**1)** An economy produces three goods: cars, computers and oranges. Quantity and unitary prices for the years 2002 – 2003 are the following:

Goods | Quantity | Price | Quantity | Price |

Cars | 10 | $2000 | 12 | $4000 |

Computers | 4 | $1000 | 6 | $500 |

Oranges | 1000 | $1 | 1000 | $1 |

**a)** Construct real GDP for years 2002 and 2003 by using the average price for each good over the 2 years.

**b)** By what percentage does the real GDP change from 2002 to 2003?

**c)** What is the GDP deflator in 2002 and 2003? What is the rate of inflator from 2002 to 2003 using the GDP deflator?

**2)** Suppose that a person’s wealth is $50,000 and that his yearly income is $60,000. Also suppose his money demand function is given by: Md = $Y (.30 – i), where Md = money demand, Y = income, and i = interest

**a)** What is his demand for money and his demand for bonds when the interest rate is 5%?10%?

**b)** Describe the effect of the interest rate on money demand and bond demand. Explain.

**c)** Suppose that the interest rate is 10%. In percentage terms, what happens to her demand for money if his yearly income is reduced by 50%?

**d)** Suppose the interest rate is 5%. In percentage terms, what happens to his demand for money if his yearly income is reduced by 50%?

**e)** Summarize the effect of income on money demand. How does it depend on the interest rate?

**3)** A bond promises to pay $100 in one year.

**a)** What is the interest rate on the bond if its price today is $70? $80? $90?

**b)** What is the relation between the price of the bond and the interest rate?

**c)** If the interest rate is 6%, what is the price of the bond today?

**4)** Suppose money demand is given by: Md = $Y (.25 – i), where $Y = $100. Also suppose that the supply of money is $20. Assume equilibrium in financial markets.

**a)** What is the interest rate?

**b)** If Bank of Canada wants to set it at 15%, at what level should it set the supply of money?

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