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IS-LM setup

Assignment:

1) Assume last year's real GDP was $7,000 billion, this year's nominal GDP is $8,820 billion, and the GDP-deflator for this year is 120. What was the growth rate of real GDP?

2) Calculate the values for government purchases (G), private domestic saving (S), and private domestic investment (I) from the following information (all variables are in billions of dollars).
national income Y = 5,200 budget deficit BuD = 150
disposable income YD = 4,400 trade deficit TD = 110
consumption C = 4,100

3) "Under a fixed exchange rate system, expansionary monetary policy depletes foreign reserves at the central bank." Comment on this statement with the help of an IS-LM diagram.

Instructions for assignment:

Please highlight the final answers for questions 1 and 2.

In question 2, clearly identify the answers for G, S and I

Please follow the prescribed directions for Question 3

Solution Preview

1. Real GDP last year = $7000 billion
Nominal GDP this year = $8820 billion
GDP Deflator = 120

By definition,
GDP Deflator = (Nominal GDP / Real GDP) * 100

Therefore we have,
120 = (8820 / Real GDP) * 100
or Real GDP = (8820 * 100)/120
or Real GDP = 7350

Hence, Real GDP this year is $7350 billion.

By definition

GDP Growth = (Change in GDP / Last Year GDP) * 100

Putting in the numbers

GDP Growth = ((7350 - 7000)/7000)*100
or GDP Growth = (350/7000)*100
or GDP Growth = ...

Solution Summary

IS-LM setup is assessed.

$2.19