Macroeconomics Homework

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Chapter 5 & 6 Macroeconomics Homework


Chapter 5

  1. (Aggregate Demand and Supply) Review the information on demand and supply curves in Chapter 4. How do the aggregate demand and aggregate supply curve presented in this Chapter differ from the market curves in Chapter 4?
  2. (Supply-Side Economics) One supply side measure introduced by the Reagan administration was cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve?

Chapter 6

  1. (Income Approach is GDP) How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value added and its importance in the income approach. Consider the following data for the selling price at each stage in the production of a 5-pound bag of flour sold by your local grocer. Calculate the final market value of the flour.


Stage of Production Sale Price
Farmer $0.30
Miller 0.50
Wholesaler 1.00
Grocer 1.50


  1. (Expenditure Approach to GDP) Given the following annual information about a hypothetical country, answer questions a through d.
Billions of Dollars
Personal consumption expenditures $200
Personal taxes 50
Exports 30
Depreciation 10
Government purchases 50
Gross private domestic investment 40
Imports 40
Government transfer payments 20


  1. What is the value of GDP?
  2. What is the value of net domestic product?
  3. What is the value of net investment?
  4. What is the value of net exports?


  1. (Consumer Price Index) Calculate a new consumer price index for the data in the following exhibit. Assume that current-year prices of Twinkies, fuel oil, and cable TV are $0.95/package, $1.25/gallon, and $15.00/month, respectively. Calculate the current year’s cost of the market basket and the value of the current year’s price index. What is this year’s price index? What is this year’s percentage compared to the base year?



Quantity in Market Basket


Prices in Base Year


Cost of basket in Base Year


Prices in Current Year


Cost if Basket in Current Year

Product     (3) * (1) * (2)   (5) * (3) * (1)
Twinkies 365 packages $ 0.89/package $ 324.85 $ 0.79 $ 288.35
Fuel oil 500 gallons 1.00/gallon 500.00 1.50 750.00
Cable TV 12 months 30.00/month 360.00      . 30.00 360.00        .
$1, 184.85 $1,398.35
  1. (Consumer Price Index) Given the following data, what was the value of the consumer price index in the base year? Calculate the annual rate of consumer price inflation in 2013 in each of the following situations:


  1. The CPI equals 200 in 2012 and 240 in 2013.
  2. The CPI equals 150 in 2012 and 175 in 2013.
  3. The CPI equals 325 in 2012 and 340 in 2013.
  4. The CPI equals 325 in 2012 and 315 in 2013.
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