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Midterm Exam 1
Economics 503
Foundations of Economic Analysis
Session 4
Multiple Choice ( ½ point each)
1. Which of the following is NOT included in GDP calculated using the expenditure
method?
A) government purchases
B) government transfer payments
C) residential investment
D) exports of services
_____B_____________
CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for
$300 and uses its labor and intermediate goods to make the canoe. It sells the finished
canoe to a a retail canoe store for $800. The retail canoe store then sells the canoe to a
consumer for $1,200.
2. Refer to the table above. The value added of CANOES-R-US for each canoe
equals
A) $1,200.
B) $800.
C) $500.
D) $400.
____________C______
3. Refer to the table above. The value of each canoe in gross domestic product
equals
A) $1,200.
B) $800.
C) $500.
D) $400.
_______A___________
4. The law of demand states that holding everything else constant:
A) there is a positive or up sloping relationship between price and quantity.
B) there is an inverse or down sloping relationship between price and quantity.
C) buyers increase the quantities they buy when their incomes increase.
D) buyers decrease the amount of a good bought when there is more in the market.
______B____________
5. If the number employed is 190 million, the working age population is 230 million,
and the number unemployed is 10 million, then the unemployment rate is
A) 50%
B) 5%
C) 10%
D) 8%
E) 5.2%
______B____________
Calculation
1.
(2 points) According to the OECD, the real GDP and the potential GDP are listed
in the following table. Calculate the output gap.
GDP
Australia
Gap 
$1,101,327.01
Potential
$1,152,105.78
Yt  Yt P
Yt P
2009
Output Gap
-4.41%
2.
(6 points) There is a country called Pizzaland. There are two consumer goods
produced in Pizzaland, pizza and soda. The following chart shows the market prices of
each good and the quantities that people buy.
Pizza
P
2007
2008
Soda
P
Q
100
100
100
200
Q
10
12
600
300
Calculate nominal GDP, real GDP and the GDP deflator in 2007 and 2008
using 2007 as the market basket. Assume that the average market basket of
the typical consumer in 2007 is 1 pizza and 6 sodas. Calculate the CPI in 2007
and 2008. Calculate the inflation rate in 2008 using both the CPI and the GDP
deflator.
Nominal Real
GDP
CPI
CPI
Deflator
GDP
GDP
Deflator Index
Inflation
Inflation
2007
16000
16000
1
1
2008
23600
23000 1.02609
1.075
0.075
0.026
GDPt  Pt PIZZA  QtPIZZA  Pt SODA  QtSODA
PIZZA
SODA
Yt  P2007
 QtPIZZA  P2007
 QtSODA
CPIt 
Pt 
Pt PIZZA 1  Pt SODA  6
PIZZA
SODA
P2007
1  P2007
6
GDPt
Yt
a. The interest rate in 2007 was 5% (i.e. i = .05). Suppose CPI inflation was
perfectly foreseen. Show the real interest rate in 2007.
r  i   t 1  .05  .075  .025
3.
(2 points) The following chart shows the HK CPI (Base year, 2005). The price of
a square meter in a Class E Residential Apartment on HK Island was $81,593 in 1999.
The price of the same real estate in 2008 was $140, 295. Convert both prices into 2002
dollars. Which is greater in inflation adjusted terms?
CPI
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
N t2002  N t 
63.6
70.8
77.5
84.4
91.8
100.1
106.4
112.7
115.9
111.3
107.1
105.4
102.1
99.5
99.1
100.0
102.0
104.1
108.6
CPI 2002
CPI t
1999
Price of
Real
Estate
$81,593
2008
$140,295
Price in 2002
dollars
102.1
=
111.3
74848.57
102.1
140, 295
108.6
= 131897.9696
81,593
4.
(2.5 points) Show in a diagram the effect on the demand curve, the supply curve,
the equilibrium quantity in the newspaper market of each of the following events.
Case 1: The cost of newsprint goes up.
S´
P
S
2
1
D
Q
Case 2: There is a big event in town, which a lot of people want to read about.
S
P
2
1
D´
D
Q