Macroeconomics Homework 1

Principles of Macroeconomics Homework 1 Please write down your answers as clearly as possible. 1. Below are some data from the land of milk and honey. Year 2008 2009 2010 Price of Milk $1 $1 $2 Quantity of Milk 100 quarts 200 200 Price of Honey $2 $2 $4 Quantity of Honey 50 quarts 100 100

a. Compute the nominal GDP, real GDP, and the GDP deflator for each year, using 2008 as the base year.
Calculating nominal GDP:

2008: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts. honey) = $200 2009: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400 2010: ($2 per qt. of milk  200 qts. milk) + ($4 per qt. of honey  100 qts. honey) = $800

Calculating real GDP (base year 2008): 2008: ($1 per qt. of milk  100 qts. milk) + ($2 per qt. of honey  50 qts. honey) = $200 2009: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400 2010: ($1 per qt. of milk  200 qts. milk) + ($2 per qt. of honey  100 qts. honey) = $400

Calculating the GDP deflator: 2008: ($200/$200)  100 = 100 2009: ($400/$400)  100 = 100 2010: ($800/$400)  100 = 200

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b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2009 and 2010 from the preceding year. For each year, identify the variable that does not change. Explain in words why your answer makes sense.
Calculating the percentage change in nominal GDP:

Percentage change in nominal GDP in 2009 = *($400 − $200)/$200+  100 = 100%. Percentage change in nominal GDP in 2010 = *($800 − $400)/$400+  100 = 100%. Calculating the percentage change in real GDP: Percentage change in real GDP in 2009 = *($400 − $200)/$200+  100 = 100%. Percentage change in real GDP in 2010 = *($400 − $400)/$400]  100 = 0%.

Calculating the percentage change in GDP deflator: Percentage change in the GDP deflator in 2009 = *(100 − 100)/100+  100 = 0%. Percentage change in the GDP deflator in 2010 = *(200 − 100)/100+  100 = 100%. Prices did