ECON 201: Introduction to Macroeconomics Midterm Exam 2: Answer Packet November 8 2010 NAME: _________________________________

Circle your TAs name:

Brian

Meysam

Travis

Directions: This test is in two parts, a multiple choice question part an a short! answer part" #se this answer pac$et to complete the e%am" Calculators are permitte " Boo$s, notes, re&erence materials, etc" are prohi'ite " (oo luc$)

*art +: ,e&errin- to the questions in the Multiple Choice .uestions *ac$et, choose the one alternative that 'est completes the statement or answers the question" Each question is worth one point" There is no penalty to -uessin-, so 'e sure to answer all o& them" /rite your answers in the &ollowin- ta'le using capital letters"

+ 1 3 5 7

0 2 4 6 +8

++ +1 +3 +5 +7

+0 +2 +4 +6 18

1+ 11 13 15 17

10 12 14 16 38

+" The wor 9e%ternalities: has come up twice in the course so &ar" /hat o& the &ollowinpairs are the topics most closely relate to e%ternalities; A) Market failure; excluded from GDP B< E&&ect o& -overnment price ceilin-s an &loors= e%clu e &rom (D* C< E&&ect o& -overnment tari&&s an quotas= mar$et &ailure D< E&&ect o& -overnment tari&&s an quotas= e%clu e &rom (D* 1" Accor in- to a course pac$et rea in-, the success o& >outh ?orea in achievin- rapi catch!up to the income o& the rich nations is partly ue to A< @ree tra e= lettin- &ree mar$ets wor$ B< @ree tra e= in ustrial policy C) Protectionism; industrial policy D< *rotectionism= lettin- &ree mar$ets wor$ 3" /hen a #">"!owne McDonal As operates in >outh ?orea, the pro&its that this &irm 'rin-s 'ac$ to the #">" are inclu e in the #">" ______ an the >outh ?orea ______" A< (D*= (D* B) GNP; GDP C< (D*= (N* D< (N*= (N* 5" A policy that o&&ers parents a ta% re uction 'ase on how much they are savin- &or their chil renAs colle-e e ucation shoul ______ the equili'rium level o& loana'le &un s an ______ the rate o& lon-!term -rowth" A) increase; increase B< increase= ecrease C< ecrease= ecrease D< ecrease= increase 7" An a vanta-e o& the househol survey over the esta'lishment survey o& the la'or mar$et is that the househol survey A) includes the number of self employed persons! B< is 'ase on actual payrolls, rather than on unveri&ie answers" C< inclu es the num'er o& iscoura-e wor$ers" D< omits persons employe at newly opene &irms" 0" Depreciation is A) the "alue of #orn out e$uipment% machinery% and buildin&s! B< the value o& ecrease in 'usiness inventory stoc$s" C< the value o& the a ition to the capital stoc$" D< the ecline in the value o& the stoc$ mar$et, net o& ivi en s" 2" /hich o& the &ollowin- will increase investment spen in- hol in- everythin- else constant;

A< B) C< D<

An increase in trans&er payments An increase in &o"ernment bud&et surplus An increase in total consumption An increase in -overnment spen in-

4" The a vice to retrain woul 'e most appropriate &or which o& the &ollowin- types o& unemployment; A< @rictional unemployment B) 'tructural unemployment C< Cyclical unemployment D< Core unemployment 6" The lecture isa-ree with a -raph in the te%t'oo$ showin- that A< Butput is ne-atively correlate with unemployment B) (nflation is ne&ati"ely correlated #ith unemployment C< Butput is positively correlate with unemployment D< Cn&lation is positively correlate with unemployment +8" C& your nominal wa-e rises &aster than the price level, we can say your real wa-e has ________ an the purchasin- power o& your income has _______" A< &allen= &allen" B< &allen= risen" C) risen; risen! D< risen= &allen" ++" A country in which a si-ni&icant &raction o& omestic pro uction ta$es place in &orei-n!owne &actories is most li$ely a country where ______" A< (N* is much lar-er than (D*" B) GDP is much lar&er than GNP! C< (D* is equal to (N*" D< (D* is not compara'le to (N*" +1" The comprehensive pro uction &unction evelope in lecture inclu es which item that is not inclu e in the te%t'oo$s treatment o& economic -rowth; A) Geo&raphy B< Duman capital C< *olitical capital D< Ee-al systems an property ri-hts E< A< an C<

+3" /hich o& the &ollowin- &actors implies that o&&icial statistics may un erstate the unemployment rate; A< The pro'lem o& measurin- the over time wor$" B< The &act that some part time wor$ers want to wor$ &ull time" C< The &act that some people stop searchin- &or Fo's a&ter a while" D) None of the abo"e! +5" An unemployment insurance pro-ram has which o& the &ollowin- e&&ects; A< Ct ecreases the amount o& personal income o& the unemploye " B< Ct contri'utes to the severity o& a recession or economic ownturn" C) (t increases the amount of time spent searchin& for a )ob! D< Ct lowers the overall unemployment rate" National income *+,,, ,etaine earnin-s not pai as ivi en -, Trans&er payments ., Cnterest on -overnment 'on s /, *ersonal ta%es 0, +7" ,e&er to the ta'le a'ove" /hat is the level o& personal isposa'le income &or this economy; A< G +,848 'illion B< G +,8+8 'illion C) * 12, billion D< G 408 'illion +0" Cncreasin- the amount o& consumption spen in- an re ucin- the amount o& savin-s ______ investment e%pen itures, an ______ lon-!run economic -rowth in the economy" A< increases= increases B< increases= ecreases C< ecreases= increases D) decreases; decreases +2" The real wa-e equals the nominal wa-e ______ the C*C, all times +88" A) di"ided by B< times C< minus D< plus +4" Cn a close economy, there is a -overnment 'u -et surplus i& A) 3 34 5 G B< ( H T!T, C< T H ( D< ( H T

+6" /hich o& the &ollowin- can e%plain why some countries have not e%perience relatively hi-h -rowth rates in real (D* per capita espite relatively low initial levels o& real (D* per capita; A< Many o& these evelopin- countries o not have a court system that can en&orce laws" B< Countries that are relatively poor are more li$ely to e%perience wars an revolutions" C< Countries that are relatively poor are li$ely to have a lower quality o& health care" D) All of the abo"e 18" The course pac$et rea in- on tra e!a Fustment assistance ITAA< conclu es that a esira'le policy woul 'e A< /a-e insurance &or all people that lasts two years B) 6a&e insurance for those a&ed 5 -, that lasts fore"er C< /a-e insurance &or all people that lasts &orever D< /a-e insurance &or those a-e H 78 that lasts two years 1+" /hen the actual in&lation rates turns out to 'e -reater than the e%pecte in&lation rate the 'orrowers _____ an the len ers ____" A< lose= -ain B< lose= lose C) &ain; lose D< -ain= -ain 11" Cn years with positive -rowth an in&lation, real (D* -rows _________ nominal (D*" A< &aster than B) slo#er than C< at the same pace as D< sometimes &aster, sometimes slower, an sometimes at the same pace as 13" C& an economy e%periences e&lation the real interest rate A< will 'e less than the nominal interest rate" B< will 'e ne-ative when nominal interest rate is positive" C) #ill be &reater than the nominal interest rate! D< will 'e equal to the e&lation rate, so lon- as the nominal interest rate is positive" 15" The 'i--est i&&erence 'etween unemployment in 1886!18+8 vs" +641 is: A< Cn 1886!18+8 the o&&icial unemployment rate is hi-her B< Cn 1886!18+8 the percenta-e o& &orce part!time is hi-her C) (n /,,1 /,+, the percenta&e of lon& term unemployment is hi&her D< A< an B<

E< B< an C< 17" Jou are an economic a visor to the presi ent" Jou are as$e to recommen a policy to promote lon-!term economic -rowth in the economy" /hich o& the &ollowin- policies woul you choose; A< A re uction in sales ta% B) An in"estment tax credit C< A re uction in ta% on lu%ury -oo s D< All o& the a'ove 10" Cn the lectures intro uction o& hypothetical or ers o& ma-nitu e o& nominal (D* an its components &or +616 vs" 1882, which o& the &ollowin- was shown; A< ,eal (D* per capita increase 'y a &actor o& +8 B) 4eal GDP increased by a factor of +, C< Nominal (D* increase 'y a &actor o& +8 D< The population increase 'y a &actor o& +8 12" Disposa'le personal income equals personal income A) minus personal tax payments! B< plus -overnment trans&er payments" C< minus personal ta% payments plus -overnment trans&er payments" D< minus -overnment trans&er payments plus personal ta% payments" 14" /hich o& the &ollowin- woul ecrease the unemployment rate; A< An increase in the minimum wa-e B< An increase in the e&&iciency wa-e C< An increase in la'or union mem'ership D) Go"ernment aid to retrain unemployed #orkers 16" The purchase 'y an in ivi ual or &irm o& stoc$ or 'on issue in another country is calle A< &orei-n e%chan-e ar'itra-e B< &orei-n irect investment C) forei&n portfolio in"estment D< -lo'al stoc$ e%chan-e 38" Eon-!run economic -rowth requires all the &ollowin- except A< technolo-ical chan-e B< increase in capital per hour wor$e C< -overnment provision o& secure property ri-hts D) political instability

'hort ans#er $uestions (30 points total) Problem 7ne (16 points, 1 point for each blank) Eet the supply an eman equations representin- the mar$et &or a new type o& phone, the Cphoney, 'e -iven 'y P 8 /9' : +;, P 8 +,,, -9D Ia< Calculate equili'rium price an quantity, un er the autar$y" /hat are consumer surplus an pro ucer surplus un er the autar$y re-ime; (2 points)

Equili'rium *rice

.,,

Equili'rium .uantity

+/,

Consumer >urplus

0;%,,,

Domestic *ro ucer >urplus

+.%.,,

I'< >uppose the worl price &or Cphoney is G388" Now calculate the quantity o& omestic pro uction, imports an omestic consumption an the consumer surplus an omestic pro ucer surplus un er this new re-ime" Assume that consumers will &irst 'uy all units o& omestically pro uce Cphoney 'e&ore -oin- to international pro ucers" (5 points)

Domestic Consumption

+.,

Domestic *ro uction

<,

Cmports

<,

Consumer >urplus

.1%,,,

Domestic *ro ucer >urplus

.%1,,

Ic< The -overnment imposes an import quota o& 37" Calculate omestic consumption, omestic supply, consumer surplus, omestic pro ucer surplus, an ea wei-ht loss" (5 points)

Domestic Consumption

+0,

Domestic *ro uction Consumer >urplus

1./%/-,

Domestic *ro ucer >urplus

1,/-

Dea wei-ht loss

2<-

I < Dow much -overnment revenue is -enerate 'y this quota; (1 point)

-,

Ie< /hat tari&& amount woul result in the same amount o& ea wei-ht loss as in part Ic<; (1 point)

I&< #n er this new rule Icompare quota an tari&&< consumers _________ (1 point) Are 'etter o&& Are worse o&& =are the same

An

omestic pro ucers __________ Are 'etter o&&

(1 point) =are the same

Are worse o&&

Problem 3#o (6 points) Assume that we &ace a close economy" Kusti&y your answers 'y provi in- the equations you use to erive those answers" Ia< C& (D* is +788, Consumption is 288 an total investment is 378, what is the -overnment e%pen iture equal to; (2 point) .-,

I'< Now i& pu'lic savin-s is !+88 how much is the private savin-; (2 point) .-,

Ic< >o &ar you $now the level o& pu'lic savin- an (" C& T, L +78, what is the level o& -overnment ta% revenue IT<; (2 points) -,,

Problem 3hree (8 points) >uppose that in a &ictional economy three -oo s are pro uce " Bne is Chocolate 'eans, which is an 9interme iate -oo :, use in the pro uction o& the two other 9&inal -oo s:" The &inal -oo s are Dot Chocolate an Chocolate ca$e" Answer the &ollowin- questions" (1/2 point each blank) 1884 1886 18+8 *rice .uantity *rice .uantity *rice .uantity Chocolate +!+/,, +!< +.,, +!<+-,, 'eans Chocolate . .,, -,, -!;,, ca$e Dot Chocolate 0 2,, 0!1,, . 1,, ,eal (D* in +" 1" 3" 1884 *rices .,,, .<,, -+,, M chan-e IEN< in real (D* at 1884 prices Nominal (D* (D* e&lator I'ase year 1884< 0" .,,, 6" +88 +/,!/ 5" N"A" +;!+/> 7" 2!+<>

2" -;-,

4" ;1,, +8" +0-

I'< Each unit o& Chocolate 'eans can turn into either one unit o& Chocolate Ca$e or one unit o& Dot Chocolate" >uppose that there is an e%tra pro uction o& +88 units o& chocolate 'eans into the country in year 18+8" /hat is the value a i& it is use to pro uce Dot Chocolate; (2 points) Nalue a Ca$e Nalue a e &rom E%tra *ro uction o& Dot Chocolate //e &rom E%tra *ro uction o& Chocolate 0<e in 18+8 prices i& the e%tra units o& chocolate 'eans are use to pro uce Chocolate ca$e; /hat a'out

Ic< Dow much will the (D* increase in 18+8 prices i& 78 units o& the e%tra Chocolate 'eans are turne into Chocolate Ca$e an the other 78 units are turne into Dot Chocolate; (1 point)

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