Exam 2 Macroeconomics
Based on the research noted in the lectures, at what level of income does happiness appear to level off?
Answer: 100,000 FEEDBACK:This one comes out of the lecture again. On the slide I mention that happiness appears to level off roughly around $100,000.
Suppose the economy is determined by the following consumption and investment equations .C = 125 + 0.8Y I_p = 125 Solve for equilibrium GDP.
Answer: 1250 FEEDBACK: same as the previous question
Assume you have zero dollars currently invested. You decide to invest $100 a month in the stock market at an average annual return of 7%. You plan to do this for 40 years. How much would you have after 40 years?
Answer: 239,562 FEEDBACK: In the notes I linked to the following webpage --https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator. Type in the numbers and you'll see the answer. You'll see that your money grew quite a bit. The problem illustrates the power of compound interest.
Suppose the economy is determined by the following consumption and investment equations. C = 450 + 0.75Y I_p = 200 What is equilibrium GDP?
Answer: 2600 FEEDBACK: These equilibrium questions are similar to what we did in module 4 lectures and the "Keynes exercises" posted under module 4. To solve any equilibrium question, you need to 1. Write out the AE equation 2. Set AE = Y (this is the equilibrium condition...in equilibrium this is true, so we apply this to the AE equation to solve for equilibrium GDP) 3. Solve for Y So here, AE = C + I_p AE = 450 + 0.75*Y + 200 We can add up like terms in order to simplify (i.e. add up the 450 and 200) AE = 650 + 0.75*Y Now set AE = Y (this just means plug in Y for AE in the AE equation)Y = 650 + 0.75*Y Now solve for Y. First, subtract the 0.75*Y from both sidesY - 0.75*Y = 6500.25*Y = 650 Now divide both sides by 0.25Y* = 650/0.25 = 2600
You have been hired to determine if unemployment is running too high. First you must determine the natural state of unemployment. You have been provided the data in the following table: Frictional unemployment: 2% Structural unemployment: 2% Cyclical unemployment: 1%
Answer: 4% Feedback:There are three different types of unemployment, but only two are considered part of the natural rate--structural and frictional. Cyclical unemployment occurs when an economy is in recession, and is therefore not counted as part of the natural rate.
Assume you have zero dollars currently invested. You decide to invest $100 a month in your bank account at an average annual return of 0.05%. You plan to do this for 40 years. How much would you have after 40 years
Answer: 48,471 FEEDBACK: Same with the question above. In the notes I linked to the following webpage --https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator. You'll see that your money didn't really grow as much because of the low return.
Using the data provided in the following table, calculate the labor force participation rate. Number unemployment: 2,000 Working-age population: 40,000 Labor force: 36,000 The labor force participation rate is...
Answer: 90% FEEDBACK: The labor force participation rate is calculated by dividing the total number of people in the labor force by the total work-eligible population, and multiplying by 100 to obtain a percentage figure. Using the data provided in the table, the labor force participation rate = (36,000/40,000) × 100= 90%
Which of the following people would be considered unemployed?
Answer: A 17-year-old offers to pet-sit, but no one hires her. FEEDBACK: To be considered unemployed, a person must be part of the labor force and searching for a job without success. The pet sitter is old enough to be counted as part of the labor force and is looking for work, but no one will hire her.
Which of the following situations would not be considered frictional unemployment?
Answer: A worker in a textile factory loses her job when manufacturing is mechanized.There are no other factories looking to hire someone with her skill set. FEEDBACK: Frictional unemployment occurs because of delays in matching workers to jobs. Delays happen because of limited information availability or because of government policies. Frictional unemployment also occurs when workers wait to find better opportunities. The worker in the textile factory is an example of structural unemployment, because the job loss was due to changes in technology
Which of the following best explains why the United States has shifted from an agricultural economy to a service-based economy?
Answer: Changes in the nature of agricultural production mean that fewer farm workers are needed FEEDBACK: The answer that best explains the change from agriculture to service involves creative destruction--the introduction of new products and technologies that lead to the end of other industries and jobs. Changes in the production process allow farmers to produce much more food with far fewer workers.
________ is the area in which policymakers can have their greatest impact.
Answer: Cyclical unemployment FEEDBACK: Cyclical unemployment is caused by recessions, or economic downturns. This type of unemployment generates the greatest concern among economists and policymakers. It is the most serious type of unemployment, because it means that jobs are not available for many people who want to work. Policymakers can pass legislation that will cut taxes and increase spending in the economy in order to lower cyclical unemployment. Structural unemployment would be better tackled by the states themselves, since they can deal directly with the skills issues in their areas. Frictional unemployment is not that much of a concern to policymakers
Make up your own C and I equation. Solve for equilibrium. Now increase the MPC-- what happens to equilibrium GDP when the MPC rises
Answer: Equilibrium GDP would rise FEEDBACK: If we increase the MPC, equilibrium GDP would rise. This is because people are spending more of their incomes when the MPC rises, so C increases. Try it out. First, MPC = 0.5 C = 100 = 0.5*Y I_p = 100 AE = 200 + 0.5*Y Set AE = Y and solve for Y Y = 200 + 0.5*Y 0.5*Y = 200 Y = 400 Now increase the MPC to 0.9 and leave everything else the same! C = 100 + 0.9*Y I_p = 100 AE = 200 + 0.9*Y Set AE = Y and solve for Y Y = 200 + 0.9*Y 0.1*Y = 200 Y = 2000 We see that after the MPC rises, equilibrium GDP also increases. In the first part I wrote theMPC = 0.5, meaning people spend 50% of their incomes. In the second part, I wrote the MPC =0.9 meaning that people spend only 90% of their incomes. When MPC rises, GDP rises.
Suppose the economy is initially given by the following C and I_p equations: C = 500 + 0.9Y I_p = 400 Now suppose companies increase planned investment to 500 (so I_p = 500). What happens to GDP?
Answer: GDP increases by 1000 FEEDBACK: Step 1. When I_p = 400, we solve for the equilibrium GDP: AE = 500 + 0.9*Y + 400 AE = 900 + 0.9*Y Set AE = Y Y = 900 + 0.9*Y Y - 0.9*Y = 900 0.1*Y = 900 Y = 900/0.1 = 9,000 So equilibrium GDP was 9000 when I_p = 400 Step 2. Now when I_p = 500, we can update the I_p to 500 rewrite the AE equation and solve again: AE = 500 + 0.9*Y + 500 AE = 1000 + 0.9*Y Set AE = Y Y = 1000 + 0.9*Y Y - 0.9*Y = 1000 0.1*Y = 1000 Y = 1000/0.1 = 10,000 So new equilibrium GDP is 10,000 when I_p = 500 After investment grew by 100 (from 400 to 500), GDP increases by 1000 (1000 = 10000 - 9000)
This is also out of the lecture. In equilibrium, we know that Y = AE and we know that inventory change = 0. If inventory change equals zero, then everything that was made that year was bought - nothing was added or subtracted to/from inventory.
Answer: GDP stays the same because the shoelaces are an intermediate good FEEDBACK:In the lecture we discussed how intermediate goods (i.e. goods that go into final goods) are only counted as part of the final good. The shoelaces in this context would be an intermediate good when Nike buys them. The shoelaces are part of the shoes, and will be embedded in the final price of the shoes. Remember that GDP tries to capture the final value of all goods and services produced within a country in a year. If we counted intermediate goods and the final goods they went into, we'd be double counting them when we calculate GDP. If you go to Best Buy and purchase Bose speakers to use at home, then that would be counted as part of consumption. So depending on who is buying the goods/services and for what purpose, the same good could be counted in different categories
The following are data on the natural rate of unemployment and actual unemployment. Natural rate of unemployment: 5% Actual unemployment: 5% The information provided reflects an economy that is...
Answer: Healthy FEEDBACK: To determine the health of an economy, we can compare the actual rate of unemployment with the natural rate of unemployment. The natural rate is the typical rate of unemployment in a healthy, growing economy. Therefore, if actual unemployment equals the natural rate, the economy is healthy. If the actual rate of unemployment is lower than the natural rate, the economy is expanding past its long-run potential--eventually, unemployment will increase to the natural rate. If the actual rate of unemployment is higher than the natural rate, the economy is in a recession
Suppose the economy is determined by the following consumption and investment equations. C = 125 + 0.8Y I_p = 125 Suppose GDP (i.e. production) was not in equilibrium, but instead at 1750. Calculate the change in inventory that would occur this year.
Answer: Inventory would rise by 100 FEEDBACK: This process is described in the "Keynes exercises" posted under Module 4.Write out the AE equation. AE = 125 + 0.8*Y + 125 = 250 + 0.8Y Now, we aren't in equilibrium. Instead, production is 1750 (Y = 1750). So plug in 1750 into theAE equation. AE = 250 + 0.8*1750 AE = 250 + 1400 AE = 1650 SO, when GDP is 1750, AE is 1650. In other words, this says that less was bought here than was produced - Y is what was produced and AE is what was bought (Y > AE). Since less was bought than produced, inventory would rise by 1750-1650 = 100.
An increase in the number of discouraged workers will do what to the measured unemployment rate?
Answer: Lower it FEEDBACK: Discouraged workers are people who gave up their search for a job. Before becoming discouraged they were counted as unemployed, after becoming discouraged they drop out of the unemployment calculation.To see that unemployment would fall when the number of discouraged workers increases, try typing in some numbersSuppose U is the number of unemployed people who will keep searching; D is the number of currently unemployed people who will eventually become discouraged; and E is the number of employed people.Suppose U = 10; D = 10; and E = 10Before they become discouraged, the unemployment rate = (U + D) / (U + D + E ) =20/30 = 0.66After they become discouraged and drop out, the unemployment rate = U / (U + E) = 10/20 = 0.50So the unemployment rate fell from about 66% to 50% after the number of discouraged workers increased
If Y > AE, what will producers do in response to the change in inventories that would occur?
Answer: Producers will decrease output FEEDBACK: If Y > AE, this means that production was more than expenditures - less was bought than what was produced. If people bought less than what was made that period, that must mean that inventory is increasing (piling up). When inventory rises, producers will tend to decrease production (because products are not selling off). Output will decrease.
Creative destruction would be associated with which of the following types of unemployment?
Answer: Structural Feedback: Creative destruction occurs when the introduction of new products and technologies leads to the end of other industries and jobs. As some jobs become obsolete, the result is structural unemployment, which is caused by changes in the industrial makeup (structure) of the economy.Although structural unemployment can cause transitional problems, it is often a sign of a healthy, growing economy.
In January 2008, the U.S. unemployment rate dropped to 4.9%. However, the percentage of the population that was employed also fell from the prior month. How could this have happened?
Answer: The labor force increased in size. Feedback: This is possible if some of the people who were employed or unemployed leave the labor force. Consider a simple economy with a labor force of 100 people, where 10 are unemployed and 90are employed. Suppose 5 of the people who were employed lose their jobs and become unemployed, and the 10 previously unemployed workers get tired of looking for work and leave the labor force.Then, the final number in the labor force is 90, and 85 are employed and 5 are unemployed. Before the transition, we had an unemployment rate of 10%, and afterward the unemployment rate is 5.56%
The most accurate definition of a recession is which of the following
Answer: a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real incomes, employment, industrial production, and wholesale-retail sales FEEDBACK:This one just comes out of the lecture. The most accurate definition is the one from the National Bureau of Economic Research.
Refer to the following table. If 4 million of those who are currently unemployed become discouraged and give up looking for a job, the unemployment rate will ________. category # of people (milli) institutionalized 14 full-time workers 113 Less than 16 years age 40 Armed forced (noncilvil) 20 part-time workers 27 populations 314 looking for work 14
Answer: decrease to 6.7% FEEDBACK: The formula for the unemployment rate is... Unemployment = u = number unemployed/labor force x 100 To calculate the unemployment rate before workers become discouraged, begin by calculating the number of employed workers. Looking at the table, we see that the number employed is equal to part-time workers plus full-time workers, or (in millions) 27 + 113 = 140. The table also tells us that 14million people are looking for work. They will be counted as unemployed until they become discouraged workers. Therefore, the previous labor force (in millions) is 140 + 14 = 154, and the unemployment rate before workers become discouraged is (14 ÷ 154) × 100 = 9.1%. To calculate the current unemployment rate, begin by considering the 4 million people who become discouraged, stop looking for jobs, and drop out of the labor force. When we account for the marginally attached workers, the number of unemployed becomes 14 million - 4 million = 10 million. The new labor force is (in millions) 140 + 10 = 150. Therefore, the new unemployment rate is (10 ÷ 150) × 100 = 6.7%.Thus, we can see that the unemployment rate decreases to 6.7%.
Which of the following situations would increase the labor force participation rate?
Answer: he government increasing the retirement age FEEDBACK: The formula for the labor force participation rate is (Labor force participation rate= labor force /work-eligible population x 100) If the retirement age increases, this increases the number of people working and therefore in the labor force. If more workers file for disability, they leave the labor force, and this would lower the labor force participation rate. The same applies to more people going back to school full time and more people becoming stay-at-home parents.
Which of the following would be an example of someone experiencing cyclical unemployment?
Answer: landscapers laid off in response to drop in new housing construction during a recession FEEDBACK: Someone who changes jobs to be closer to their family would be considered frictional, because they would be in between jobs. The coal miners are structural due to changes in how the industry is run. The ski resort workers fall under seasonal. The landscapers are an example of cyclical because their unemployment is a result of a significant reduction in spending in the economy.
Data on the natural rate of unemployment and actual employment are provided in the following table: Natural rate of unemployment: 5% Actual unemployment: 8%
Answer: positive Feedback: Cyclical unemployment occurs during recessions, when actual unemployment is higher than the natural rate. During temporary expansions, with unemployment below the natural rate, cyclical unemployment is negative. If the actual unemployment rate is higher than the natural rate, cyclical unemployment must be positive. If actual unemployment is below the natural rate, cyclical unemployment must be negative. If the rates are the same, cyclical unemployment is zero.
Suppose the economy is given by the following C and I_p equations: C = 500 + 0.9Y I_p = 400 Determine equilibrium GDP
Answer:9,000 FEEDBACK:Same equilibrium process again. AE = 500 + 0.9*Y + 400 AE = 900 + 0.9*Y Set AE = YY = 900 + 0.9*Y Y - 0.9*Y = 900 0.1*Y = 900 Y = 900/0.1 = 9,000
In the Keynes model, equilibrium happens when AE = Y. What also happens in equilibrium?
Answer:This is also out of the lecture. In equilibrium, we know that Y = AE and we know that inventory change = 0. If inventory change equals zero, then everything that was made that year was bought - nothing was added or subtracted to/from inventory.
GDP can be calculated using three approaches. The approaches are
Answer:This is just straight out of the lecture notes. The three approaches are the production approach, the expenditure approach, and the income approach
A firm owner with $25,000 in wealth opens a t-shirt production company. The owner buys a brand new machine from a local factory for $8,000 that is used to print images on the t-shirts. The firm owner hires 2 workers, Mary and Jim, to design and print t -shirts. In this company, workers are paid based on output. For every t-shirt made, the worker earns $10. Mary made 25 t-shirts and Jim made 18. The firm owner charges customers $25 per t-shirt. Suppose the t-shirts are unpopular with customers and only Mary and Jim buy them. Mary bought 3 and Jim bought 2 at the market price.For all your answers, just type the answer rounded to the nearest whole number (no commas, no decimals, no dollar signs).
Use the production approach to calculate GDP. Place your answer (rounded to the nearest whole number...i.e. NO DECIMAL PLACES) in the following blank.Answer: $9,075. What is the value of everything that is produced in this economy? T-shirts: 43 shirts at $25 each Machines: 1 machine at $8000 GDP = 43*25 + 1*8000 = 1075 + 8000 = $9075 Use the expenditure approach to calculate GDP. Place your answer (rounded to the nearest whole number...NO DECIMAL PLACES) in the following blank.Answer: $9,075. Use GDP = C + I (note that G, X, and M are zero in this economy) C = 5 shirts at $25 each I = IP + value of inventory change So I = 8000 on machine + 38 leftover shirts worth $25 each GDP = 5*25 + 8000 + 38*25 = 125 + 8000 + 950 = $9075 According to the expenditure approach, what is the value of investment in this economy (rounded to the nearest whole number...NO DECIMAL PLACES)?Answer: $8950. Solved for in the expenditure approach in previous question What is saving in this economy?Answer: $8,950. Easiest way to solve for this is just Savings = GDP - C. Remember, GDP is the sum of everyone's income. So you make money (that's your income), you spend some of it(that's your consumption), what you have leftover is your savings. Here GDP = 9075 Consumption = 125 So savings = 9075 -125 = $8950
