Question

Q1Assume the following accounts and amounts were reported by a nation last year: Government purchases of goods and services were $6.9 billion; personal consumption expenditures were $40.6 billion; gross private domestic investment amounted to $20 billion; personal savings were estimated at $2 billion; imports of goods and services amounted to $7.9 billion; and the exports of goods and services were $4 billion.

(a)

Determine the nation’s gross domestic product.

Q2) Assume that the interest rate on a one-year Treasury bill is 4.0 percent and the rate on a two-year Treasury note is 8.7 percent.

(a) If the expected real rate of interest is 2.8 percent, determine the inflation premium on the Treasury bill.

Answer 1

Q1Assume the following accounts and amounts were reported by a nation last year: Government purchases of goods and services were $6.9 billion; personal consumption expenditures were $40.6 billion; gross private domestic investment amounted to $20 billion; personal savings were estimated at $2 billion; imports of goods and services amounted to $7.9 billion; and the exports of goods and services were $4 billion.

Answer to Q1(a)

GDP =[ C+I+G+E-I]

Where GDP = Gross Domestic Product , C= Consumption Expenditure , I = Investment Expenditure

G = Government Expenditure , E = Export , I = Import

NI = [ $40.6+$20+$2+$6.9+$4-$7.9]

= [ $73.5-7.9]

= $ 65.6

Hence the GDP of the country for the year is $ 65.6 million.

Answer 2 a]

Inflation Premium = 1+ Nominal Rate / 1+Real Rate -1

= 1+4/ 1+2.8 -1

= 5/3.8 -1 = 1.316-1 = 0.316