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1. If inventories increase, which of the following will increase? Consumer spending, government spending, GDP (Gross Domestic Product), net exports.

2. Which of the following will be included in GDP? Bread purchased by a consumer to make sandwiches that he/she will eat; bread purchased by a restaurant to make sandwiches; government social security payments to households; goods produced by US citizens in another country (and purchased in another country); goods produced by US citizens in the US and consumed by people in another country; the sale of a used car; an oven purchased by a restaurant.

3. Which of the following statements is true? Real GDP is nominal GDP added to the price index (in hundredths); real GDP is nominal GDP subtracted from the price index; real GDP is nominal GDP multiplied by the price index; real GDP is nominal GDP divided by the price index.

4. Suppose that incomes increase and bicycles are an inferior good. What will happen to the equilibrium price of bicycles? (Type "increase" or "decrease".)

5. Suppose that the price of sugar increases. What will happen to the equilibrium quantity of cupcakes, assuming sugar is an input in production? (Type "increase" or "decrease".)

6. Consider the market for Apple stocks. Assume we're talking about the secondary market with current stockholders as suppliers. Suppose a rumor spreads that iPhones might start to explode. Expecting a stock price drop, what will happen to the supply of Apple stocks TODAY? (Type "increase" or "decrease".)

7. In 1984, the total output in a single-good economy was 7,000 buckets of chicken at $10 each. In 2005, the price per bucket was $16, and 22,000 buckets were produced. Calculate the GDP price index for 1984 using 2005 as the base year, along with real GDP for 1984 and 2005, and the growth rate of real GDP between these years.

8. The table provides nominal GDP and an appropriate price index for several years, with 1968 as the base year. Compute real GDP for each year, rounding answers to two decimal places.

9. The data for a hypothetical economy: personal consumption expenditures $50 billion; purchases of stocks and bonds $30 billion; net exports −$10 billion; government purchases $20 billion; purchases of intermediate goods $8 billion; gross private domestic investment $25 billion. Compute the GDP for this economy.

10. Which of the following does GDP represent? Total income to factors, total expenditures on final goods and services, total value-added in production, or all of the above.

11. Considering the market for tennis shoes, which of the following will increase the price of tennis shoes in a competitive market? A decrease in the price of rubber, an input; an increase in the price of shoelaces, if they are complementary goods; an increase in the price of sandals, if they are substitute goods; or a decrease in incomes, if tennis shoes are normal goods.

Paper For Above instruction

Understanding the dynamics of economic variables such as inventories, gross domestic product (GDP), market expectations, and various factors affecting supply and demand is fundamental to macroeconomic analysis. These interrelated concepts help interpret economic indicators and formulate policies that promote sustainable growth.

Impact of Inventory Changes on Consumer Spending and GDP

Inventories are classified as part of a nation's aggregate demand accounting because an increase in inventories can lead to an increase in overall economic activity. When inventories rise, it typically indicates that goods produced are not yet sold, which may suggest that consumer demand is lower than expected. However, in the short term, an increase in inventories still contributes to higher GDP since production is up. Specifically, if inventories increase, consumer spending might initially remain unchanged, but business investment components of GDP rise as firms produce more goods to build stocks. Over time, if inventories keep increasing without sales, firms may reduce production, leading to a slowdown. Conversely, a decline in inventories can signal a pickup in consumer demand, prompting producers to increase output, which can boost GDP (Mankiw, 2020).

GDP Components and Inclusion Criteria

GDP encompasses all final goods and services produced within a country during a specific period. Items such as bread purchased by a consumer for personal consumption, a restaurant’s bread purchases for meals served, and oven purchases by restaurants are included because they are final goods or capital goods used for production. Government social security payments, however, are transfer payments and are not included in GDP because they do not reflect purchase of newly produced goods or services. Goods produced abroad by US citizens are part of the Gross National Product (GNP), not GDP, as GDP counts only domestic production. Similarly, the sale of used cars is excluded because they are not newly produced. The key criterion is whether the goods are newly produced and finished within the measurement period (U.S. Bureau of Economic Analysis, 2021).

Calculation and Interpretation of Real GDP

Real GDP adjusts nominal GDP for changes in the price level, offering a more accurate measure of economic growth. Among the options presented, real GDP is calculated as nominal GDP divided by the price index (expressed in hundredths), which corrects for inflation or deflation. This ensures the comparison of output across periods reflects actual quantity changes, not price level changes (Mankiw, 2020). For example, if nominal GDP increases but the price index rises proportionally, real GDP remains unchanged, indicating no real growth.

Effects of Income Changes and Prices on Market Equilibrium

When incomes increase, demand for normal goods typically rises, leading to higher prices and quantities. However, bicycles, classified here as an inferior good, have demand that decreases as income rises; thus, an increase in income would cause the demand curve to shift left, decreasing the equilibrium price of bicycles (Varian, 2014).

Likewise, an increase in sugar prices, an input in cupcake production, raises production costs, leading to a decrease in supply. Consequently, the equilibrium quantity of cupcakes decreases as firms reduce output or raise prices to maintain margins.

Market Expectations and Stock Market Responses

Expectations significantly influence supply and demand in financial markets. If rumors suggest that Apple's stock might decline sharply, current stockholders anticipate losses, leading to a decrease in the supply of Apple stocks today—they are more reluctant to sell at current prices to avoid further losses. This shifts the supply curve leftward, increasing the current stock prices but decreasing liquidity (Fama, 1970).

In contrast, negative news about product safety (iPhones exploding) affects demand negatively, causing the stock price to fall as investors lose confidence, affecting future supply and demand dynamics accordingly.

Price Indices, Real GDP, and Economic Growth Analysis

Calculating the GDP price index involves comparing the nominal GDP of a base year to that of a current year using the formula:

GDP Price Index = (Nominal GDP / Real GDP) × 100

For 1984, with production values and prices, the index helps to measure inflation-adjusted growth. The growth rate of real GDP indicates the overall economic expansion between years and is calculated as:

Growth Rate = [(Real GDP in 2005 − Real GDP in 1984) / Real GDP in 1984] × 100%

Gross Domestic Product: Calculation and Significance

The GDP of the hypothetical economy is calculated by summing consumption expenditures, investment, government purchases, and net exports (exports minus imports), matching the expenditure approach:

GDP = C + I + G + (X − M) = 50 + 25 + 20 + (−10) = 85 billion dollars.

This measure reflects the total market value of finished goods and services produced domestically during the period, serving as a key indicator of economic health (Mishkin, 2019).

The Meaning and Scope of GDP

GDP encompasses the total income earned by factors of production, total expenditures on final goods and services, and the total value added during production. All these perspectives are different representations of the same economic activity, making GDP a comprehensive indicator of a nation's economic performance (Baumol & Blinder, 2015).

Market Forces and Price Changes in Competitive Markets

In the tennis shoes market, an increase in the price of substitute goods, such as sandals, tends to raise demand for tennis shoes, thus increasing their price. Similarly, an increase in the price of a complementary good like shoelaces raises the cost of manufacturing or using tennis shoes, leading to higher prices. Conversely, a decrease in incomes reduces demand if tennis shoes are normal goods, leading to a decrease in their price (Pindyck & Rubinfeld, 2018).

References

• Baumol, W. J., & Blinder, A. S. (2015). Principles of Economics (6th ed.). Cengage Learning.
• Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25(2), 383–417.
• Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage Learning.
• Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.
• U.S. Bureau of Economic Analysis. (2021). National Income and Product Accounts. https://www.bea.gov
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th Edition). Pearson.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton & Company.