1. What is the mechanism in the economic system that guarantees the saving of the economy will always equal the investment of the economy? You may assume a closed economy in answering the question.

2. Using a graph representing the market for loanable funds, show and explain what happens to the real interest rate and investment if the Canadian federal government succeeds in running budget surpluses.

3. Table 1.0 below gives data for the country of Weston

TABLE 1.0

YEAR NOMINAL GDP REAL GDP GDP DEFLATOR

2002 3,055 94

2003 3,170 100

2004 3,410 3,280

2005 3,500 108

(i) Complete the above Table 1.0.

(ii) What is the base year for the GDP deflator?

(iii) Calculate the percentage change in nominal GDP, real GDP, and the GDP deflator between 2004 and 2005. Was the increase in nominal GDP due mostly to an increase in real GDP or to an increase in the price level?

4. In 1970, Lyle bought a hand calculator for $200. The calculator was more accurate in its four functions of addition, subtraction, multiplication, and division than was Lyle’s $35 slide rule. In 1990, Lyle could not buy a calculator, which could only perform four functions. The simplest calculator he could fine cost $5, and was much superior to his 1970 calculator. The CPI in 1970 was 100, and in 1990 it was 250.

(i) Based on the CPI, what was the value of the 1990 calculator in 1970 dollars?

(ii) By how much had the price of the calculator fallen in real terms from 1970 to 1990?

(iii) What problems in the use of the consumer price index as a measure of the cost of living does the above illustrate?

5. What is the difference between GDP and GNP in theory? For Canada, would GDP or GNP be larger? Explain.

6. If in 1984, measured GDP in Canada was $400 billion, and in 1985 it was $440 billion, explain why we cannot necessarily conclude that the typical Canadian's welfare has improved by 10-percent over the year.

7. The "government purchases" component of GDP does not include spending on transfer payments such as Employment Insurance. Thinking about the definition of GDP, explain why transfer payments are excluded.

8. Consider the following data on Canadian GDP:

NOMINAL GDP GDP DEFLATOR

YEAR (IN BILLIONS) (BASE YEAR 1992)

1993 $725 101.2

1994 $762 102.4

a. What was the growth rate of nominal income between 1993 and 1994? (Note: The growth rate is the percentage change from one period to the next.)

b. What was the growth rate of the GDP deflator between 1993 and 1994?

c. What was real income in 1993 measured in 1992 prices?

d. What was real income in 1994 measured in 1992 prices?

e. What was the growth rate of real income between 1993 and 1994?

f. Was the growth rate of nominal income higher or lower than the growth rate of real income? Explain.

9. Suppose that the residents of Veggieland spend all of their income on cauliflower, broccoli, and carrots. In 1998 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 1999 they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100. If the base year is 1998, what is the CPI in both years? What is the inflation rate in 1999?

10. Explain carefully the meaning and importance of the term “productivity”