Econ 002- INTRO MACRO Prof. Luca Bossi September 29, 2016 ... · Econ 002- INTRO MACRO Prof. Luca...

TOTALSCORE______ MC____EXE1____EXE2____

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Econ002-INTROMACROProf.LucaBossi September29,2016MIDTERM#1–SOLUTIONS

MysignaturebelowcertifiesthatIhavecompliedwiththeUniversityofPennsylvania'sCodeofAcademicIntegrityincompletingthisexamination.Inparticular,IdeclarethatIhavenotusedagraphingcalculatortocompletethisexam. ____________________________ ____________________ StudentName(printed) PennID

______________________________ ______________ ___________________________ YourSignature Date YourTAName(printed)

INSTRUCTIONSTheexamisclosedbook. Theexamiscomposedof20multiplechoicequestionsandtwoexercises.Unlessstatedotherwise,allmultiple choicequestionsareworth3points (the total is60points for themultiplechoicepart).Theexercisesareworth20pointseach(thetotalis40pointsfortheexercisepart).OnlytheanswersheetfortheMCpartwillbegradedforyourMC.YoucandetachtheanswersheetfortheMCpartattheendoftheexamifthisismorecomfortableforyou.Ifthatisthecase,besuretoputyournameonitandtotellyourTAtostapleitbacktotheexamwhenfinished.IfyoudonotfillintheMCpartontimeandrequestextratimeattheendoftheexamtowritetheanswersup,aproctorwilltakeyournameandyouwillreceiveapenaltyof5points.Pleasefollowtheinstructionsastohowtosubmityourexamattheendofthe60minutes.Ifyoudonotfollowthoseinstructionsand/ordelayyourexamsubmission,aproctorwilltakeyournameandyouwillreceiveapenaltythatwilldependonyour(miss)behavior.

ANSWERALLQUESTIONS.TOTALPOINTS=100.TOTALTIME=60minutes

Provideyouranswersontheexamsheetdirectly.Readallquestionsverycarefully.Writelegibly.

EXAMTAKINGPOLICYIfyouneedtousetherestroom,raiseyourhandandwaitfortheproctortocometoyou.Onlyonepersoncanbeoutoftheexaminationroomatatime,andtheproctorwillholdontoyourexampaperswhileyouareoutattherestroom.FORTHEDURATIONOFTHEEXAM,ANDWITHTHEEXCEPTIONOFYOURALLOWEDSCIENTIFICCALCULATOR,YOUHAVETOTURNOFFEVERYTHINGELSETHATHASAPOWERBUTTON.NOCELLPHONES.NOBOOKS.NONOTES. NOHELP SHEETS.NOTALKINGTOEACHOTHER.NOASKINGTHEPROCTORSANYQUESTIONORHELPTOSOLVETHEEXAM.YOUCANNOTCONNECTTOTHEINTERNET.WRITE INPENCILORINPENASYOULIKE,BUTIFYOUWRITE INPENCILTHEREISNOPOSSIBILITYTOASKFORRE-GRADING.PLEASEWRITEYOURNAMEONTHEFIRSTPAGEOFTHEEXAMANDONTHEMCBUBBLEPAGE.

PLEASEDONOTSTARTTHISEXAMUNTILINSTRUCTEDTODOSO.

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GOODLUCK!

MULTIPLECHOICEQUESTIONSIdentifytheletterthatbestcompletesthestatementoranswersthequestion.Markyouranswer(fillintheletterofyourchoice)intheanswerbubblesheetfortheMCprovidedonthelastpageoftheexam.

1)AMinnesotafarmerbuysanewtractormadeinIowabyaGermancompany.Asaresult,a. U.S.investmentandGDPincrease,butGermanGDPisunaffected. b. U.S.investmentandGermanGDPincrease,butU.S.GDPisunaffected. c. U.S.investment,U.S.GDP,andGermanGDPareunaffectedbecausetractorsareintermediategoods. d. U.S.investment,U.S.GDP,andGermanGDPallincrease.2)Efficiencywagesa. increaseproductivityandreduceunemployment. b. increaseproductivitybutincreaseunemployment. c. decreaseproductivitybutreduceunemployment. d. decreaseproductivityandincreaseunemployment.3)Darla,aCanadiancitizen,onlyworksintheUnitedStates.Thevalueaddedtoproductionfromheremploymentisa. includedonlyinU.S.GDP.b. includedinbothU.S.GDPandCanadaGDP.c. includedonlyinCanadaGDP.d. notincludedineitherU.S.GDPorCanadaGDP.4)Arnoldquithisjobbecausehewasunhappyatwork.Michaelwasfiredbecausehefrequentlycametoworklate.Whoiseligibleforunemploymentinsurancebenefits?a. bothArnoldandMichael b. ArnoldbutnotMichael c. MichaelbutnotArnold d. neitherArnoldnorMichael5)Supposethatoverthelasttwenty-fiveyearsacountry'snominalGDPgrewtothreetimesitsformersize.Inthemeantime,populationgrewby40percentandpricesroseby100percent.WhathappenedtorealGDPperperson?a. Itmorethandoubled. b. Itincreased,butitlessthandoubled. c. Itwasunchanged. d. Itdecreased.6)Whichofthefollowingitemsiscountedaspartofgovernmentpurchases?a. Thefederalgovernmentpays$2,000inSocialSecuritybenefitstoaretiredperson. b. ThecityofAthens,Ohiopays$10,000toatree-trimmingfirmtotrimtreesalongcityboulevards. c. ThestateofNebraskapays$1,000ofunemploymentbenefitstohelppersonwhoqualifiesforthose. d. Alloftheabovearecorrect.

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7) Jamesowns twohouses. He lawfully rentsonehouse to the Johnson family for$10,000peryear. He lives in theotherhouse.Ifheweretorentthehouseinwhichhelives,ithasbeenestimatedthathecouldearn$12,000peryearinrent.HowmuchdothehousingservicesprovidedbythesetwohousescontributetoGDP?a. $0b. $10,000c. $12,000d. $22,0008)WhichofthefollowingisnotincludedinU.S.GDP?a. unpaidcleaningandmaintenanceofhouses b. servicessuchasthoseprovidedbylawyersandhairstylists c. theestimatedrentalvalueofowner-occupiedhousing d. productionofforeigncitizenslivingintheUnitedStates9)RocketEnergyDrinkCompanybuyssugartoproduceenergydrinks.Attheendofaquarterbothitsinventoryofsugaranditsinventoryofenergydrinkshasincreased.Investmentforthequarterwillincludea. boththeincreasedinventoryofsugarandtheincreasedinventoryofenergydrinks. b. theincreasedinventoryofsugar,butnottheincreasedinventoryofenergydrinks. c. theincreasedinventoryofenergydrinks,butnottheincreasedinventoryofsugar. d. neithertheincreasedinventoryofsugarnortheincreasedinventoryofenergydrinks.10)Asurveyshowsthatineachofthepast12monthstherewasonepersonwhowasunemployed.Thatpersonworkedinallothermonthsoftheyear.Thesurveyshowsthattherewerealsotwootherpersonswhowereunemployedforall12months.Giventhisinformation,whatpercentageoftheunemploymentspellsduringtheyearwasshort-term,andwhatpercentageoftheunemploymentinagivenmonthwaslong-term?a. 75percentand33.3percent b. 75percentand66.7percent c. 85.7percentand33.3percent d. 85.7percentand66.7percent11)Supposesomeunemployedpeoplesearchforjobsonlyatplaceswheretheyareunlikelytobehired,sothattheycanstillqualifyforunemploymentbenefits.Thesepeopleareofficiallycountedasunemployed.Iftheseindividualswerecountedasoutofthelaborforceinsteadofasunemployed,thena. boththeunemploymentrateandlabor-forceparticipationratewouldbehigher.b. boththeunemploymentrateandlabor-forceparticipationratewouldbelower.c. theunemploymentratewouldbelowerandthelabor-forceparticipationratewouldbehigher. d. theunemploymentratewouldbehigherandthelabor-forceparticipationratewouldbelower.12)IntheeconomyofUkztenin2010,consumptionwas60%ofGDP,governmentpurchaseswere$212,importswere$67andequalto67%ofthevalueofexports,investmentwasone-halfofthevalueofconsumption.WhatwasUkzten’sGDPin2010?a. $1450 b. $1790 c. $2450 d. $2790

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Table1:2010LaborDataforAdults(age16andolder)inMeditorMalesnotinlaborforce 45millionFemalesnotinlaborforce 35millionMalesunemployed 5millionFemalesunemployed 5millionMalesemployed 85millionFemalesemployed 65million13)RefertoTable1.WhatistheadultpopulationinMeditor?a. 90million b. 160million c. 230million d. 240million 14)RefertoTable1.WhatistheadultmaleunemploymentrateinMeditor?a. 3.7percent b. 5percent c. 5.6percent d. 5.9percent15)RefertoTable1.Whatistheadultfemalelabor-forceparticipationrateinMeditor?a. 38.1percent b. 61.9percent c. 66.7percent d. 95.2percent16)Assumeaneconomyexperiencedapositiverateofinflationbetween2003and2004andagainbetween2004and2005.However,theinflationratewaslowerbetween2004and2005thanitwasbetween2003and2004.Whichofthefollowingscenariosisconsistentwiththisassumption?a. TheCPIwas100in2003,110in2004,and105in2005. b. TheCPIwas100in2003,105in2004,and130in2005.c. TheCPIwas100in2003,120in2004,and135in2005. d. TheCPIwas100in2003,90in2004,and88in2005.17)GDPdoesnotreflecta. thevalueofleisure. b. thevalueofgoodsandservicesproducedathome. c. thequalityoftheenvironment. d. Alloftheabovearecorrect.18)Aworkerreceived$5foradailywagein1930,whichhastheequivalentvalueof$63.24today.IftheCPIwas17in1930whatisthevalueoftheCPItoday,roundedtothenearestwholenumber?a. 215 b. 134 c. 17 d. 1.3

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19)Whenlookingatagraphofnominalandrealinterestratesyounoticethatnominalratesalwayslieaboverealrates.Fromthisyoucanconcludeforsurea. therewereseriousepisodesofdeflationinthetimeframerepresentedonthegraph. b. theeconomyneverexperiencedarecessioninthetimeframerepresentedonthegraph.c. consumerpriceswerealwaysrisinginthetimeframerepresentedonthegraph. d. GDPwasalwaysincreasingforthetimeframerepresentedonthegraph.20)(Attendance)Whenwestudiedinflationinclass,inordertointroducethetopicandmakeyouunderstandthatpricesintheeconomyasawholechangeovertime,ProfessorBossishowedyoutheevolutionofpricesofitemsthatarerelatedtoaMarvelsuper-hero.Pleasenamethatsuper-hero.a. Hulk.b. Wolverine. c. Superman. d. SpiderMan.

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Togetfullcreditintheseexercisesbelowyoureallyneedtoshowyourwork.Ifyouwritejustanumberastheanswerandevenifthatnumberiscorrectyouwillnotgetfullcreditintheexerciseunlessyoushowfullytheformulasandyourwork(howyougotthatnumberandthestepsinvolvedinyourcomputation).EXERCISEI(20pointstotal)Thetablebelowpresentsinformationforalltheproductsthatareproducedand/orconsumedinNarnia'seconomyfortheperiod2010-2012.Let2010bethebaseyear.Use2decimals(roundingtothenearestone)whennecessary.Year Coffee-imported Tractors-produceddomestically

P Quantity P Quantity

2010 8 4 50 3

2011 9 5 55 3

2012 8.5 4 56 4Year Bread–produceddomestically Butter-produceddomestically

P Quantity P Quantity

2010 3 12 5 6

2011 2 10 NotAvailable NotAvailable

2012 4 13 NotAvailable NotAvailablea)(7POINTS)ForeachyearcomputetheinflationrateusingtheGDPDeflator.b)(7POINTS)TherearetwoidenticalhouseholdsthatconsumealltheavailableamountofconsumptiongoodsthatareinNarniain2012.Thetwohouseholdsspliteachrelevantconsumptiongoodexactlyinequalamounts(donotround).ThisarrangementconstitutethetypicalmarketbasketofaconsumerthatisusedtocomputetheCPI.Usingthisinformation,computeforeachyeartheinflationrateusingtheCPI.c)(6POINTS)ForeachyearcomputetheinflationrateusingthePersonalConsumptionExpenditureDeflator.

PAPERFORYOURUSEAnswers:a)First,calculatetheNGDPandRGDP.Noticethattheycoincidein2010becausethebaseyearis2010.Besides,ascoffeeisimporteditisnotincludedwhencalculatingGDP.Year NominalGDP RealGDP

2010 50x3+3x12+5x6=216 216

2011 55x3+2x10=185 50x3+3x10=180

2012 56x4+4x13=276 50x4+3x13=239ThencalculatetheGDPDeflatorandtheinflationrate.Recallthefollowingformulas:GDPDt=100*NGDPt/RGDPtInflationinperiodt=100*(GDPDt-GDPDt-1)/GDPDt-1

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Year GDPD Inflationrate

2010 100 Notavailable

2011 100*185/180=102.78 100*(102.78-100)/100=2.78%

2012 100*276/239=115.48 100*(115.48-102.78)/102.78=12.36%

b)Firstnoticethatinthetypicalbasketeachconsumerconsumes2unitsofcoffeeand6.5unitsofbread.Wemustnotincludebutterbecausebutterisnotagoodthatisinthebasketof2012.Alsowecannotincludetractorsbecausetractorsareaninvestmentgoodandnotaconsumptiongood.Coffeeisimportedandobviouslyconsumed(otherwiseitwouldnotbeimported)andbreadisaconsumptiongood.ThencalculatetheCPIandtheinflationrate.Recallthefollowingformulas:CPIt=100*BKt/BKBPInflationinperiodt=100*(CPIt-CPIt-1)/CPIt-1Year Basketcost CPI InflationRate

2010 2x8+6.5x3=35.5 100 Notavailable

2011 2x9+6.5x2=31 100*31/35.5=87.32 100*(87.32-100)/100=-12.68%

2012 2x8.5+6.5x4=43 100*43/35.5=121.13 100*(121.13-87.32)/87.32=38.72%

c)WhensolvingthisyouhavetorememberthatintheRPCEandNPCEalltheconsumptiongoodsareincludedwhenavailable(coffee,bread,andbutter).Besides,rememberweareusing2010asthebaseyear.Year NPCE RPCE

2010 8x4+3x12+5x6=98 98

2011 9x5+2x10=65 8x5+3x10=70

2012 8.5x4+4x13=86 8x4+3x13=71

ThencalculatethePCEDandtheinflationrate.Recallthefollowingformulas:PCEDt=100*NPCEt/RPCEtInflationinperiodt=100*(PCEDt-PECDt-1)/PECDt-1Year PCED Inflationrate

2010 100 Notavailable

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2011 100*65/70=92.86 100*(92.86-100)/100=-7.14%

2012 100*86/71=121.13 100*(121.13-92.86)/92.86=30.44%

EXERCISEIITheKingdomoftheNorthhasanadultpopulationof300millionpeople.110millionworkintheserviceindustry,20millionworkinmanufacturing,2millionworkinagriculture,8millionareself-employed,andtherestofthelaborforceisunemployed.Service,manufacturing,agriculture,andself-employmentaretheonlyindustries.a)(10POINTS)Weknowthatthelaborforceparticipationrateis50%.Howmanypeopleareinthelaborforce?Whatisthetotalunemploymentrate?b)(10POINTS)Supposethattheunemploymentrateintheserviceindustryisthesameastheoneinthemanufacturingindustryandequalto6%.Thereisnounemploymentamongtheself-employed.Howmanyagricultureworkersareunemployedandwhatistheagricultureindustryunemploymentrate?

PAPERFORYOURUSESolutions:

a) 𝐿𝐹𝑃𝑅 = !"#$% !"#$%!"#$% !"#$%&'(")

×100 → 50% = !"#$% !"#$%!"" !"##"$%

→ 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 = 150 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 − 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 150− 110− 20− 2− 8 = 10 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

𝑈 − 𝑅𝑎𝑡𝑒 =𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 ×100 =

10 𝑚𝑖𝑙𝑙𝑖𝑜𝑛150 𝑚𝑖𝑙𝑙𝑖𝑜𝑛×100 = 6.67%

b) 𝑈 − 𝑅𝑎𝑡𝑒 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 = 0.06 = !"#$% !!"#$%&'( !!!"#$% !

= !"#$% !!!"!!"#$% !

→ 𝑈𝑛𝑒𝑚𝑝 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 = 7.02 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

𝑈 − 𝑅𝑎𝑡𝑒 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 = 0.06 = !"#$% !!"#$%&'( !!!"#$% !

= !"#$% !!"!!"#$% !

→

𝑈𝑛𝑒𝑚𝑝 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 = 1.28 𝑚𝑖𝑙𝑙𝑖𝑜𝑛Total𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 𝑈𝑛𝑒𝑚𝑝 𝑆 + 𝑈𝑛𝑒𝑚𝑝 𝑀 + 𝑈𝑛𝑒𝑚𝑝 𝐴 → 10 = 7.02+ 1.28+ 𝑈𝑛𝑒𝑚𝑝 𝐴

𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝐴𝑔𝑟𝑖𝑐𝑢𝑙𝑡𝑢𝑟𝑒 = 1.7 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

𝑈 − 𝑅𝑎𝑡𝑒 𝐴 =𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝐴𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 𝐴 ×100 =

1.72+ 1.7×100 = 45.95%

YOURNAME:_______________________YOURTA’sNAME:________________________________

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MARK CLEARLY (FILL IN) THE LETTER OF YOUR CHOICE FOR THE MULTIPLE CHOICE QUESTIONS. ONLY THIS PAGE WILL BE GRADED FOR THE MC PART.

1. Ⓐ Ⓑ Ⓒ Ⓓ2. Ⓐ Ⓑ Ⓒ Ⓓ3. Ⓐ Ⓑ Ⓒ Ⓓ4. Ⓐ Ⓑ Ⓒ Ⓓ5. Ⓐ Ⓑ Ⓒ Ⓓ6. Ⓐ Ⓑ Ⓒ Ⓓ7. Ⓐ Ⓑ Ⓒ Ⓓ8. Ⓐ Ⓑ Ⓒ Ⓓ9. Ⓐ Ⓑ Ⓒ Ⓓ10. Ⓐ Ⓑ Ⓒ Ⓓ11. Ⓐ Ⓑ Ⓒ Ⓓ12. Ⓐ Ⓑ Ⓒ Ⓓ13. Ⓐ Ⓑ Ⓒ Ⓓ14. Ⓐ Ⓑ Ⓒ Ⓓ15. Ⓐ Ⓑ Ⓒ Ⓓ16. Ⓐ Ⓑ Ⓒ Ⓓ17. Ⓐ Ⓑ Ⓒ Ⓓ18. Ⓐ Ⓑ Ⓒ Ⓓ19. Ⓐ Ⓑ Ⓒ Ⓓ20. Ⓐ Ⓑ Ⓒ Ⓓ