Part I: Essays.

1. [GDP measures the market value of all final goods and services produced in one year. It does not include the value of household services, black market activities or other underground activities. The growth in nominal GDP can be a misleading indicator due to inflation--inflation overstates the value of the new production taking place.]

2. [The most basic definition is called M1 and includes currency, demand deposits and traveler's checks. Other measures of the money supply (M2 and M3) are broader measures that include less liquid forms of deposits and bonds. The Fed controls the money supply primarily through its open market operations (the purchase and sale of government bonds). The Fed can also influence the money supply with the discount rate and reserve requirements.]

3. [We did this one in class; see the answer on the problem set answer key.]

4. [Unemployment is the total number of workers who do not have a job but are actively seeking one. Unemployment is nonzero due to imperfections in the labor market with respect to information and job search and due to wage rigidities because of labor unions, minimum wages, and efficiency wages.]

5. [Real interest rate is 2%.]

6. [The real interest rate is the equilibrator. If there is excess demand for goods and services, then the interest rate will rise to choke off the excess demand. If there is excess supply, the interest rate will fall. The interest rate adjusts due to changes in the loanable funds market. For example, one cause of an excess demand for goods and services is an increase in autonomous consumption on the part of consumers. This would show up as a leftward shift in the national savings curve in the loanable funds market. As the S curve shifts to the left, the interest rate must rise, thereby choking off investment expenditures.]

7. [Overall consumption depends primarily on GDP; the higher the GDP, the higher the consumption. Investment expenditures primarily depend on the real interest rate; the higher the interest rate, the lower the level of investment expenditures.]

Part II: Calculations.

8. [Since Y = C + I + G + NX, we know that NX = 1950 - 840 - 650 - 520 = -60.]

9. [Nominal GDP = (70,000)(120) + (80)(400,000) = $40,400,000
Real GDP = (60,000)(120) + (70)(400,000) = $35,200,000]

10.

a) [Y = 5000]

b) [C = 3580]

c) [r = 11.8%]

d) [ I = 820]

e) [Sp = 820]

f) [Sg = 0]

g) [Sn = 820]