Macroeconomic Theory

Assignment No. 1

Submitted by: Farwa Zahra

BD-13/2008

Sept. 29, 2010

Question Number 3

Item Symbol Amount

Gross domestic product GDP 6000

Gross Investment I 800
Consumption C 4000
Govt. purchases of goods and services G 1100
Govt. budget surplus BD 30
Net Investment NI 200

Solution

Net Investment = Gross Investment – Depreciation

 Depreciation = 800-200 = 600

Net domestic product (NDP) = GDP – Depreciation

 NDP = 6000 – 600 = 5400

Y = C + I + G + NX

 NX = 6000 – 4000 – 800 – 1100

 NX = 100

G + TR – TA = BD

 TR – TA = BD – G
 TA – TR = G – BD
 TA – TR = 1100 – (-30) = 1130

YD = Y + TR – TA

 YD = Y – TA + TR
 YD = Y – (TA – TR)
 YD = 6000 – 1130
 YD = 4870

YD = C + S

 S = YD – C
 S = 4870 – 4000
 S = 870
Question Number 4

Item Symbol Amount

Gross domestic product GDP 6000

Disposable income YD 5100
Consumption C 3800
Trade deficit NX 100
Budget deficit BD 200

Solution

YD = C + S

 S = YD – C
 S = 5100 – 3800
 S = 1300

S – I = BD + NX

 I = S – BD – NX
 I = 1300 – 200 – 100
 I = 1000

YD = Y + TR – TA

 YD = Y – TA + TR
 YD = Y – (TA – TR)
 TA - TR = Y – YD
 TA - TR = 6000 – 5100 = 900

G + TR – TA = BD

 G = BD + TA – TR
 G = 200 + 900
 G = 1100
Problems/Challenges

Home Depot faced a number of problems that posed new challenges for the company. The
company expanded in 1985 which caused a hike in its revenue by about 62 percent. However,
the earning declined owing to various socio economic issues like the increasing competition in
the concerned industry which cut short the profitability margins. On the top of it, the company
had plans to further expand thereby demanding significant investment. For these investments,
the company depended on both the forms of financing ie the debt and equity. However, the
falling repute of the company due to lesser earnings had marred its scope of equity based
financing as it had led to a fall in share price. While to gain the option of financing by debt it had
to make the interests attractive enough to get fair share of the amounts.