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Final Exam
ECON 201
Fall 1999
1. For each of the following statements, explain why the transaction is or is not included
in the GDP of the country known as Colgatia. If it is included in GDP, explain
whether it is considered part of C, I, G, X or M.
a. Dave buys a new textbook at the college bookstore for $50.
b. Susan cuts her friend Mary’s hair in her dorm room and Mary pays Susan $20.
c. Trevor buys 50 shares of Microsoft stock at $80 apiece.
d. Jill donates $75 to her favorite charity, Habitat for Humanity.
e. The government of Colgatia pays Tom’s grandmother $250 per month in Social
Security.
f. The government decides to increase the number of police officers on the street by
1000, paying each a salary of $35000.
2. The following table shows the prices and quantities consumed in the country known
as Colgatia. Suppose the base year is 1996. (This is also the year the typical
consumption basket was determined.)
Year
Price of
Quantity
Price of
Quantity
Price of
Quantity
books
of books
pencils
of pencils pens
of pens
1996
$50
10
$1
100
$5
100
1997
$50
12
$1
200
$10
50
a. Suppose you were asked to calculate a CPI for Colgatia. Explain what a CPI is,
what it is attempting to measure, and what it would be used for?
b. What is your calculation of the CPI in 1996 and 1997?
c. What is the inflation rate in Colgatia in 1997?
d. Why is the CPI and corresponding inflation rate you generated above biased or
misleading?
3. Use the following information about Colgatia to answer question 3. (All numbers are
in millions.)
1998
1999
Population
223.6
226.5
Adult population
168.2
169.5
Number of unemployed
7.4
8.1
Number of employed
105.2
104.2
a. What is the labor force in 1998 and 1999?
b. What is the labor force participation rate in 1998 and 1999?
c. What is the unemployment rate in 1998 and 1999?
d. From 1998 to 1999, the adult population when up while the labor force went
down. Provide at least three explanations why this might have happened.
e. If the natural rate of unemployment in Colgatia is 6.6%, is Colgatia likely to be
experiencing a recession in either of these years? Explain.
4. Answer the following question using the loanable funds model.
a. Draw a graph representing the market for loanable funds being sure to label all
lines and axes.
b. Suppose the government suddenly increases its budget deficit by $400 billion.
Show this change on the graph from part (a). What is the effect on the
equilibrium level of investment and the equilibrium interest rate in the economy?
c. Economists are quite concerned when governments run a budget deficit. Based
on your answer to part (b), explain why.
d. Suppose that, in addition to running a deficit, the government enacts an
investment tax credit which allows firms to pay lower corporate taxes if they
undertake investment projects. Show this change on a graph similar to the one
from part (a). What is the combined effect of these two fiscal changes on the
equilibrium level of investment and the equilibrium interest rate in the economy?
5. Suppose the Fed was worried that unemployment in Colgatia was below its natural
rate, and thus that inflation might soon increase. The Fed therefore, wants to decrease
the money supply in Colgatia.
a. What are the three monetary policy tools of the Fed?
b. If the Fed wanted to decrease the money supply, explain how should they use
each of the three tools mentioned in part (a).
c. If the Fed did decrease the money supply, how would interest rates in the
economy change? Use a loanable funds diagram to explain your answer.
6. Answer the following questions about the aggregate demand-aggregate supply model.
a. Draw a graph representing aggregate demand and supply being sure to label all
lines and axes.
b. Give one reason and explain why the aggregate demand curve is sloped as it is
(upward or downward slope).
c. Suppose the economy is in general equilibrium and the Fed decides to decrease
the money supply as described in question 5. Which curve does this affect and
why?
d. Describe the short-run effect on the price level and output in Colgatia.
e. Does this decrease in the money supply move unemployment above or below its
natural rate? What effect does this have on wages in the economy?
f. Describe the long-run effect on the price level and output in Colgatia.
7. A public official recently argued that our goal as a society should be to eliminate
crime, that we should not stop until there is not a single robbery or murder. His
assertion is that even one robbery is one too many. Even if a society has enough
resources to make it feasible to eliminate crime, would it make sense? Or is this bad
economics? Can you make an analogy with pollution control? Write a short essay
explaining what’s wrong with this way of thinking.