Multiple Choice Questions:
1. Real GDP in year 3 is calculated by
a. Summing together the product of the base year's prices times the year 3 quantities of production.
b. Summing together the product of year 3's prices times the year 3 quantities of production.
c. Summing together the product of year 3's prices times the base year quantities of production.
2. In the classical model, an increase in the level of the money supply
I. Has no effect on nominal variables
II. Has no effect on real variables
III. Will result in an increase in the price level, holding everything else constant
a. Statements I, II and III are true.
b. Statements I and III are true.
c. Statements II and III are true.
d. Statement I is true.
e. Statement III is true.
3. Economists build models and then use these models to test hypotheses. Variables explained by the models are called
a. Endogenous variables.
b. Exogenous variables.
4. Depreciation is an example of a
a. Stock.
b. Flow.
5. Positive increases in inventories cause
a. GDP for that period to increase.
b. No change in the level of GDP computed for that period.
6. Income is an example of a
a. Stock.
b. Flow.
7. Computing GDP using the value added approach can also be referred to as double counting.
a. True
b. False
8. Reductions in inventories from the beginning level of inventories to the final level of inventories during the period under consideration cause
a. GDP for that period to decrease.
b. No change in the level of GDP computed for that period.
9. Sue, a U.S. resident, purchases Italian wine twice a month at her local grocery store. Holding everything else constant, this purchase
1. Increases the level of U.S. consumption spending.
2. Decreases the level of net exports.
a. Statements (1) and (2) are correct.
b. Statement (1) is correct.
c. Statement (2) is correct.
d. Neither statement (1) nor (2) is correct.
10. Real GDP is measured using
a. Constant dollars.
b. Current dollars.
11. Suppose an economy's production is described by a Cobb-Douglas production function. If the amount of labor used increases, holding everything else constant, this will
I. Increase the value of the MPL for this economy
II. Decrease the value of the MPL for this economy
III. Decrease the value of the MPK for this economy
IV. Cause labor productivity to decrease
a. Statements I, III and IV are correct.
b. Statements II, III and IV are correct.
c. Statements I and III are correct.
d. Statements II and III are correct.
e. Statements II and IV are correct.
12. An increase in the GDP deflator may be due to
1. An increase in nominal GDP holding everything else constant.
2. An increase in real GDP holding everything else constant.
3. A decrease in real GDP holding everything else constant.
a. Statements (1) and (2) are true.
b. Statements (1) and (3) are true.
c. Statement (1) is true.
d. Statement (2) is true.
e. Statement (3) is true.
13. The CPI holds constant prices in its calculation, using prices defined at the level they are at during the base year, while allowing quantities to vary from year to year.
a. True
b. False
14. An increase in the number of discouraged workers in an economy will, holding everything else constant,
I. cause the unemployment rate to fall
II. cause the unemployment rate to rise
III. cause the labor force participation rate to rise
a. Statements I and III are correct.
b. Statements I and II are correct.
c. Statement I is correct.
d. Statement II is correct.
e. Statement III is correct.
15. Suppose that the MPL for the next additional unit of labor is $35 while the prevailing wage rate is $30. If you are a profit maximizing firm, you will
a. Hire more labor since the value of the production of another unit of labor exceeds the cost of that unit of labor.
b. Hire less labor since you already have the profit maximizing amount of labor employed at your factory.
c. Make no changes in the amount of labor you hire since more labor will only reduce your level of labor productivity at your factory.
16. Joe, a U.S. resident, purchased a brand-new Ford in 2002 for $22,000. This year he sold the Ford for $8000. U. S. GDP for this year
a. Decreased by $14,000.
b. Increased by $8,000.
c. Was unaffected by this transaction.
d. Was affected by this transaction, but insufficient information is provided to measure the effect of the transaction on U.S. GDP for this year.
17. The number of employed people in an economy is an example of a
a. Stock.
b. Flow.
18. When the central bank purchases treasury bills on the open market this
a. Increases the money supply and therefore raises the market interest rate.
b. Decreases the money supply and therefore raises the market interest rate.
c. Increases the money supply and therefore lowers the market interest rate.
d. Decreases the money supply and therefore lowers the market interest rate.
19. When k, the constant that tells us how much money people want to hold for every dollar of income, has a relatively large value then
a. Money in this economy changes hands infrequently.
b. Money in this economy changes hands frequently.
20. Use the following table to answer this question.
|
Year
|
Money Supply
|
Velocity
|
Real GDP
|
|
2006
|
10,000
|
2.5
|
125
|
|
2007
|
11,000
|
3.0
|
132
|
Using the arithmetic tricks for estimating percentage changes in a variable and the above information, estimate the percentage change in the price level from 2006 to 2007. The percentage change in the price level is approximately
a. 24.70%
b. 20.46%
c. 23.84%
d. 24.4%
21. Joe lends $1000 to Sue for the year. Sue promises to repay Joe the $1000 plus 8% interest on the loan at the end of the year. Joe figures that the inflation rate for the year will be 4%. The actual inflation rate for the year is 5%. Which of the following statements is true?
I. The ex ante real interest rate for Joe is 4%.
II. The ex post real interest rate for Joe is 5%.
III. Joe ends up worse off than he expected when he agreed to make the loan.
a. Statements I, II and III are true.
b. Statements I and II are true.
c. Statements I and III are true.
d. Statements II and III are true.
e. Statement III is true.
22. Suppose that the money supply increases by 1 percent in one year and then remains constant at this higher level thereafter. According to the quantity theory of money, the inflation rate
a. Is 1 percent in the first year and thereafter.
b. Increases by 1 percent in the first year and remains constant at the higher level thereafter.
c. Increases by 1 percent in the first year and returns to its former value thereafter.
d. Is unaffected.
23. When the government spends more than it receives in tax revenue, holding everything else constant, we know that
I. Public Saving is positive
II. The government is running a deficit
III. The government is running a surplus
a. Statements I and II are correct.
b. Statements I and III are correct.
c. Statement I is correct.
d. Statement II is correct.
e. Statement III is correct.
24. Suppose nominal GDP is $150 in 2002 and $300 in 2003. Furthermore, you know real GDP in 2002 was $200 and that real GDP increased by 50% in 2003. With certainty you know
a. The GDP deflator decreased between 2002 and 2003.
b. The GDP deflator increased between 2002 and 2003.
25. During periods of unexpected inflation, lenders are hurt while borrowers gain because the
a. Ex post real interest rate exceeds the ex ante real interest rate.
b. Ex post real interest rate is lower than the ex ante real interest rate.
c. Real interest rate rises.
d. Nominal interest rate falls.
26. The GDP deflator is calculated using a pre-determined "market basket" of goods and services that includes particular amounts of all goods and services produced in an economy.
a. True
b. False
27. Constant returns to scale occurs when
a. Output doubles when the amounts of all factor inputs double.
b. Output remains constant over time.
c. The marginal productivity of labor equals the marginal productivity of capital.
d. The marginal products of capital and labor do not change.
28. Suppose, k, the constant that tells us how much money people want to hold for every dollar of income, has a value of .2. If the money supply is equal to $1000, then what is the value of nominal GDP?
a. $5000
b. $500
c. $50,000
d. The value of nominal GDP cannot be determined without information about the aggregate price level.
Short Essays/Problems:
1.
Use the following information about an economy that produces three goods - books, socks, and pizzas - to answer this set of questions.
|
|
Prices in Year 1
|
Quantities in Year 1
|
Prices in Year 2
|
Quantities in Year 2
|
|
Books
|
10
|
100
|
12
|
120
|
|
Pairs of Socks
|
2
|
50
|
1
|
200
|
|
Pizzas
|
4
|
200
|
3
|
250
|
a. Using year 1 as the base year, what is the value of real GDP in year 1? Show your work and provide the base formula you are using. (An answer without any indication of how you got the answer will not receive full credit.)
b. Using year 1 as the base year, what is the value of nominal GDP in year 2?
c. Using Year 1 as the base year, what is the value of the GDP deflator for this economy in year 2? Assume the GDP deflator is being measured on a 1 point scale.
d. Using Year 1 as the base year and defining the consumer market basket as 50 books, 20 pairs of socks, and 100 pizzas, calculate the CPI for Year 2. What is the value of the CPI for year 2? Assume the CPI is being measured on a 100 point scale.
e. Given the market basket defined in part (d) and this economy's CPI figures, what is the rate of inflation between Year 1 and Year 2?
f. Suppose a particular good in this economy cost $1200 in year 1 and its price precisely adjusts to the rate of inflation in this economy. What will its price be in year 2?
2. The economy of your country can be described using a Cobb-Douglas production function where A is a measure of the available technology, L is the amount of labor available, K is the amount of capital available, and Y is the level of aggregate real output. Capital's share of output is 50%. You also know that this country has 625 units of labor available this year and 900 units of capital. Its level of available technology has a value of 2.
a. What is the level of aggregate real output in this country for this year? Show your work.
b. What is labor's income in this economy during the current year? Show your work.
c. What is the value of labor productivity for this year? Show your work.
d. What is the ratio of labor income to capital income equal to in this economy?
e. Suppose that the unemployment rate in this economy during this year is 4% (resulting in 625 units of labor being utilized in this economy). This economy has no discouraged workers. What is the size of the labor force in this economy during this year? (Hint: round to the nearest whole number.)
f. Suppose there is no change in the labor force in this economy and no change in the level of employment, but that productivity changes in the economy are such that Okun's Law holds. If Okun's Law holds, what is your prediction as to the level of real output in the next year for this economy? (Assume that labor and capital are unchanged, but that productivity does change in such a way that Okun's Law precisely captures the predicted change in real GDP.)
3. For this problem carry all calculations out to two places past the decimal. Use the following information to answer this question. A closed economy can be described by the standard Cobb-Douglas production function. Furthermore, all firms in this economy are competitive firms with constant returns to scale and they all are profit maximizing firms. Technology in this economy can be measured as having a value of 15, while capital's share of aggregate income is 70%. There are initially 100 units of capital and 100 units of labor.
Furthermore, this economy can be described using the Classical Model where
Y = C + SP + T
Y = C + I + G in equilibrium
C = a + b(Y - T) = 10 + .6(Y - T)
I = I(r)
G is a constant and is equal to 100
T is a constant and is equal to 200
Where Y is real GDP
C is consumption spending
SP is private saving
T is net taxes
I is investment
G is government spending
r is the real interest rate
SG is government saving
a. What is the initial value of private saving, SP , in this economy? Show your work. Answers without supporting work cannot receive full credit.
b. What is the initial value of government saving, SG , in this economy? Show your work. Answers without supporting work cannot receive full credit.
c. Describe the government's initial budget situation. In your answer be sure to relate the budget situation to the level of government saving.
d. In this economy, what is the initial equilibrium value for investment? Show your work. Answers without supporting work cannot receive full credit.
Now, suppose net taxes are reduced by 100. Use this information to compute the answers for the rest of the questions in this problem.
e. What is the new value of private saving, SP , in this economy? Show your work. Answers without supporting work cannot receive full credit.
f. What is the value of government saving, SG , in this economy? Show your work. Answers without supporting work cannot receive full credit.
g. Describe the government's budget situation now that the level of net taxes has changed.
h. In this economy, what is the new equilibrium level of investment? Show your work. Answers without supporting work cannot receive full credit.
i. What is the effect on the real interest rate of this change in fiscal policy? Explain your answer, making note of any shifts of curves or movements along curves.
j. Now, draw a well-labeled graph of the loanable funds market to illustrate your answer.