Download Econ 002 – INTRO MACRO –Prof. Luca Bossi

Econ 002 – INTRO MACRO –Prof. Luca Bossi – October 5, 2010
MIDTERM #1
SUGGESTED SOLUTIONS
1) By far the largest category of goods and services represented in the CPI basket is
a. Transportation
b. Housing
c. Recreation
d. food and beverages
2) The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it sells all 25 cars.
a. The value of the increased inventory will be counted as 2003 GDP and the value of the cars
sold in 2004 will increase 2004 GDP.
b. The value of the increased inventory will not affect 2003 GDP, but will be included in 2004
GDP.
c. The value of increased inventory will be counted as part of GDP in 2003, but the value of the
cars sold in 2004 will not cause GDP to increase.
d. None of the above is correct.
3) Steph buys a designer dress produced by an American-owned fashion shop in France. As a result, U.S.
consumption increases, U.S. net exports
a.
decrease, U.S. GDP is unaffected, and U.S. GNP increases.
b.
decrease, U.S. GDP increases, and U.S. GNP is unaffected.
c.
decrease, U.S. GNP increases, and French GDP is unaffected.
d.
are unaffected, U.S. GDP is unaffected, and French GDP increases.
4) U.S. GDP and U.S. GNP are related as follows:
a.
GNP = GDP - Value of exported goods + Value of imported goods.
b.
GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
c.
GNP = GDP + Value of exported goods - Value of imported goods.
d.
GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad.
5) Darla, a Canadian citizen, only works in the United States. The value added to production from her
employment is
a. included only in U.S. GDP.
b. included in both U.S. GDP and Canada GDP.
c. included only in Canada GDP.
d. not included in either U.S. GDP or Canada GDP.
6) You know that the wage of Charlie Chaplin was $2,000 in 1959. You also know the CPI for 1959 and
the CPI for today. Which of the following would you use to compute the wage of Charlie Chaplin in
today's prices?
a. $2,000 (1959 CPI/ today's CPI)
b. 2,000 (1959 CPI/(today's CPI - 1959 CPI))
c. $2,000 (today's CPI/1959 CPI)$
d. $2,000 today's CPI – $2,000 1959 CPI.
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7) Suppose GDP consists of wheat and rice. In 2002, 20 bushels of wheat are sold at $4 per bushel, and
10 bushels of rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the price of rice
was $1 per bushel in 2001, the base year,
a.
nominal 2002 GDP is $100, real 2002 GDP is $50, GDP deflator is 50.
b.
nominal 2002 GDP is $50, real 2002 GDP is $100, GDP deflator is 200.
c.
nominal 2002 GDP is $100, real 2002 GDP is $50, GDP deflator is 200.
d.
nominal 2002 GDP is $40, real 2002 GDP is $100, GDP deflator is 50.
8) At the University of Trinidad and Tobago, tuition in 1972 was $15 per credit hour and in 1999 it was
$77 per credit hour. The consumer price index for Trinidad and Tobago was 26.1 in 1972 and 110.9 in
1999. What was 1972 tuition per credit hour in 1999 dollars?
a. $18.12.
b. $63.74
c. $13.26
d. $74.21
9) In 2008, OPEC succeeds in raising world oil prices by 300 percent. This price increase causes
inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered
engine is developed which is cheaper to operate than gasoline engines. Which problem in the construction
of the CPI does this situation represent?
a. income bias and substitution bias
b. introduction of new goods and unmeasured quality change
c. unmeasured quality change and new goods.
d. substitution bias and introduction of new goods
10) The inflation rate is defined as the
a. price level.
b. change in the price level.
c. price level divided by the price level in the previous period.
d. percentage change in the price level from the previous period.
11) In the markets for goods and services,
a. households provide firms with savings for investment.
b. households provide firms with labor, land, and capital.
c. firms provide households with the output they produced.
d. the government provides firms with inputs for the production process.
12) An increase in the minimum wage would
a. increase both the quantity demanded and the quantity supplied of labor.
b. decrease both the quantity demanded and the quantity supplied of labor.
c. increase the quantity of labor demanded while decreasing the quantity supplied.
d. decrease the quantity of labor demanded while increasing the quantity supplied.
13) The labor-force participation rate is defined as
a. (Labor Force Adult Population) 100.
b. (Employed Labor Force) 100.
c. (Employed Adult Population) 100.
d. (Adult Population Labor Force) 100.
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14) President Luke Skywalker is running for re-election against Senator Han Solo. Skywalker proclaims
that more people are working now than when he took office. Solo says that the unemployment rate is
higher now than when Skywalker took office. You conclude that
a. one of them must be lying.
b. both of them could be telling the truth if the labor force participation rate and the labor
force both fell.
c. both of them could be telling the truth if the labor force grew slower than employment.
d. both of them could be telling the truth if the labor force grew faster than employment.
15) Most spells of unemployment are
a. long, and most unemployment observed at any given time is long term.
b. long, but most unemployment observed at any given time is short term.
c. short, but most unemployment observed at any given time is long term.
d. short, and most unemployment observed at any given time is short term.
16) Suppose that some people are counted as unemployed when, to maintain unemployment
compensation, they search for work only at places where they are unlikely to be hired. If these individuals
were counted as out of the labor force instead of as unemployed,
a. both the unemployment rate and labor-force participation rate would be higher.
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be lower and the labor-force participation rate would be
higher.
d. the unemployment rate would be higher and the participation rate would be lower.
17) Which of the following statements about GDP is correct?
a.
GDP measures two things at once: the total income of everyone in the economy and the total
expenditure on the economy’s output of goods and services.
b.
Money continuously flows from households to firms and then back to households, and GDP
measures this flow of money.
c.
GDP is generally regarded as the best single measure of a society’s economic well-being.
d.
All of the above are correct.
18) The information below was reported by the World Bank. On the basis of this information, which list
below contains the correct ordering of GDP per person from highest to lowest?
Country
Kenya
Tanzania
Zimbabwe
a.
b.
c.
d.
Nominal GDP in 2000
$10,400 million
$9,000 million
$7,200 million
Kenya, Tanzania, Zimbabwe
Kenya, Zimbabwe, Tanzania
Zimbabwe, Kenya, Tanzania
Zimbabwe, Tanzania, Kenya
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Population in 2000
30.1 million
33.7 million
12.6 million
19) An important difference between the GDP deflator and the consumer price index is that
a. the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer
price index reflects the prices of goods and services bought by consumers.
b. the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the
consumer price index reflects the prices of some goods and services bought by consumers.
c. the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens,
whereas the consumer price index reflects the prices of final goods and services bought by consumers.
d. the GDP deflator reflects the prices of all goods and services bought by producers and consumers,
whereas the consumer price index reflects the prices of final goods and services bought by consumers.
20) George buys and lives in a newly constructed home he paid $200,000 for in 2003. He sells the house
in 2004 for $225,000.
a. The 2004 sale increases 2004 GDP by $25,000 and does nothing to 2003 GDP.
b. The 2004 sale does not increase 2004 GDP and does nothing to 2003 GDP.
c. The 2004 sale increases 2004 GDP by $225,000 and does nothing to 2003 GDP.
d. The 2004 sale increases 2004 GDP by $225,000 and 2003 GDP is revised upward by
$25,000.
21) EXTRA CREDIT. THIS QUESTION IS WORTH 1 POINT. CHOOSE THIS ONE
WISELY…Which of the following options best describes your opinion while taking this course?
a. Econ 002 rocks!
b. I LOOOOOVE economics.
c. I am tormented by the idea that the course will be over in 2 months or so.
d. The professor is awesome. He is the man!
e. All of the above.
EXERCISE I
Use the following table to answer the questions below. Assume that the base year is 2006 and that the
representative urban consumer’s bundle includes the following: 5 cookies and 10 magazines.
total
units
produced
in 2000
total
total
units per unit per unit
units
produced produced prices prices in
2003
in 2003 in 2006 in 2000
per unit
prices in
2006
Cookies
100
150
200
$0.50
$0.60
$0.70
Magazines
300
275
250
$5.00
$6.00
$7.00
Socks
50
52
55
$3.00
$3.25
$3.50
a) (8 points) What are the nominal and real GDP for this economy in year 2000?
Real GDP in 2000 = prices of the base year * quantities of 2000 = 0.7*100+7*300+3.5*50 = $2,345
Nominal GDP in 2000 = prices of 2000 * quantities of 2000 = 0.5*100+5*300+3*50 = $1,700
b) (6 points) Use the GDP Deflator to compute approx. the inflation rate for 2006 (use 2 decimal digits
precision)
The ideal situation would be to have figures concerning the Nominal and Real GDP for 2005 to compute
the inflation for 2006. These figures are however not available in the table. Hence we need to make an
approximation. The best approximation is with the most recent data available (2003).
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Nom. GDP 2003=prices of 2003 * quantities of 2003 = 0.6*150+6*275+3.25*52 = $1,909
Real GDP 2003= prices of the base year * quantities of 2003 = 0.7*150+7*275+3.5*52 = $2,212
Taking their ratio of the nominal GDP in 2003 to the real GDP in 2003 and multiplying by 100, we get
that the 2003 GDP Deflator is 86.3.
The GDP Deflator in 2006 is 100 since 2006 is the base year. Thus, inflation using the GDP deflator is
100*(100-86.3)/86.3=15.87%
Alternatively you could have also computed the average annual inflation. If you were to do this you are
implicitly assuming that the inflation is the same in all the 3 years. Hence, you are still making an
approximation error (we don’t know the standard deviations).
How does one compute the average annual inflation?
Take the inflation for the period 2003-2006 Î100*(100-86.3)/86.3=15.87%
And divide this number by 3 (= number of years in the time span) to obtain 5.29%.
Having the average annual inflation between 2003-2006 or the total inflation for the period 2003-2006 are
both acceptable answers.
You will get partial credits if you used the GDP deflator of 2000 to compute the inflation for 2006 (and of
course you will see that you get a vastly different number for inflation if you do so). From part a) we
know
Nom. GDP 2000= $1,700
Real GDP 2000 = $2,345
Taking their ratio of the nominal GDP in 2000 to the real GDP in 2000 and multiplying by 100, we get
that the 2000 GDP Deflator is 72.49.
Thus, inflation using the GDP deflator is 100*(100-72.49)/ 72.49 = 37.95%
See that inflation looks much bigger (more than twice!) using data from 2000. The reason is due to the
fact that what you are actually computing is the inflation rate for the period 2003 and 2006 and/or the
inflation rate for the period 2000 and 2006. With increasing prices the most recent data do a better job at
approximating the inflation rate.
c) (6 points) Use the CPI to compute approx. the inflation rate for 2003 (use 2 decimal digits precision)
Here there is no question that the only approximation you can do is by using CPI for 2000 and CPI for
2003.
Recall that the CPI basket is composed only of 5 cookies and 10 magazines in this exercise.
Cost of the basket in 2006 = $73.5 = 5*0.7+10*7 This is the cost of the basket in the base year, as 2006
is the base year.
Cost of the basket in 2003 =$63= 5*0.6+10*6
Cost of the basket in 2000 =$52.5= 5*0.5+10*5
CPI 2000 =(52.5/73.5)*100=71.42.
CPI 2003 = (63/73.5)*100 = 85.71
Thus inflation using the CPI is 100*(85.71-71.42)/ 71.42=20%.
Again you could have also used the average annual inflation 20%/3 = 6.66% and that would have been
fine.
EXERCISE II
Consider the following information for the imaginary country of Mordor
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Population of Mordor in Year 1
HPSOR\HG
XQHPSOR\HG
1RWLQODERUIRUFH
Since this is a magical world, all Mordorians are born adults, capable of working immediately. No
Mordorian dies. You know that 50% of the population is hired by Gandalf's company. Gandalf's company
is the only employer on Mordor. Mordor is an island and no movement is possible in and out of Mordor.
a) (2 points) What is the size of Mordor's labor force?
Labor force = # employed + # unemployed = 100 + 20 = 120
b) (4 points) What is the number of Mordorians not in the labor force. (Note you will need to use
this number in part d) of the exercise below)
You know that 50% of the population is employed and this corresponds to 100 Mordorians
the remaining 50% of the population is either not in the labor force or unemployed. So 100
Mordorians are either unemployed or not in the labor force. You also know that 20
Mordorians are actually unemployed so 80 are those not in the labor force.
c) (10 points) Frodo runs a census study on Mordorians in Year 1. He trips over a ring and loses
some information. Help him recover what he lost. Frodo knows that 60% of Mordorians are elves
while the rest are trolls. What are the value of A, B, C, D, E, and F in the table below? Show your
computations and how you obtain your results. (Hint: carefully match the column information with
the row information to find your answers)
7RWDO
0RUGRULDQV
(OYHV
7UROOV
HPSOR\HG
$
XQHPSOR\HG
1RWLQODERU
IRUFH
))URPSDUWE
DERYH %
&
'
(
)
A = 20 (because total Mordorians employed are 100 – 80 Elves employed = 20 Trolls
employed)
B = 35 (Because the total population of Mordorians is 200 of which 60% =120 are the total
number of Elves in the population. Of those 120, we are told 80 are employed and 5 are
unemployed hence 35 = 120 - 80 – 5 are the one that are not in the labor force).
C = 45 (from part b) of the question above you know that 80 is the total number of Mordorians
not in the labor force, from letter A you know that 20 are the trolls employed hence 45 = 80-2015 are the trolls not in the labor force)
D = 200 This is simply adding 120 to 80
E = 120 (60% of 200 are Elves)
F = 80 (40% of 200 are Trolls)
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d) (4 points) What is the unemployment rate for Elves? And for Trolls? (use 2 decimal digits
precision)
Total labor force for Elves is 85 (80 employed + 5 unemployed).
Total labor force for Trolls is 35 (20 employed + 15 unemployed).
U-rate for Elves =100*# Elves unemployed /Labor force of Elves
So 100*5/85 = 5.88%
U-rate for Trolls =100*# Trolls unemployed /Labor force of Trolls
So 100*15/35 = 42.86%
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