Economics 11: The Market and the State Exercise Set No. 4 Deadline: October 21, 2014

A. Arcenas Adriano/Aranas/Libre/Morales

I. GDP Calculation (14 pts.)

Year Nominal GDP (in billions of Pesos)

Nominal GDP Growth

GDP Deflator

Real GDP Real GDP Growth

2003 4548.10 --------------------- 1.134 ------------------

2004 5120.43 1.197

2005 5677.75 1.267

2006 6271.16 1.33

2007 6892.72 1.371

2008 7720.90 1.474

2009 8026.14 1.515

2010 9003.50 1.579

2011 9706.27 1.643

2012 10564.90 1.674

2013 11546.10 1.707

Source: World Bank

1. Compute for Philippine nominal GDP growth. (4 pts.)

2. Compute for real GDP, and real GDP growth. (6 pts.)

Round off your FINAL answer to 4 decimal places for the raw growth rates (ex: .0123= 1.23%), and 2 decimal

places for real GDP. To ensure that your final answers are the same as the actual figures, do not round off

while calculating.

3. The nation of Panem consists of 4 districts, each with its own final product. District one produces jewelry,

district two produces cars, district three produces furniture, and district four produces canned goods. Fill in the

table below and compute for the total value of production. (1 pt.)

Good Price/unit Level of production (in units)

Value of production

Jewelry 400 400

Cars 600 200

Furniture 200 400

Canned goods 50 800

Total:

This method of calculating the GDP above is known as the (encircle your answer): (1 pt.)

a) production approach b) substitution approach c) earnings approach

4. Panem is a country with low wages and high taxes. Wages make up for 20% of total value of production in the

previous item while taxes make up 40%. The remaining 40% consists of corporate profits. Construct the

components of total output in the table below. (1 pt.)

Wages

Taxes

Corporate Profits

Total:

This method of calculating the GDP above is known as the (encircle your answer): (1 pt.)

a) production approach b) substitution approach c) earnings approach

II. Multiple choice: (18 pts.)

1. Macroeconomics is the study of the economy in the _________, while microeconomics focuses on

__________ markets.

a) long run; competitive

b) aggregate; individual

c) short run; competitive

d) a and b

e) b and c

2. The long-term focus of macroeconomics includes:

a) GDP growth

b) improvements of living standards

c) stock market price fluctuations

d) a and b

e) none of the above

3. Which of the following is NOT a concern of macroeconomics?

a) the relationship of output and employment

b) the determinants of economic growth

c) the effect of a price increase in business production

d) the cause of inflation and its management

e) the use of fiscal and monetary policy

4. Which of the following statements is always true about GDP?

a) It can be calculated using constant or current prices.

b) It is a measure of output that takes into account the depreciation of capital.

c) It is the sum of all the production of a country and its nationals.

d) It represents the maximum sustainable level of production of a country.

e) It always takes into account the effects of inflation.

5. Which of the following is not a key ingredient for long-term economic growth?

a) Fast population growth

b) Stable macroeconomic policy

c) Price stability

d) High rates of investment

e) None of the above

6. The following are examples of fiscal policy except:

a) government expenditures

b) the sale of bonds

c) government transfer payments

d) income taxation

e) subsidy programs

7. The aggregate demand schedule

a) is not affected by monetary and fiscal policy

b) explains how a tax on rice will affect the quantity demanded

c) explains the interaction of the overall price level with the purchases of every agent in the

economy

d) is dependent on the potential output of an economy

e) none of the above

8. The interaction of the aggregate demand and aggregate supply curves determines:

a) market equilibrium price P and quantity Q

b) how much all business produce and all consumers buy

c) the overall price level P and national output Q

d) b and c

e) a and b

9. An increase in potential output would result in:

a) a rightward shift of the aggregate supply curve, decreasing prices and increasing output

b) a leftward shift of the aggregate supply curve, increasing prices and decreasing output

c) a rightward shift of the aggregate demand curve, decreasing prices and output

d) a leftward shift of the aggregate demand curve, increasing prices and output

e) no change in the price level and output

10. An economy that enters a recession experiences a decline in output and falling prices. This may be explained

by:

a) a decrease in the aggregate supply

b) a decrease in the aggregate demand

c) an increase in the aggregate demad

d) an increase in both the aggregate demand and supply

e) none of the above

11. Assume that a policy maker is tasked with keeping the aggregate price level constant. If potential output

increases, what monetary or fiscal policy tools would she implement to keep the price level the same?

a) increase taxes to offset the increase in potential output

b) tighten the money supply to reduce aggregate demand

c) increase government expenditures to boost aggregate demand

d) decrease government expenditures to reduce aggregate supply

e) decrease the bank reserve requirement to increase aggregate demand

12. Which of the following is counted in calculating GDP?

a) the sale of a second-hand automobile

b) the value-added in the preparation of a computer chip

c) the purchase of a plot of land

d) home-cooked meals

e) OFW remittances

13. The exclusion of intermediate goods in the calculation of GDP is important because:

a) the value of total output might be underestimated

b) the cost in producing intermediate goods is not a component of the price of the final good

c) because its inclusion raises the problem of double counting

d) it is difficult to identify intermediate goods from final goods

e) none of the above

14. Which of the following is an example of an economic investment?

a) the distribution of money into a diverse portfolio until marginal benefits are equalized and risk is

evenly distributed

b) buying stocks from the San Miguel Corporation

c) purchasing a mutual fund in an investment firm

d) producing new factory machines

e) landscaping your home

15. Which of the following is true about consumption?

a) Consumption is constant over time

b) Food as a percentage of consumption tends to decrease as disposable income increases

c) Consumption is dependent on the composition of the goods basket that consumers face

d) It is positively related with disposable income

e) b, c, and d

16. At the break-even point:

a) families are neither spending nor saving

b) the consumption function coincides with the 45-degree line

c) families are barely able to break out of poverty, hence break-even

d) saving and consumption are equal

e) none of the above

17. Which of the following are determinants of consumption?

a) how much your parents bequeath to you

b) your expectation of future income

c) your current disposable income

d) all of the above

e) only a and c

18. The level of investment in an economy is determined by:

a) the costs of investing, which includes the interest rate

b) revenues generated by productive activities

c) speculation due to human nature

d) all of the above

e) a, b, and c

III. Consumption and Saving Analysis (16 pts.)

Use the data in the table below to answer questions 1-5

Disposable Income (in Pesos) Consumption Net Saving MPC

30,000 30,500

31,000 31,350

32,000 32,200

33,000 33,050

34,000 33,900

35,000 34,750

36,000 35,600

37,000 36,450

38,000 37,300

39,000 38,150

40,000 39,000

1. Compute for net savings. (2 pts.)

2. Compute for the MPC (2 pts.)

3. Compute for the MPS (2 pts.)

4. In what income range does the break-even point lie? (2 pts.)

5. Assume that at zero disposable income, consumption is equal to 1,000. Given this, what is the level

of consumption and saving with a disposable income of 50,000? (Hint: compute savings as a residual

of income after consumption) (2 pt.s)

6. Illustrate the following scenarios with graphs (label the axes and include the 45-degree line) (6 pts.)

1. A change in disposable income results in a movement along the consumption function.

2. A change in wealth or other factors results in a shift of the consumption function.