1. (Section 11.2) Suppose a new drug can cure cancer. It costs a few cents to ma
ID: 1130429 • Letter: 1
Question
1.
(Section 11.2) Suppose a new drug can cure cancer. It costs a few cents to make the pill, and one pill can stop a malignant growth with zero side effects. The drug goes on sale for a few cents a pill, and although the manufacturer makes millions, the money value of the produc- tion is tiny. Is it right that GDP has not really changed much? What would the price index, both before and after the invention and sale of the drug, look like?
2.
(19.6) The Hong Kong dollar depreciates by 5% against the U.S. dollar, but Hong Kong in- ation also rises by 5%. What will happen to the Hong Kong current account? How would your answer differ if the authorities managed to prevent ination from increasing?
3.
(19.6) In 2003, several European nations were running large scal decits. What would our net savings = net exports analysis predict should happen to the euro?
4.
(10.5) Suppose that the real interest rate in an economy is 6%. Real GDP grows by 2.75% a year. The new chief economic adviser to the government argues that a tax increase of $20 billion will generate huge benets because the real interest rate is much larger than the growth of GDP, so that tax rates will be lower on future generations forever. What is wrong with this argument?
5.
(11.3/11.9) Most economists—and nearly all central bankers—seem to think that ination is costly. But the quantity theory asserts that there is no long-run link between money and out- put nor between ination and output. Can ination be costly if the quantity theory is true?
Explanation / Answer
1) GDP will increase. GDP will be the value of good and services produced by factors of production within the country. Thus introduction and increased production of new kind of pills will increase real GDP. However producer charges very high price for new pills and therefore earn high profits. So nominal GDP will be higher than real GDP because price index will be substantially higher as compared to real GDP growth rate.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.