Macroeconomics, Fall 2022
Michael Koch
September 8, 2022
Problem set 1: Ch. 1-3 in Mankiw & Taylor (2014)
Please work on all exercises in this problem set in your study group and work out detailed written
solutions for all of them (for your own benefit). It is required to send solutions to your class
instructor (see information on Brightspace) no later than Thursday, September 15th, 23:59.
Prepare the answers as one complete PowerPoint or PDF file. Clearly state the exercise numbers
and sub-question (letter) in the document you upload.
Answers should be prepared in groups of up to five students. The front page of each uploaded
file/presentation must clearly state the names of students and student numbers in the group. All
students from a given group should be able to present the solution you have prepared in class.
However, it will be convenient for your group to choose one or two students who will actually
present the material in class. Please alternate the student(s) presenting in class so that all students
get a chance to present throughout the course. This is a good opportunity to practice a presentation!
Please use the blackboard/whiteboard for developing your solution in class where suitable. The
class instructors will notify the students in advance which group will present the solution to an
exercise and give them feedback how to improve the uploaded solutions.
If you have not found a group, please work on the problem set on your own and upload your own
solution. The class instructors will assign you to a group after the first tutorial.
Exercise 1:
True-or-false questions. State whether the following statements are true or false and briefly explain
your answers:
a) In long-run models of the economy some prices are usually assumed to be sticky.
b) In the equation 𝑌𝑌 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺 + 𝑁𝑁𝑁𝑁, the investment category 𝐼𝐼 includes both private and
public investment.
c) The residents of two different countries with identical GDPs will always have the same total
income.
d) The CPI is a stock variable, whereas the GDP deflator is a flow variable.
e) Consider the neoclassical model where production takes place according to the following
Cobb-Douglas production function: 𝐹𝐹(𝐾𝐾, 𝐿𝐿) = 𝐾𝐾 0.5 𝐿𝐿0.5 , where 𝐾𝐾 and 𝐿𝐿 are the amounts of
capital and labour used in production, respectively. Then, the share of the economy’s total
income going to capital owners will be larger than the share going to workers as long as
𝐾𝐾 > 𝐿𝐿, and vice versa for 𝐿𝐿 > 𝐾𝐾.
Exercise 2:
Consider an economy that produces and consumes hot dogs and hamburgers. In the following table
are data for two different years.
2010
2020
Good
Quantity
Price
Quantity
Price
Hot dogs
200
$2
250
$4
Hamburgers
200
$3
500
$4
a) Using 2010 as the base year, compute the following statistics for each year: nominal GDP,
real GDP, the implicit price deflator for GDP, and the CPI.
b) By what percentage did prices rise between 2010 and 2020? Give the answer for each good
and for the two measures of the overall price level. Compare the answers by the Laspeyres
and Paasche price indexes. Explain the difference.
Exercise 3:
Due to the increasing inflation rates, governments are discussing to cut taxes to support households.
Use the neoclassical model of production to provide a qualitative analysis of the long-run effects of
their plan to cut taxes. Assume, for simplicity, that you are looking at a closed economy, and thus
the goods market equilibrium satisfies 𝑌𝑌 = 𝐶𝐶(𝑌𝑌 − 𝑇𝑇) + 𝐼𝐼(𝑟𝑟) + 𝐺𝐺 (we will relax this assumption
later in another problem set).
a) What will be the effect on the supply side of the economy, i.e., on output 𝑌𝑌?
b) What will be the effect on the demand side of the economy, i.e. how are consumption 𝐶𝐶,
investment 𝐼𝐼, and government spending 𝐺𝐺 affected?
c) What will be the effect on national savings 𝑆𝑆 = 𝑌𝑌 − 𝐶𝐶(𝑌𝑌 − 𝑇𝑇) − 𝐺𝐺? What is the role of the
real interest rate 𝑟𝑟 in restoring equilibrium in the goods market?
d) What will be the effect on the government budget?
e) Redo exercises a) to d), but now assume that apart from the tax cut there is a plan to cut
spending by the same amount in order not to worsen the government budget. How do your
answers depend on the marginal propensity to consume?
Exercise 4:
Do Problem 9, chapter 3 in Mankiw & Taylor (2014), but change it as follows:
a) As in the textbook.
b) As in the textbook.
c) Now suppose that due to a large number of immigrants the labour force increases so that the
economy’s total output increases from 5000 to 6000. Compute private saving, public saving,
and national saving, and find the new equilibrium interest rate.
d) How does your answer change if you take into account that the government also collects 250
in taxes from the immigrants, which are then used for additional government spending, so
that the government budget remains balanced.
Exercise 5:
Find and download data on GDP for a selection of European countries. One place to find this is here:
http://ec.europa.eu/eurostat
Use the data to answer the following questions and provide meaningful visual illustration of the
data where suitable:
a) The Danish economy was strongly affected by the Global Financial Crisis in 2008/2009.
How much bigger is the Danish economy today compared to 2008?
b) A more recent shock was due to the Covid-19 pandemic. Compare the evolution of GDP for
3-5 European countries during the last years and briefly discuss similarities and differences.
c) How many quarters has Denmark experienced shrinking GDP out of the last 12?
d) What are the latest numbers on GDP growth in the three largest European economies?
e) What is the overall size of the Eurozone economy compared to what it was in 2008?
Compare this to the evolution of the US economy.
f) Briefly describe the underlying arguments (advantages/disadvantages) for the specific type
of data series that you decided to use (e.g. real, seasonally adjusted, etc.) in each of the subquestions a)-e).
Exercise 6:
Read the article by Jon Gertner in the NY Times (see Brightspace). Write down three arguments
why the GDP is not a good measure of a country's overall well-being. Lay out each argument in no
more than three sentences.