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COURSE 180.101

MACROECONOMICS

EXAM #1 (Two Hours) SEPTEMBER 29, 2015

NAME_________________________ TA______________________

Section #_______________________

Section 1 (20 points)

Fill in the item from the list below that is most closely associated with each of the twenty

phrases that appear on the next two pages. Note: Some of the listed items may provide

the correct answer for more than one of the phrases that follow. Conversely, many of the

items listed do not correspond to any of the phrases on the next two pages.

A tranche mortgages J.K. Galbraith

Absolute advantage John Maynard Keynes

Adam Sandler Labor force

Adam Smith Labor force participation rate

Additive Separability Labor Productivity

Aggregate demand Long term sustainable growth

Aggregate expenditure model Malthusian dilemma

Art Okun Marginal analysis

Business cycles Marginal propensity to consume

Complements Marginal propensity to save

Construction employment Marginal employment rate

Comparative advantage Microeconomics

Consumer Price Index Milton Berle

CPI: Core Milton Friedman

CPI: Core Services National Income

CPI: Owners’ Equivalent Rent Net National Product

Deflation Okun’s Law

Depreciation Opportunity Costs

Disinflation Paul Samuelson

Expansion Payroll Employment

Final sales PCE deflator

Final sales to domestic purchasers Production possibilities frontier

GDP deflator Property Rights

GNP Quit Ratio

Great Recession Real GDP

Great Depression Real GNP

Great Moderation Recession

Gross Domestic Product Seasonal Adjustment

Household employment survey Substitutes

Initial unemployment claims ` Unemployment rate

Invisible hand U6 unemployment rate

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Section 1 (20 points)

1. __________________________If the price of item A falls, consumption of item

B goes up. Items A and B are what?

2. __________________________The sum of the number of those who have jobs

plus the number of those who are looking for jobs.

3. __________________________An economist who posited in the 1930s that

sometimes free markets fail and government intervention is needed to restore

economic health.

4. __________________________A formula that allows us to link changes in the

unemployment rate to the growth rate for real GDP.

5. __________________________Rising output with no increase in labor hours is a

consequence of an increase in what?

6. __________________________Two or more consecutive quarters of negative

growth of real GDP.

7. __________________________A U.S. inflation index that allows for the fact that

consumers change their mix of purchases over time.

8. __________________________The dollar value of the flow of all final goods and

services produced by U.S. entities.

9. __________________________The macroeconomic pattern of economic

recovery/expansion/recession that is a recurring feature of economies around the

world and throughout history.

10. __________________________A measure of the increase in saving that will

occur, from a given increase in income.

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11. __________________________An estimate reflecting the sum of expectations

for long term gains in productivity and expectations for the long term growth in

the labor force.

12. __________________________A period in which prices are rising but the rate at

which prices are increasing is slowing.

13.________________________A depiction of the maximum possible combinations

of output an economy can produce, given available resources and current technology.

14. __________________________The name for the period of deep economic

decline experienced in the 1930s.

15. __________________________A key piece of social infrastructure that was

instituted in China in the 1980s, and played a key role in china’s economic

miracle.

16. __________________________A statistical technique used to allow economists

to compare December retail sales and January retail sales.

17. __________________________An index of consumer prices that excludes food

and energy prices.

18. __________________________a tally of individuals that have jobs at U.S.

companies.

19. __________________________The difference between gross and net investment.

20. _______________“There are two kinds of economists, those who know they

don’t know, and those who don’t know they don’t know”. Who said this?

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SECTION 2 (12 POINTS)

In 2015 a total of 3 million bicycles were sold in the US for $200 each. Following the

U.S. Presidential election in 2016 a big increase in funding for bike lanes is enacted.

Suppose that by 2018 there are 6 million bikes sold at $250 each.

1. What curve(s) shift in 2018? (1 point)

(a) Demand Curve (b) Supply curve (c) Demand and Supply curve

2. Label the graph below and show the shift in the relevant curve(s)

(3 points)

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3. Did the change in bicycle production reflect movement move along the supply or

demand curve? (1 point)

4. What is likely to happen to the supply curve for bicycle helmets given this change

in the bicycle market? (Explain briefly)

(2 points)

5. Are bicycles and bicycle helmets substitutes or complements? (1 point)

6. Suppose that at $30/helmet half of all bicycles sold in the US would be sold with

a helmet. At $40/helmet only one third of bicycles would be sold with a helmet.

No other helmets are sold in the US. Draw the demand curves for bike helmets in

both 2015 and 2017.

(4 points)

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Section 3 (16 points)

USE The INFO ABOVE TO ANSWER THE FOLLOWING:

1) Over the four quarters of 2016, (choose 1):

(a) Inflation rose despite plunging food and energy prices

(b) Inflation held steady despite surging food and energy prices

(c) A mild disinflation unfolded.

(d) Inflation rose mainly due to surging food and energy prices

2) Given the information available in the table provided, what is your best guess for

the quarterly annualized pace of advance for nominal GDP, over the first quarter

of 2016, (choose 1):

(a) 3.00% (c) 3.75%

(b) 3.4% (d) 4.10%

Q1:16 Q2:16 Q3:16 Q4:16 Q1:17

CPI 2.20% 2.30% 2.70% 2.90% 1.00%

Core CPI 2.90% 3.20% 4.00% 4.75% 2.00%

non-farm payrolls (Q/Q, annualized) 1.32% 1.30% 0.9% 0.75% 0.90%

GDP (Current $, Q/Q, annualized) ??? 4.30% 3.90% 4.25% 3.5%

Real GDP, (Q/Q,annualized) 1.20% 2.0% 1.20% 1.35% 2.50%

Real Consumption, (Q/Q/, annualized) 1.30% 2.60% 3.50% 1.80% 1.25%

real exports-real imports ( real $, trillions) -400 -405 -475 -450 -355

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3) Use the information on prices to calculate the quarterly annualized rate of change for

food and energy prices for the first quarter of 2017. (show work)

4) In the first quarter of 2017, real GDP growth rose at a 2.5% annualized rate. Yet real

consumption, around 2/3 of GDP, rose at a 1.25% annualized rate. Use a piece of data

provided to explain how a quarter GDP growth can be 2.5% despite such weak growth in

real consumer spending?

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Section 4 (12 points)

Fastolia’s economists offer the following long term projections for key

macroeconomic variables for their Nation:

Expected long run annual growth rate for population = 10% per year

Expected long run annualized growth rate for labor force = 4% per year

Expected long run annualized growth rate for labor productivity = 2% per year

Okun’s Coefficient = 2

2014:Q4 levels for key economic variables are as follows:

U-3 Unemployment: 10% LFPR: 80%

Prime working age LFPR: 100%

(Use the data provided above to answer the next 4 questions; Show your work)

1. What is Fastolia’s expected long term sustainable growth rate (LTSG)?

2. Use Okun’s Law to calculate the growth rate for real GDP, Q4:2014 to Q4:2015,

if the unemployment rate averages 8% in Q4:2015?

3. If the economists’ long run projections are correct for the next four quarters,

roughly speaking, what will be the value for the LFPR, in one year’s time?

a. 91%

b. 86%

c. 76%

d. 66%

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Section 5 (20 points)

Consider the following data for Akerlof, a nation with two products: Time (in quarters)

Umbrellas Umbrellas I-pads I-pads Unemployment Rate

Price Quantity Price Quantity

2015:Q4 $25.00 10 $100.00 20 6%

2016:Q2 $40.00 12 $90.00 30 6%

2019:Q4 $60.00 12 $60.0 38 6%

1. What is the quarterly level of total expenditures in 2015:Q4? What is annualized

nominal GDP in 2015:Q4 and in 2019:Q4?

2.

3. Calculate annualized real GDP for both 2015:Q4 and 2019:Q4. Use 2015:Q4 as

the base.

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4. Write the equation to calculate the annualized growth rate of nominal GDP

between 2015:Q4 and 2019:Q4? (only write it, don’t solve it)

5. From 2015:Q4 to 2019:Q4 which grew more quickly, real GDP or nominal GDP?

6. Based upon you previous answer, the economy, 2015:Q4 to 2019:Q4 experienced:

a. Rising inflation b. disinflation c. deflation

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Section 6 (20 points)

Consider a closed economy (no exports or imports) with these characteristics:

Autonomous consumption = 2 MPC = 0.5

Planned investment = 1 Government expenditures = 1

1. Label the two axes. Draw the line representing aggregate expenditure/income

equilibrium. (3 points)

2. Draw: a) consumption b) consumption + planned investment

c) consumption + planned investment + government expenditures

d) identify the AE line. (4 points)

3. Identify on the chart the equilibrium value for income and AE. (2 points)

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4. Derive, algebraically, the equilibrium level for income. (4 points)

5. Suppose in period 1 income equals 6. What level of AE corresponds to an income

level of 6? And what will be the resultant level for Iu? (show work) (4 points)

6. What do you suppose will happen to planned investment in period 2? Will this

move the economy closer or further away from equilibrium? (3 points)

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