# Make sure to demonstrate ALL your calculations

November 24, 2016

UNIVERSITY OF THE INCARNATE WORD

Department of Economics

SUMMER 2014

PRINCIPLES OF MACROECONOMICS

MINI EXAM #3

MACROECONOMIC THE BIG PICTURE

TRACKING THE MACROECONOMY

Dr. Nürşen Albayrak Zanca

TOTAL 101%

(Yes, 1% extra!)

(1) Make sure to demonstrate ALL your calculations.

NO clearly shown calculations = NO Credit

(2) Please do NOT use extra paper! Attachments/additional papers will NOT be accepted. ONLY utilize the space provided for each question.

(3) I have ZERO tolerance for any form of cheating.

THANK YOU for your cooperation in maintaining a great class!

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.edu”>zanca@uiwtx.edu

QUESTION-1: (16%)

The consumer price index, or CPI, measures the cost of living for a typical urban household by multiplying the price for each category of expenditure (housing, food, and so on) times a measure of the importance of that expenditure in the average consumer’s market basket and summing over all categories. However, using data from the consumer price index, we can see that changes in the cost of living for different types of consumers can vary a great deal.

Let’s compare the cost of living for a hypothetical retired person and a hypothetical college student. Let’s assume that the market basket of a retired person is allocated in the following way: 10% on housing, 15% on food, 5% on transportation, 60% on medical care, 0% on education, and 10% on recreation. The college student’s market basket is allocated as follows: 5% on housing, 15% on food, 20% on transportation, 0% on medical care, 40% on education, and 20% on recreation.

The accompanying table shows the November 2007 CPI for each of the relevant categories.

CPI (July 2011)

Housing

220.2

Food

228.3

Transportation

216.6

Medical care

400.3

Education

206.2

Recreation

113.5

(A) Calculate the overall CPI for the retired person and for the college student by multiplying the CPI for each of the categories by the relative importance of that category to the individual and then summing each of the categories. (10%)

The CPI for all items in November 2007 was 210.2.

(B) How do your calculations for a CPI for the retired person and the college student compare to the overall CPI? (6%)

QUESTION-2: (16%)

Assume that the below given data is from an URBAN city in the U.S., and a typical consumer utilizes only six types of goods and services: Housing, food, transportation, medical care, education and recreation. The hypothetical unit prices of the six goods and services are given in the accompanying table. Assume that the typical consumer purchases 1 units of housing, 6 units of food, 2 units of transportation, 1 units of medical care, 2 units of education and 2 units of recreation. Answer the following questions:

(A) What is the percent change in the price of HOUSING from 2000 to 2009? (2%)

(B) What is the percent change in the price of FOOD from 2000 to 2009? (2%)

(C) What is the percent change in the price of TRANSPORTATION from 2000 to 2009? (2%)

(D) What is the percent change in the price of MEDICAL CARE from 2000 to 2009? (2%)

(E) What is the percent change in the price of EDUCATION from 2000 to 2009? (2%)

(F) What is the percent change in the price of RECREATION from 2000 to 2009? (2%)

(G)Using 2000 as a base year, create a price index for ALL SIX commodities for ALL years (4%)

(H) What is the percent change in the price index from 2000 to 2009? (4%)

HOUSING

FOOD

TRANSPORTATION

MEDICAL CARE

EDUCATION

RECREATION

2000

\$500

\$100

\$20

\$100

\$150

\$50

2003

600

120

25

110

200

60

2006

750

140

30

120

210

70

2009

800

150

40

125

225

80

QUESTION-3: (20%)
How do economists in the United States determine when a recession begins and when it ends? (4%)
Distinguish between Self-Regulating vs. Keynesian economics. (4%)

Demonstrate business cycle over graph. (4%)

How do you compare previous U.S. recessions. (4%)

QUESTION-4: (6%)

Which of the following questions are relevant for the study of macroeconomics and which for microeconomics?

(A)How will Ms. Martin’s tips change when a large manufacturing plant near the restaurant where she works closes?

o MACRO o MICRO

(B)What will happen to spending by consumers when the economy enters a downturn?

o MACRO o MICRO

(C)How will the price of oranges change when a late frost damages Florida’s orange groves?

o MACRO o MICRO

(D)How will wages at a manufacturing plant change when its workforce is unionized?

o MACRO o MICRO

(E)What will happen to U.S. exports as the dollar becomes less expensive in terms of other currencies?

o MACRO o MICRO

(F) What is the relationship between a nation’s unemployment rate and its inflation rate?

o MACRO o MICRO

QUESTION-5: (6%)

Which of the following transactions will be included in GDP for the United States?

(A) Coca-Cola builds a new bottling plant in the United States.

o INCLUDED o EXCLUDED

(B) Delta sells one of its existing airplanes to Korean Air.

o INCLUDED o EXCLUDED

(C) Ms. Moneybags buys an existing share of Disney stock.

o INCLUDED o EXCLUDED

(D) A California winery produces a bottle of Chardonnay and sells it to a customer in

o INCLUDED o EXCLUDED

(E) An American buys a bottle of French perfume in Tulsa.

o INCLUDED o EXCLUDED

(F) A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.

o INCLUDED o EXCLUDED

QUESTION-6: (8%)

Below is a list of domestic output and national income figures for a given year.

All figures are in millions of USD. Compute Net Exports and GDP.

Net Exports :

GDP :

Personal consumption expenditures

\$2,450

Net foreign factor income earned

40

Transfer payments

120

Rents

140

Consumption of fixed capital (depreciation)

270

Social security contributions

200

Interest

130

Proprietors’ income

330

Exports

110

Imports

160

Dividends

2,230

Compensation of employees

180

210

Undistributed corporate profits

260

Personal taxes

190

Corporate income taxes

560

Corporate profits

720

Government purchases

530

Gross private domestic investment

420

Personal saving

2,450

MULTIPLE CHOICE QUESTIONS (29 questions, 1% each, 29% total)

1. Which of the following is a microeconomic variable?
a. the overall level of prices
b. the price of coffee
c. the overall level of employment
d. the current account
2. Which of the following is a macroeconomic variable?
a. the overall level of output
b. the price of legal services
c. the price of medical services
d. the seasonal fluctuation in rental prices for vacation homes
3. The long-run effect of macroeconomic growth is to
a. allow for a higher standard of living.
b. discourage people from saving.
c. contribute to inflation.
4. The tools of fiscal policy are
a. control over the interest rate and the level of investment spending.
b. control over the interest rate and the quantity of money.
c. price controls and export subsidies.
d. government spending and taxation.
5. The tools of monetary policy are
a. control over the interest rate and the quantity of money.
b. government spending and taxation.
c. controlling the level of the minimum wage.
d. export subsidies and job training.
6. The most important effect of a recession is its effect on
a. the overall level of prices.
b. the ability of workers to find jobs.
d. the percentage of Americans without health insurance coverage.
a. the length of time it takes for a new product to be developed.
b. the length of time it takes for an unemployed person to get a job.
c. the length of time it takes for an entrepreneur to start a new business.
d. the short-run alternation between economic recessions and expansions.
8. Which of the following statements is true?
a. Over the business cycle, the economy’s level of output and its unemployment rate move in opposite directions.
b. During recessions, the unemployment rate typically falls.
c. During expansions, aggregate output typically declines.
d. Because unemployment is a microeconomic variable, it does not have any correlation with the business cycle.
9. Overall output
a. typically declines as employment rises.
b. typically declines during recessions.
c. typically increases during recessions.
d. is a microeconomic variable.
10. Fiscal policy attempts to
a. forecast the timing of recessions.
b. forecast the severity of recessions.
c. stabilize the economy through changes in the interest rate.
d. stabilize the economy through changes in taxation and government spending.
11. Long-run growth refers to
a. the expansion phase of the business cycle.
b. the recession phase of the business cycle.
c. the growth of the economy over several decades.
d. the stimulative effect of spending on health care.

12. A nation’s gross domestic product (GDP):

A) can be found by summing C + Ig + G + Xn.

B) is the dollar value of the total output produced by its citizens, regardless of where they are living.

C) can be found by summing C + S + G + Xn.

D) is always some amount less than its NDP.

13. The GDP is the:

A) monetary value of all final goods and services produced within a nation in a particular year.

B) national income minus all non-income charges against output.

C) monetary value of all economic resources used in producing a year’s output.

D) monetary value of all goods and services, final and intermediate, produced in a specific year.

14. Net exports are:

A) that portion of consumption and investment goods sent to other countries.

B) exports plus imports.

C) exports less imports.

D) imports less exports.

15. Net exports are negative when:

A) a nation’s imports exceed its exports.

B) the economy’s stock of capital goods is declining.

C) depreciation exceeds domestic investment.

D) a nation’s exports exceed its imports.

16. GDP is equal to:

A) C + Ig + G + Xn.

B) C + Ig + G – Xn.

C) C + In + G + Xn.

D) C + In + G – Xn.

17. The smallest component of aggregate spending in the United States is:

A) net exports.

B) government purchases.

C) investment.

D) consumption.

18. In calculating GDP, governmental transfer payments, such as social security or unemployment compensation, are:

A) not counted.

B) counted as government spending.

C) counted as investment spending.

D) counted as consumption spending.

19. The largest component of total expenditures in the United States is:

A) net exports.

B) government purchases.

C) consumption.

D) gross investment.

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20. Refer to the above data. GDP is:

A) \$116.

B) \$121.

C) \$125.

D) \$150.

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21. Refer to the above data. GDP is:

A) \$390.

B) \$417.

C) \$422.

D) \$492.

E) \$512.

22. A price index is:

A) a comparison of the price of a market basket from a fixed point of reference.

B) a comparison of real GDP in one period relative to another.

C) the cost of a market basket of goods and services in abase perioddivided by the cost of the same market basket inanother period.

D) a ratio of real GDP to nominal GDP.

23. Which of the following activities is excluded from GDP, causing GDP to understate a nation’s well-being?

A) the services of health care workers

B) the services of military personnel

C) the construction of new buildings

D) goods and services produced in the underground economy.

24. A large underground economy results in an:

A) understated GDP.

B) understated GDP price index.

C) overstated GDP.

D) overstated GDP price index.

25. The GDP tends to:

A) overstate economic welfare because it does not include certain nonmarket activities such as the

productive work of housewives.

B) understate economic welfare because it includes expenditures undertaken to offset or correct pollution.

C) understate economic welfare because it does not take into account increases in leisure.

D) overstate economic welfare because it does not reflect improvements in product quality.

26. The growth of GDP may understate changes in the economy’s economic well-being over time if the:

A) distribution of income becomes increasingly unequal.

B) quality of products and services improves.

C) environment deteriorates because of pollution.

D) amount of leisure decreases.

27. GDP data are criticized as being inaccurate measures of economic welfare because:

A) they do not take into account changes in the amount of leisure.

B) they do not take into account all changes in product quality.

C) they do not take into account the adverse effects of economic activity on the environment.

D) of all of the above considerations.

28. Assume that the size of the underground economy increases both absolutely and relatively over time. As a result:

A) real GDP will rise more rapidly than nominal GDP.

B) GDP will tend to increasingly understate the level of output through time.

C) GDP will tend to increasingly overstate the level of output through time.

D) the accuracy of GDP will be unaffected through time.

29. The U.S. government agency responsible for compiling the national income accounts is the:

A) Census Bureau.

B) Bureau of Labor Statistics (BLS).

C) Commerce Department’s Bureau of Economic Analysis (BEA).

D) Government Accounting Office (GAO).

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