Purchase Solution

Graph to Determine Equilibrium Levels

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1) Given the following data:
Year 1 Year 5

Consumption 600 960
Investment 134 340
Property Income earned overseas 75 120
Property income paid overseas 95 95
Subsidies 55 110
Indirect Taxes 85 150
Exports 80 150
Imports 105 125
Depreciation 70 90
Government Spending 280 270

Calculate for both years:
1- GDP at market prices
2- GNP at market prices
3- GNP at factor cost
4- Net National Product
5- National Income

2) Consider the following graph, and determine the equilibrium level of income algebraically.

(AE = Total Spending, AP = Total Production or Total Output)(Hint: The equilibrium level exists where AE = AP. Graphically, this is expressed at the point of intersection between the AE and AP curves. In this problem, consumption spending is the only component of AE. Therefore, equilibrium exists where the expenditures function intersects the AP curve (the 45 degree line).

3) Use figure 2 below to answer to the following question:

Indicate where the economy is located if aggregate output is above the level of planned spending and if aggregate output is above the equilibrium level of output.

4)

5) Use the graph to indicate where the economy is located if the interest rate is below the equilibrium level and people are holding less money than they desire.
9) Consider the following data for the United States and Switzerland:

GDP Deflator Switzerland GDP Deflator United States Market Exchange Rate
1980 85.7 76.0 2.49 francs/\$
1990 113.4 119.6 2.12 francs/\$
Compute the real exchange rate for 1980 and 1990.
(Real exch. rate = (exch. Rate*U.S. price index)/foreign price index)

Solution Summary

The expert graphs to determine the equilibrium levels. The real exchange rate is computed.

Solution Preview

1) Given the following data:
Year 1 Year 5

Consumption 600 960
Investment 134 340
Property Income earned overseas 75 120
Property income paid overseas 95 95
Subsidies 55 110
Indirect Taxes 85 150
Exports 80 150
Imports 105 125
Depreciation 70 90
Government Spending 280 270

Calculate for both years:
1- GDP at market prices = C + I + G + X - M
2- GNP at market prices = GDP + Net Receipts
3- GNP at factor cost = GNP @ Market Price + Subsidies - Indirect Taxes
4- Net National Product = GNP @ Market Price - Depreciation
5- National Income = NNP - Indirect Taxes

- GDP at market prices: GDP at market price is the sum of consumption, gross investment, government expenditure, and net exports.
For Year 1, C = 600, I = 134, G = 280, X = 80, and M = 105. Hence GDP = C + I + G + X - M = 600 + 134 + 280 + 80 - 105 = 989.
For Year 5, C = 960, I = 340, G = 270, X = 150, and M = 125. Hence GDP = C + I + G + X - M = 960 + 340 + 270 + 150 - 125 = 1595.
- GNP at market prices: GNP at market prices is the sum of GDP at market price and net receipts.
For Year 1, net receipts is given by Property Income Earned Overseas - Property Income Paid Overseas = 75 - 95 = -20. For Year 5, net receipts are given ...

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