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Economic 1102-27 - Principles of Macroeconomics
Midterm Exam 1 Answer Key
1
Question Set 1 (20 points, 1 RP):
Definitions
Instructions: Provide the most complete answer you can
...
1
(3 pts) Define macroeconomics
...
Microeconmics is the study of how individual consumers, or other small-scale actors, behave (in a market)
...
2
(3 pts) Define Gross Domestic Product (GDP)
...
1
...
1
...
The law of supply states that as prices increase, quantity supplied should increase
...
1
...
Death rate must decrease
...
(For full credit: say something along the lines of
...
)
1
...
Detail an example of someone unemployed who might fit
under this category of unemployment
...
Any example of a person that fits in the category, like a farmer in New York City
...
7
(3 pts) Explain the concept of diminishing marginal returns of capital
...
1 RP Between 1980 and 2005 has consumption’s share of GDP grown, decreased, or stayed the same?
(Grown)
2
Question Set 2 (30 points, 3 RP):
Data / Graphical Analysis
Instructions: If you are asked to provide a graph, you must introduce an abbreviation at
least once before using it (e
...
if you use AD, first indicate AD means aggregate demand)
...
1
(10 pts) For the following questions, begin with an economy in AS-AD long-run equilibrium which is
then hit by some event
...
(+1) For specifying what SRAS, AD, LRAS stand for somewhere in this section
...
Imagine there is a oil shock as the price of oil unexpectedly increases
...
Explain at least one way the economy could return to long-run equilibrium (note saying
SRAS, AD, or LRAS shifts back with no justification is not an answer)
...
g
...
Or any other reasonable alternative
...
Suppose there is a large influx of immigrants into the economy so there is an increase in the labor
supply
...
Explain how the economy could return to long-run
equilibrium
...
2
(b) E
...
the economy could return to equilibrium by a positive shift in aggregate demand, perhaps
through expanded demand because of the larger population, or by a shift right in the short-run
aggregate supply, perhaps because more labor decreases wages and thus supply costs
...
c
...
Depict the impact on your diagram
...
(a) Depict the shift correctly as a shift right in aggregate demand
...
(c) E
...
the economy could return to equilibrium by a subsequent shift left in aggregate supply,
perhaps because higher prices cause wage contracts to eventually be renegotiated higher and thus
increase production costs
...
2
(10 pts) Draw and completely label a money flow diagram for the US with five agents–consumers, firms,
the government, China, and the United Kingdom–and two places of exchange–the output market and
factor market
...
2
...
Calculate 2011 US GDP and provide justification for each step of your calculation:
a
...
b
...
$3000 worth are sold to Americans, and $7000 worth are sold elsewhere in the world
...
c
...
d
...
11
e
...
a) The $4000 worth to Steve in 2010 is irrelevant to 2011, only $250 is sold as a final good in 2011
...
The last $250 of aluminum must be stored inventory (and thus not counted) since it is not used
by anyone
...
Brazilian consumption of Brazilian goods are
irrelevant to US GDP
...
SO +I=$200
d) The $300 birdhouse is not sold on the market and so has no impact on GDP
...
e) Government spending is $1500
...
So -Im=$500, +G=$1500
Therefore, GDP = 250+3000+7000+200+1500-500 = $11450
1 RP Define cost-push inflation, or depict it on a fully marked graph
...
)
2 RP What are two of the three explanations for why aggregate demand is downsloping (you can list the
effects)? Wealth effect, interest rate effect, net export effect
3
Question Set 3 (25 points, 2 RP):
Policy and Short Answer
Instructions: For open-ended questions, you must provide economic intuition from class as
justification for your answers
...
1
(10 pts) Imagine you are a macroeconomist (not to worry, just briefly) and have been hired by the
government to make certain policy recommendations
...
Explain what actions could be taken to meet those goals
...
a
...
Could there be any unintended side effects? What are they
and under what circumstances would they occur?
(a) E
...
– Issue a minimum wage that is higher than the average wage of the labor force
...
g
...
b
...
Be specific with your response
...
(a) E
...
– Raise government spending
(b) E
...
– A stimulus package could increase aggregate demand beyond the correct level for equilibrium, in which case the economy is still out of equilibrium
...
2
(5 pts) Assess the following statement, “Capital growth is more important to the economic growth of
lower income countries, while technology growth is more important to the growth of higher income
countries
...
The Solow model claims that growth is a function of growing capital stocks for a given level of labor
...
For poorer countries with low levels of capital, growth in capital is still a reasonable way to expand national
wealth
...
e
...
This is a concern more relevant to developed economies with higher
levels of capital
...
3
...
Louis was recently criticized for
(approximately) claiming that the burst of the housing bubble had an impact on the natural rate of
output of the US
...
My impression: Disagree because the natural rate of output is a function of labor, technology, natural
resources, and capital, none of which is directly affected by the loss of national wealth
...
4
(2 pts) List two common criticisms of the measurements of official unemployment figures in the United
States
...
2) Figure does not measure job quality (i
...
measure
if someone is underemployed)
...
4) Does not include
informal people or jobs on the black market
...
5
(4 pts) What is the difference between nominal and real GDP? Give one reason why economists favor
using real GDP over nominal GDP in assessing a country’s economic well-being
...
One possible response: 1) Nominal GDP is susceptible to inflation so high inflation can erroneously make
it appear as if a country has greatly expanded output
...
To obtain full credit, you MUST show how you
obtained your answer
...
1
(4 pts) What is Macworld’s nominal GDP in 2005?
2005
2005
p2005 qDC + p2005 qB = $1, 950, 000
DC
B
4
...
3
(3 pts) What is Appleland’s real GDP in 2005?
RGDP =
4
...
38
(2 pts) What is the size of Appleland’s population?
20 + 36 + 5 + 12 + 15 + 12 = 100
4
...
6
=
$436,405
...
05
(2 pts) What was the inflation rate in Appleland between 2004 and 2005?
Inf lation04−05 =
4
...
P articipation =
4
...
What is the total effect on aggregate demand?
What if the government sends each person (everyone in the population) a $1 check?
If the government spends $10, this is the initial injection (CISOM)
...
So ∆AD = M × CISOM = 33
...
In the second
3
case, the total addition to consumer wealth is $100 ($1 for each of the 100 people in the population)
...
7 of it so the initial injection is $70 in aggregate
...
33
...
Base year = 2003
Year
Bottles of Diet Coke
Price by Bottle
Batteries
Price per Battery
2003
2004
2005
2006
100,000
400,000
500,000
800,000
$1
...
50
$3
...
25
2,000
1,500
3,000
4,000
$16
$20
$25
$32
Figure 2:
Appleland’s Economy
We have the following information on Appleland:
Marginal propensity to consume = 0