Problem Set 4 Solution
ECON 201
1. Mankiw, chapter 22, Problems and Applications #6.
2. For each of the following transactions, explain whether or not they are included in U.S.
GDP.
a. Microsoft buys $20 million in paper boxes from Northern Paper Co. It will use these
boxes to package its newest version of Windows.
b. Judy buys the newest version of Windows in a store.
c. I sell my brother an old version of Windows 95 that I own.
d. A disabled worker receives his disability check from the government.
e. A government bureaucrat receives his monthly income check from the government.
f. The government makes interest payments to persons holding government bonds.
3. Mankiw, chapter 23, Problems and Applications #2.
4. Suppose that the government decides to borrow $20 billion more next year than this year.
a. Will this affect the supply or the demand for loanable funds? Explain.
b. Use a loanable funds diagram to show the effect on interest rates and the level of
loans given out in the economy.
c. We often say that government deficits “crowd out” private investment. Explain this
in light of your findings in part b.
d. Explain why the level of private investment is important for the long-run growth of
an economy.
5. Internet question: Go to the web site for the Federal Reserve Board of Governors
(http://www.federalreserve.gov/), and find the answers to the following questions:
a. When was the last meeting of the Federal Open Market Committee?
b. What did they decide at that meeting?
c. Who are the current members of the Board of Governors? Are any of the Board
members originally from upstate New York?
d. Who is the President of the New York Federal Reserve Bank?
e. How are members of the Board of Governors selected?
f. Write a brief paragraph on the functions and responsibilities of the Board of
Governors.