ISL244E Macroeconomics Problem Session-3 by Research Assistant Serkan Değirmenci (Ph.D. Candidate) D202/27.02.2012

Today B (2009), Macroeconomics: - Chapter 2: A Tour of the Book (Pages: 41-61) Quick Check (QC): (1-f), 5 (Page: 59) GNH (2009), Macroeconomics in Context: - Chapter 11: Money and Monetary Policy Discussion Questions (DQ): (1-2: Page: 264) Review Questions (RQ): 2-3-4 (Page: 284)

Review Up to Date macroeconomics vs. microeconomics positive statement vs. normative statements schools of economic thought (classical, Keynesians, monetarists…etc.) definition and measurement of GDP GDP vs. GNP nominal GDP vs. real GDP GPI and HDI CPI vs. GDP deflator three functions of money (medium of exc., unit of account, store of value) types of money (commodity money, fiat money) measures of money supply (M1, M2, M3… etc.)

B-Chapter 2: QC-(1-f) (Page: 59) The GDP deflator gives the average price of output-the final goods produced in the economy. But consumers care about the average price of consumption –the goods they consume. B-Chapter 2: QC-(1-f) (Page: 59) The rate of inflation computed using the CPI is a better index of inflation than the rate of inflation computed using the GDP deflator. ANSWER: Uncertain. Which index is better depends on what we are trying to measure—inflation faced by consumers or by the economy as a whole. The two prices need not be the same: The set of goods produced in the economy is not the same as the set of goods purchased by consumers, for two reasons: ***some of the goods in GDP are sold not to consumers but to firms (machine tools, for example), to the government, or to foreigners. ***and some of the goods bought by consumers are not produced domestically but are imported from abroad.

B-Chapter 2: QC-5 (Page: 59) Consider the economy described in problem 4. a. Use the prices for 2006 as the set of common prices to compute real GDP in 2006 and in 2007. Compute the GDP deflator for 2006 and for 2007 and compute the rate of inflation from 2006 to 2007. b. Use the prices for 2007 as the set of common prices to compute real GDP in 2006 and in 2007. Compute the GDP deflator for 2006 and for 2007 and compute the rate of inflation from 2006 to 2007. c. Why are the two rates of inflation different? Which one is correct? Explain your answer.

B-Chapter 2: QC-5 (Page: 59) 2006 2007 Quantity Price Cars 10 $2000 12 $3000 Computers 4 $1000 6 $500 Oranges 1000 $1 Nominal GDP (2006): 10($2,000)+4($1,000)+1000($1)=$25,000 Nominal GDP (2007): 12($3,000)+6($500)+1000($1)=$40,000 2006 base year: Real GDP (2006): $25,000 Real GDP (2007): 12($2,000)+6($1,000)+1000($1)=$31,000 2007 base year: Real GDP (2006): 10($3,000)+4($500)+1,000($1)=$33,000 Real GDP (2007): $40,000

B-Chapter 2: QC-5 (Page: 59)-answer a. 2006 base year: Deflator(2006)=1; Deflator(2007)=$40,000/$31,000=1.29 Inflation=29% b. 2007 base year: Deflator(2006)=$25,000/$33,000=0.76; Deflator(2007)=1 Inflation=(1-0.76)/0.76=.32=32% c. Neither answer is incorrect, just as measurement in inches is not more or less correct than measurement in centimeters.

Chapter 11: DQ-1 (Page: 264) Suppose you asked someone who has not taken an economics class what makes a dollar bill have value. What do you think he or she would say? Would he or she be correct? ANSWER: People often think that a dollar bill is backed by gold or silver. This is incorrect, since it is "fiat" money, backed only by a declaration of the government and society's consent.

Chapter 11: DQ-2 (Page: 264) What do you commonly use to make payments? Cash? Credit cards? On-line payments? In which of these cases are you using "money"? ANSWER: This will depend on the students' experience. On-line payments, for example, will be "money" if they come directly from checking accounts, but "credit" if they are charged to credit cards.

Chapter 11: RQ-2 (Page: 284) Describe the three roles of money. ANSWER: Medium of exchange, Store of value, Unit of account.

Chapter 11: RQ-3 (Page: 284) Describe at least three very different types of money. ANSWER: (3 of the following 4) Commodity money. Coins made of precious metal. Silver certificates. Fiat money.

Chapter 11: RQ-4 (Page: 284) Describe at least two measures of money. ANSWER: M1 = currency (in circulation), checkable deposits, and traveler's checks. M2= M1 + savings deposits, and other accounts such as small certificates of deposit and retail money market funds.

TCMB Para Arzı Tanımları TCMB’nin 2005 yılından itibaren kullandığı para arzı tanımları şöyledir: M1= Dolaşımdaki Para (nakit) + Vadesiz Mevduat (TL) + Vadesiz Mevduat (YP-yabancı para) M2= M1 + Vadeli mevduat (TL ve yabancı para) M3= M2 + Repo işlemlerinden sağlanan fonlar + Para Piyasası Fonları

to be continued…