government purchases 1) Government saving is defined as T “ (G + TR + INT), where G is government purchases. Suppose, instead, that we decompose government purchases into government consumption expenditures GCE and government investment GI. Now we define government saving as T “ (GCE + TR + INT). With this new definition of government saving, which treats government investment similarly to private investment, how is the uses-of-saving identity modified? 2) In Year 1 and Year 2, there are two products produced in a given economy, computers and bread. Suppose that there are no intermediate goods. In Year 1, 20 computers are produced and sold at $1,000 each, and in Year 2, 25 computers are sold at $1,500 each. In Year 1, 10,000 loaves of bread are sold for $1.00 each, and in Year 2, 12,000 loaves of bread are sold for $1.10 each. a) Calculate nominal GDP in each year. b) Calculate real GDP in each year, and the percentage increase in real GDP from Year 1 to Year 2 using Year 1 as the base year. Next, do the same calculations using the chain-weighting method. c) Calculate the implicit GDP deflator and the percentage inflation rate from Year 1 to Year 2 using Year 1 as the base year. Next, do the same calculations using the chain-weighting method. d) Suppose that computers in Year 2 are twice as productive as computers in Year 1. The Bureau of Economic Analysis accounts for this by treating the price of a computer as $750 and the number of computers produced as 50 in Year 2. How does this change your calculations in parts (a)-(c)? Explain any differences. 3) Paul Fjeldstad buys a one-year government bond on January 1, 2013, for $500. He receives principal plus interest totaling $545 on January 1, 2014. Suppose that the CPI is 200 on January 1, 2013, and 214 on January 1, 2014. In January 2013, Paul expected the CPI would be 210 on January 1, 2014. Find the nominal interest rate, the inflation rate, Paul€„¢s expected inflation rate, the real interest rate, and the ex post real interest rate. 4) The following data give real GDP, Y, in billions of dollars; capital, K, in billions of dollars; and labor, N, in millions of workers for the US economy in various years. Year Y K N 1960 2502 2695 65.8 1970 3772 4044 78.7 1980 5162 5831 99.3 1990 7113 7809 118.8 2000 9817 10392 136.9 Assume that the production function is Y = AK0.3N0.7. a) By what percentage did US total factor productivity grow between 1960 and 1970? Between 1970 and 1980? Between 1980 and 1990? Between 1990 and 2000? b) What happened to the marginal product of labor between 1960 and 2000? Assume the marginal product of labor is MPN = 0.7A(K/N)0.3. 5) Discuss the income and substitution effects that result from an increase in the real wage. Explain why a temporary increase in the real wage will typically increase the number of labor hours supplied while a permanent increase may decrease the number of hours supplied. 6) The marginal product of labor (measured in units of output) for a firm is MPN=A(100-N), where A measures productivity and N is the number of labor hours used in production. The price of output is $3.00 per unit. a) If A = 1.0, what will be the demand for labor if the nominal wage is $10? If it is $20? Graph the demand curve for labor. What is the equilibrium real wage if the supply of labor is fixed at 95? b) Repeat part (a) for A = 2.0. 7) Consider an economy in which the marginal product of labor MPN is MPN = 309 “ 2N, where N is the amount of labor used. The amount of labor supplied, NS, is given by NS = 22 + 12w + 2T, where w is the real wage and T is a lump-sum tax levied on individuals. a) Use the concepts of income effect and substitution effect to explain why an increase in lump-sum taxes will increase the amount of labor supplied. b) Suppose that T = 35. What are the equilibrium values of employment and the real wage?