econ 309 exam 1
Assume that total output consists of four apples and six oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of gross domestic product (GDP) is:
4*1 + 6*.5 = 7 = GDP
Assume that the consumption function is given by C = 200 + 0.7 (Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by:
560
Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be
760
Consider two competitive economies that have the same quantities of labor (L = 400) and capital (K = 400), as well as the same technology (A = 100). The economies of the countries are described by the following Cobb- Douglas production functions: North Economy: Y = A L0.3K0.7 South Economy: Y = A L0.7K0.3 a. Which economy has the larger total production? Explain.
Both Production in the South and the North equal 400,000 therefore there is no larger production than others.
Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,000 + 0.3 (Y - T). Investment (I) is given by the equation I = 1,500 - 50r, where r is the real interest rate, in percent. Taxes (T) are 1,000, and government spending (G) is 1,500. a. What are the equilibrium values of C, I, and r?
C= 2200, I= 1300, r= 4%
Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?
C=2200, I= 1300, r= 14%
What are the new values of private saving, public saving, and national saving?
D: NS= 1300, Private S= 1800, Public S= -500
In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will
Decrease
Compute a fixed-weight price index for the later year, using the base-year quantities as weights
Fixed weight Price index = 20000 + 10000 / 10000 + 10000 = 30000/20000 x 100 = 1.5 x 100 = 150
If nominal gross domestic product (GDP) in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator?
GDP = NGDP/RGDP 14/11= 1.27
If nominal gross domestic product (GDP) grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately _____ percent.
GDP deflator = NGDP - RGDP 5 - 3 = 2
which price rises faster, the GDP deflator (Paasche) index or the fixed-weight index (Laspeyres) index
GDP deflator index rises faster than the fixed-weighted quantities
Compute nominal gross domestic product (GDP) in the base year and later year
Good A: 100 x 100 = 10000 Good B: 100 x 100 = 10000 NGDP: 10000 + 10000 = 20000 Good A: 200 x 200 = 40000 Good :100 x 100 = 10000 NGDP: 40000 + 10000 = 50000
City A has a total population of 10 million, of which 70 percent are adults. Assume that 20 percent of the adult population is not looking for a job and 60 percent of the remaining adult population is employed. Compute the following: a. Labor-force participation rate
LFPR = (5.6 / 7) x 100 = 80%
Compute the GDP deflator in the later year, using your answers to parts (a) and (b)
NGDP/RGDP = GDP deflator 50000/30000 x 100 = 166.67
What are the values of private saving, public saving, and national saving?
NS= 1300, Private S= 1800, Public S: -500
Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real gross domestic product (GDP) (in 2002 prices) in 2009 was:
Q in 2009 * P in 2002 + Q in 2002 * P in 2009 = GDP 5*.5 + 1*4 = 6.50 = GDP
The quantity of coffee demanded, Qd, depends on the price of coffee, Pc, and the price of tea, PT. The quantity of coffee supplied, Qs, depends on the price of coffee, Pc, and the price of electricity, PE, according to the following equation: Qd = 17 − 2Pc + 10PT Qs = 2 + 3Pc − 5PE a.If the price of tea is $1.00 and the price of electricity is $0.50, what are the equilibrium price and quantity of coffee?
QD= 17 - 2p + (10x1) = 2 + 3p - (5*.5) 5Pc = 27.5 Pc = 5.5 Q = 17 - 11 + 10 = 16 = 2 + 16.5 - 2.5
In which economy is labor's share of income larger? Explain.
South's Labor share of income is .7 which is higher than the North's which is .3. Therefore, the south economy has a larger share of income.
In which economy is the real wage larger? Explain.
South's wage is 70 while the North's wage is 30. Therefore, the real wage is higher in the southern economy which has larger wages
If income is 4,800, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, public saving is:
T - G = public saving 800 - 1000 = -200
b. In which economy is the marginal product of labor larger? Explain.
The South's MPL is 70 which is higher than the North's MPL which is 30. Therefore, the marginal product of labor is larger in the South economy.
unemployment rate for City A
UR = 2.24/5.6 x 100 = 40%
If bread is produced using a constant returns to scale production function, then if the:
amount of equipment and workers are doubled; twice as much bread will be produced
In the circular flow model, the flow of dollars from firms to household is paid ____, and the flow of dollars from household to firms is paid ____.
as wages, capital income, and profits; for goods and services
exogenous variables are:
determined outside the model (independent variable)
Endogenous variables are:
determined within the model (dependent variable)
b. What is/are the endogenous variable(s) in this model?
equilibrium price = 5.50 dollars and equilibrium quantity = 16
c. What is/are the exogenous variable(s) in this model?
exogenous = price of tea and electricity
in an economic model:
exogenous variables affect endogenous variables
In the long run, the level of national income in an economy is determined by its:
factors of production and production functions
the assumption of continuous market clearing means that:
in any given instant, buyers can buy all that they want at the going price
a typical trend during a recession is
income falls
Assume that the production function is Cobb-Douglas with parameter a = 0.3. In the neoclassical model, if the labor force increases by 10 percent, then output:
increases by about 10 points
In the classical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving _____ and private saving _____.
increases; does not change
when a firm sells a product out of inventory, gross domestic product (GDP):
is not changed
Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5 (Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. Government spending (G) is 1,000, and taxes (T) are also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r, I:
is unchanged and r rises by 10 percentage points
If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor-force participation rate equals _____ percent.
labor force/ total population = labor force participation rate 150/250 = 60%
When the demand for loanable funds exceeds the supply of loanable funds, households and the government want to save _____ than firms want to invest, and the interest rate _____.
less; rises
A fixed-weight price index like the consumer price index (CPI) _____ the change in the cost of living because it _____ take into account that people can substitute less expensive goods for ones that have become more expensive.
overestimates: does not
The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts spending, holding other factors constant
point B
which is the best example of a flexible price (long run)
price of gasoline at a service station
in a simple model of supply and demand for pizza, the endogenous variables are:
price of pizza and quantity of pizza
An increase in the price of goods bought by firms and the government will show up in:
the GDP deflator but not in the CPI
Macroeconomics is the study of
the economy as a whole
what is the best example of a sticky price (short run)
the price of a soda in a vending machine
In a classical economy, assume that the government lowers both government spending and taxes by the same amount. This causes investment:
to rise and the real interest rate to fall
If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately _____ percent
unemployed/population in labor force = unemployment rate 7/150 = 4.7%
prices of items included in the consumer price index (CPI) are:
weighted according to the quantity of the item purchased by the typical household
assume that a tire company sells 4 tires to an automobile company for 400, another company sells a navigation system for 500, and the automobile company puts all of these items in or on a car that it sells for 20,000. In this case, the amount from these transactions that should be counted in gross domestic product is:
20,000
all of these transactions that took place in 2009 would be included in the gross domestic product (GDP) EXCEPT the purchase of a:
2001 Jeep Cherokee
Compute real GDP in the base year and later year.
100 x 200 = 20000 100 x 100 = 10000 RGDP = 10000 + 20000 =30000 100 x 100 = 10000 100 x 100 = 10000 RGDP = 10000 + 10000 = 20000
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6 (Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate, in percent. In this case, the equilibrium real interest rate is:
13%
