components of GDP (if any) would each of the following transactions affect? Explain.
a. A family buys a new refrigerator ↑Consumption (not an investment)
b. Aunt Jane buys a new house ↑Investment (it allows you to have a house for the next decade)
c. Aston Martin sells a DB7 from its inventory (change in inventory = disinvest)
↓Investment (Aston Martin disinvest) & ↑Consumption = cancels each other out
It does not have an effect on GDP, but it does have an effect on the components of the GDP
d. You buy a pizza ↑Consumption
e. The government builds a new motorway ↑Government Purchases (=public investment by the gov)
f. You buy a bottle of Californian wine ↑Consumption & ↓Net Export = no impact on UK GDP
g. Honda expands its factory in Derby, England ↑Investment (the production of that factory is being
realized in the country itself (England) that’s why it’s not NX, factory is not imported from JPN to ENG)
Exercise 5 (CH4)
Below are some data from the land of milk and honey
Year Price of milk (€) Quantity of milk (liters) Price of honey (€) Quantity of honey (jars)
2016 1 100 2 50
2017 1 200 2 100
2018 2 200 4 100
a. Compute nominal GDP, real GDP and the GDP deflator for each year, using 2016 as the base year
Calculating nominal GDP
2016: (€1/l milk * 100l milk) + (€2/l honey * 50l honey) = 200
2017: (€1/l milk * 200l milk) + (€2/l honey * 100l honey) = 400
2018: (€2/l milk * 200l milk) + (€4/l honey * 100l honey) = 800
Calculating real GDP
2016: (€1/l milk * 100l milk) + (€2/l honey * 50l honey) = 200
2017: (€1/l milk * 200l milk) + (€2/l honey * 100l honey) = 400
2018: (€1/l milk * 200l milk) + (€2/l honey * 100l honey) = 400
Calculating GDP deflator
2016: (200/200) * 100 = 100
2017: (400/400) * 100 = 100
2018: (800/400) * 100 = 200
b. Compute the % change in nominal GDP, real GDP and the the GDP deflator in 2017 and 2018 from the
preceding year. For each year, identify the variable that does not change. Explain in words why your
answer makes sense.
% change in nominal GDP
2017: (400-200/200) * 100 = 100% Real GDP measures the change in quantities & the GDP deflator
2018: (800-400/400) * 100 = 100% measures the change in prices. Observation: there are no
changes in price between 2017 & 2018 meaning the GDP
% change in real GDP deflator would be 0% & at the same time we can observe that
2017: (400-200/200) * 100 = 100% the quantity remains constant between 2017 & 2018, meaning
2018: (400-400/400) * 100 = 0% no change in real GDP.
% change in GDP deflator
2017: (100-100/100) * 100 = 0% Inflation rate: % of change of
2018: (200-100/100) * 100 = 100% price level in year t & year t+1
c. Did economic well-being rise more in 2017 or 2018? Explain.
Only real GDP tells you something about the economic well-being, so based on this we can see that the
economic well-being rose more in 2017 then in 2018.
1
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