Reference no: EM1373803

1. Describe briefly the reasons why the following transactions would or would not be included in GNP.

a. The members of the Legislative assembly vote for an immediate decrease in their salaries.
b. A sports card dealer sells Bobby Orr rookie card for $500.
c. You sell your old refrigerator to another person.
d. An earthquake destroys part of the country.
e. An owner receives rent on an apartment.
f. You receive interest on a government bond.
g. A woman purchases an insurance policy.
h. A child receives an allowance from her parents.
i. A carpenter is paid for repairing the family home.
j. A monthly salary is paid to a domestic servant.

2. How does GDP deflator differ from the Consumer Price Index (CPI)? Do the GDP deflator and Consumer Price Index always show the same increase in the rate of inflation?

3. Compare and contrast the stabilization policy recommendations of monetarists and activists.

4. The following activities took place in an imaginary economy last year:

Item $
Wages paid to labor 800,000
Consumer expenditure 650,000
Taxes paid by households 200,000
Transfer payments 50,000
Total profits made by firms 200,000
Profits retained by firms 50,000
Investment 250,000
Interest earned by households 100,000
Rent received by households 40,000
Taxes paid by firms 50,000
Government expenditure on goods and services 200,000
Export of goods and services 250,000
Import of goods and services 160,000
Depreciation 50,000

Calculate the following: (Show all steps)

a. GDP at market price
b. GDP at factor cost
c. The government budget deficit
d The change in net financial assets of (i) the private sector (ii) the government sector, (iii) the foreign sector.
e. Indirect taxes less subsidies 
f Personal income
g. Personal disposable income
h. Savings
i. Leakages and injections. Are they equal?

5. Show from national income accounting identities that an increase in government budget deficit must imply a change in net export or the
saving- investment balance.

6. What determines the real interest rate, saving and investment in the Classical model? What impact does a change in the quantity of money have on the interest rate?

7. Explain how real GDP, employment, and real wage rate are determined at full employment. If money wages are held momentarily above
the level needed for full employment, what is the process by which full employment is achieved in the Classical model?