Second Midterm Exam-
I. Problems:
1. Suppose in the loanable funds market the demand for loanable funds is given by the equation r = 20 - (1/100)I where r is the interest rate and I is the level of investment funds demand. The supply of loanable funds is given by the equation r = (1/300)Sp where Sp represents the supply of loanable funds from private savings by households. Assume that initially the government deficit is equal to zero and the trade balance is also equal to zero.
a. Given the above information, find the initial equilibrium level of investment and the initial equilibrium interest rate. Show your work in order to get full credit.
Now, suppose that exports increase by $100 while imports increase by $400.
b. What do you predict will happen to the equilibrium interest rate and the equilibrium level of investment given this change in the foreign sector?
c. Sketch a qualitative graph of the effects of this change in the foreign sector on the loanable funds market. Be sure to label all curves as well as the axes in your sketch. Full credit requires that your sketch be labeled clearly and completely.
d. Describe the effect of this change in the foreign sector on the supply of loanable funds curve. If the supply curve has shifted, provide the new equation for the supply of loanable funds curve.
e. Describe the effect of this change in the foreign sector on the demand for loanable funds curve. If the demand curve has shifted, provide the new equation for the demand for loanable funds curve.
f. Given the changes in the foreign sector calculate the new equilibrium interest rate, r', and the new equilibrium level of investment, I'. Calculate the interest rate to two places past the decimal. Show your work to get full credit.
2. Use the following information to answer this set of questions. You are provided the following data about an economy that produces three goods: pizzas, bikes, and cell phones. The following table provides you with data about the prices and quantities of these goods produced in this economy.
|
Item
|
Price in 2004
|
Quantity in 2004
|
Price in 2005
|
Quantity in 2005
|
|
Pizzas
|
$5
|
100
|
$6.50
|
80
|
|
Bikes
|
$100
|
20
|
$120
|
22
|
|
Cell Phones
|
$50
|
50
|
$50
|
60
|
a. Calculate the value of nominal GDP for 2004. Show your work and any relevant formula in the space below.
b. Calculate the value of nominal GDP for 2005. Show your work and any relevant formula in the space below.
c. Calculate the value of real GDP for 2004 using 2004 as the base year. Show your work and any relevant formula in the space below.
d. Calculate the value of real GDP for 2005 using 2004 as the base year. Show your work and any relevant formula in the space below.
e. Calculate the value of the GDP deflator for 2005 using 2004 as the base year. Use a one point scale for the GDP deflator. Show your work and any relevant formula in the space below. Provide an interpretation of the meaning of the numeric value you calculated for your GDP deflator.
f. Why do economists prefer real GDP over nominal GDP as a measure of productive activity in an economy over time? Explain your answer fully.
3. Suppose an economy's labor market can be described by the following demand and supply curves for labor where W is the nominal wage and L is the quantity of labor:
Labor Demand: W = 50 - 0.4L
Labor Supply: W = 0.1L
Furthermore, assume that this economy's aggregate production function is given by the equation
Y = 10K1/2L1/2
where Y is real GDP, K is capital, and L is labor. Assume that the aggregate price level is equal to one for this entire problem and that capital is initially equal to 225 units.
a. Given the above information, what is the equilibrium wage rate, We, and the equilibrium quantity of labor, Le? Show your work in the space below.
b. Given the above information, what is the full employment level of output, Yfe? Show your work in the space below.
c. At the full employment level of output, what is labor productivity? Show your work in the space below. For full credit provide more than just a number.
d. Suppose the amount of capital available in this economy increases to 400 units. Holding everything else constant, what is the new full employment level of output, Yfe'? Show your work in the space below. For full credit provide more than just a number.
e. Given the change described in part (d), what happens to labor productivity? Provide a verbal explanation for the effect of the increase in capital on labor productivity.
f. In the space below draw a sketch representing the labor market, the initial aggregate production function, and the effect of the change in capital described in part (d). Label all curves, all axes, and all numeric values carefully and completely. Your sketch should depict the entire story of this problem (the more complete and thorough your sketch the more credit your answer will receive). For full credit make sure you also include what is happening to labor productivity.
II. Multiple Choice Questions:
1. Suppose Macroland has the following economic activity during 2010. Given this is all the economic activity that occurs, what is Macroland's GDP for 2010?
- Tires, Inc. produces $500,000 worth of tires: 60% of these tires are used on new cars produced during 2010 and the remaining tires are produced as replacement tires.
- Zoom cars produces $1,000,000 worth of new cars this year: they sell $800,000 worth of these cars and the remaining cars are placed into inventory.
- Sally Consumer and Joe Consumer (actually there are many consumers in Macroland and we are just describing them simplistically as Sally and Joe) purchase $700,000 worth of groceries during 2010. $200,000 of these purchases are of wine produced in Croatia, cheese produced in Greece, and lamb grown in Australia.
- Mary provides childcare to her five children. If Mary had purchased this childcare in the marketplace its value would have been $25,000.
- Larry runs a gambling ring in Macroland and earns $600,000. He does not report any of his earnings to the internal revenue service of Macroland.
GDP for Macroland in 2010 is equal to
a. $1,500,000
b. $1,700,000
c. $1,725,000
d. $2,825,000
2. At the beginning of 2009 T-shirts, Inc. had no inventory. During 2009 T-shirts, Inc. produced $400,000 worth of T-shirts and sold $300,000. The rest of the T-shirts were held as inventory. During 2010 T-shirts, Inc. produced $500,000 worth of T-shirts and sold $600,000 worth of T-shirts. Given this information, what was T-shirts, Inc.'s contribution to GDP in 2010?
a. $600,000
b. $800,000
c. $500,000
d. $700,000
3. Which of the following is not included in investment spending?
a. Don, invests $10,000 of his savings in the company DataWorld.
b. Micah purchases $20,000 worth of manufacturing equipment to use at his company, Widget, Inc.
c. Sarah builds a new house this year for $400,000.
d. Jerry's business, Digital Music, increases its inventories of CDs by $20,000 this year.
4. Which of the following statements is true?
I. GDP as currently measured understates the level of productive activity in an economy each year since it excludes non-market activities.
II. GDP as currently measured provides a good measure of a nation's well-being.
III. GDP provides a measure of an economy's economic production of all final goods and services produced within a given time period.
a. Statement I is true.
b. Statement II is true.
c. Statement III is true.
d. Statements I, II and III are true.
e. Statements I and III are true.
f. Statements I and II are true.
g. Statements II and III are true.
5. You are given the following information about an economy's production in 2010.
Total tire production $20 million
New car production $100 million
Sales of stocks $5 million
Stockbroker Commission $1 million
Sales of New Homes $40 million
Real Estate Agents' Commissions $2.4 million
Furthermore, you are told that 75% of the value of tire production represents tires for new cars produced during the same year. GDP in 2010 for this hypothetical economy is equal to
a. $153.4 million
b. $158.4 million
c. $148.4 million
d. $108.4 million
6. Suppose that a nation's GDP for 2010 is equal to $15 trillion. Furthermore, suppose that 20% of this nation's productive activities do not occur in legal markets. If the overall tax rate in this economy is 10% on all reported productive activity, what would happen to tax revenue if the underground economy was included (and taxed) as part of the economy? Tax revenue would increase by
a. $300 billion
b. $30 billion
c. $3 billion
d. $300 million
e. $30 million
f. $3 million
Use the following information to answer the next two (2) questions.
Suppose that there are 10,000 people sixteen years old and older in Econoland. 2,000 of these people work part-time and 3,000 work full-time. Currently 1000 of the remaining 5000 people are in the military; 1000 are in prison; and 1000 are not working but are not looking for work since they believe there are no jobs available for them. Any other people not accounted for are currently not working, are available to work, and have sought jobs within the last four weeks.
7. Given the above information, what is the unemployment rate in Econoland?
a. 40%
b. 66.7%
c. 25%
d. 28.6%
8. The Bureau of Labor Statistics (BLS) in Econoland is responsible for calculating the unemployment rate. The BLS decides to change the definition of unemployed workers so that it counts discouraged workers as unemployed workers. With the change in definition and holding everything else constant, the unemployment rate in Econoland will
a. Increase.
b. Decrease.
c. Not change from the initial level.
d. May increase, decrease, or remain the same as its initial level.
9. Joey plans to graduate from the University in May 2012. He has started sending out his resume and talking to potential employers in hopes of landing a job starting in June 2012. During this time period when Joey is actively seeking a job he would best be classified as
a. Frictionally unemployed.
b. Structurally unemployed.
c. Cyclically unemployed.
d. Seasonally unemployed.
10. When an economy enters a recession the
a. Cyclical unemployment rate decreases.
b. The level of real GDP falls.
c. Structural unemployment rate increases.
d. Frictional unemployment rate decreases.
11. Joey lost his job in March 2011 and since then he has been available for work, he has applied for jobs weekly, and he has yet to find a position. Mary lost her job in April 2011 and since then she has taken care of her sister's children three mornings a week (a total of nine hours a week); Mary, although available for work, has not submitted any job applications and her sister is not paying her for her current services. Michael lost his job in September 2010 and since then he has been enrolled as a full-time student studying for a certificate as a medical tech. Michael has not applied for any jobs even though he is available and would like to have the spending money he would earn from a job. Given this information which of the following statements is true?
I. Joey is unemployed but from the information provided it is impossible to determine whether Joey is frictionally, structurally, or cyclically unemployed.
II. Mary is not employed since she is working without pay for less than fifteen hours a week. Mary is also not unemployed since she is not actively seeking a job. Mary would be considered "not in the labor force".
III. Michael is not in the labor force.
a. Statements I and II are both true statements.
b. Statements I and III are both true statements.
c. Statements II and III are both true statements.
d. Statements I, II and III are all true statements.
e. None of the above statements are true given the information.
12. The natural unemployment rate is that rate of unemployment where
a. The economy produces at its full employment level of output and the unemployment rate is 0%.
b. There is frictional and structural unemployment but no cyclical unemployment.
c. The business cycle has been eliminated.
d. There is frictional unemployment but no cyclical or structural unemployment.
13. Annual tuition rates are rising at a rate of roughly 7% a year. Currently tuition at Harvard is roughly $35,000 per year. If tuition rates keep rising at 7% per year, what will the tuition at Harvard be in 20 years?
a) $35,000
b) $70, 000
c) $105,000
d) $140,000
Use the following information to answer the next three (3) questions.
Betty is a recent college graduate and she has been lucky enough to land three good job offers. The three jobs are doing similar work but one offer is for Boston, one is for New York, and one is for San Francisco. The non-salary benefits for these three jobs are exactly the same but the salaries differ. Betty has no preferences about where she lives or who she works for-she only wishes to maximize her purchasing power.
14. Given the above information, Betty also has the following information about the three positions.
|
Location
|
Nominal Salary per Year
|
CPI for Location
|
|
Boston
|
$100,000
|
150
|
|
New York
|
$100,000
|
160
|
|
San Francisco
|
$100,000
|
140
|
Betty will maximize her purchasing power by taking the job in
a. Boston.
b. New York.
c. San Francisco.
d. Any one of the three cities since all three jobs pay exactly the same amount.
15. We are still considering Betty but now she has a different set of information she will use to make her decision about which job to take. Here's her new information:
|
Location
|
Nominal Salary per Year
|
CPI for Location
|
|
Boston
|
$160,000
|
100
|
|
New York
|
$300,000
|
150
|
|
San Francisco
|
$100,000
|
50
|
Betty will maximize her purchasing power by taking the job in
a. Boston.
b. New York.
c. San Francisco.
d. Either New York or San Francisco since the real salary is the same in these two cities.
16. Betty is still trying to figure out this job issue: she recalls from her econ class that "inflation does not necessarily erode real wages". As she remembers the lecture the point was
a. Provided that the nominal salary increases at the same rate as the inflation then real purchasing power will not be changed.
b. Provided that the nominal salary increases at a faster rate then the inflation rate then real purchasing power will not be changed.
c. That the government can be relied upon to pursue policies that will maintain the purchasing power of citizens.
d. To focus on the nominal wage and not the real wage since the nominal wage increases when there is inflation.
17. In constructing the CPI the government economists
a. Hold constant the prices of all the goods and services included in the measure while allowing the quantities to vary.
b. Hold constant the quantities of all the goods and services included in the measure while allowing the prices to vary.
18. Consider an economy with a fixed amount of capital. As this economy hires more labor which of the following statements is true?
I. Capital productivity increases.
II. The marginal product of labor decreases.
III. Nominal GDP increases but real GDP remains constant.
a. Statements I, II and III are all true statements.
b. Statements I and II are both true.
c. Statements I and III are both true.
d. Statements II and III are both true.
19. Midge is borrowing money from Larry. Both Midge and Larry have agreed that the nominal interest rate for this loan will be 7% and each of them believe that the real interest rate that will be paid for this loan is 4%. Suppose actual inflation is 5% over the period of the loan. Given this information we can conclude that
a. Midge will be better off than she anticipated when she agreed to the terms of the loan.
b. Larry will be better off than he anticipated when he agreed to the terms of the loan.
20. You are given the following information about the CPI for an economy. The CPI has been calculated using 2005 as the base year.
|
Year
|
CPI with Base Year 2005
|
|
2003
|
50
|
|
2004
|
75
|
|
2005
|
100
|
|
2006
|
150
|
|
2007
|
200
|
|
2008
|
500
|
Suppose that Roger wants the CPI to be calculated using 2008 as the base year. What is the value of the CPI in year 2003 if the CPI uses 2008 as the base year?
a. 50
b. 100
c. 10
d. 5
e. 0.5