Below are the key to the first three questions for the june exam.

I will write a mail this evening about the last two questions. 1a) Purchasing-power adjusted (real) gdp per capita. PPP-adjustment is necessary because of different national price levels. Gdp per capita: adjustment to per capita levels, otherwise the data does not mak e sense since different economies have different population sizes. b) An attempt to measure well-being, not only economic well-being. Takes into ac count factors as gdp, life-expectancy, education etc c) see Mankiw figure 2.1 d) NNP = GNP - depreciation 2a) D is used instead of the "delta" symbol for simplicity here. We know that DM + DV = DY + DP. DV = 0. DY = 3. DM = 7. => DM - DY = DP ie: 7-3 = 4. r = i - pi: 8-4 = 4. b) Money without intrinsic value. Established as money by government decree. c) Store of value. Money can be stored to transfer purchasing power over time. Medium of exchange. Money buys every other good or service. Makes it possible to avoid barter. Unit of account Prices quoted in monetary units is easily understood (prices quo ted in godds units are more difficult to understand). d) Baskets of goods (in equilibrium) have the same prices (in common currency) i n different economies. The law of one price. 3.a) Y =200 + 0.8(Y-300)+200+400 Y = 800 + 0.8Y - 240 0.2Y = 560 Y = 5x560=2800. b) S = Y-C-G = 2800-200-0.8(2800-300) -400 = 2600-2000-400=200. c) DY = 140. DG=? k = 1/(1-mpc) = 1/(1-0.8) = 5. DY = 5DG or DY/5 = DG ie: 140/5 = DG = 28. d) (Investment multiplier and government multipliers are the same and both equal 5.) DI = 20. DY = 5x-20 = -100. 4 a) From a position in long run equm. (AD=SRAS=LRAS) I increases => AD increases (shifts up) => GDP increases, but not prices. Unemployment decreases. In the long run: wages will increase thus SRAS will shift up and GDP will decrea se, and this process will continue until GDP equals its (original) long run leve l. Unemployment is then back at the natural level, prices has increased. b) If saving is increased, the actual level of saving is above the necessary and thus capital accumulates. k will increase => output per capita increases, raisi ng the necessary level of saving until the gap between actual and necessary leve ls of saving is closed. (new steady state) this is illustrated in figure 7-5 but this figure leaves out the production function. 5. Policy lags. Long and variable. Result when new disturbances occur?! What is long-run equm GDP? What is the natural rate of unemployment. (We don't k now for certain) => the we don't know for certain what to aim for... The time inconsistency problem. (Tempting to say "A" and later do "B"). Credibil ity The Luqas critique.