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MAKEUPEcon 1120 - INTRODUCTORY MACROECONOMICSPRELIM #1 – Wissink – Fall 2017 – October 4

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_________________ Your Student Number:________________________________

Instructions and Exam Taking Policy:

There are two sections in this exam. Answer all questions.

Part I: 14 multiple choice/fill in the blank questions @ 3 points eachPart II: 3 problems @ 14, 22, and 22 points eachTotal Points = 100, Total Time = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.NO GRAPHING CALCULATORS.NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.

Circle the TA’s name for the section you regularly attend (that is, where you will pick up your prelim):

One more time, please…

_____________________________________ _________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_________________ Your Student Number:________________________________

GRADING

MC/FIB (out 42 points) =___________________

Q1 (out of 14 points) =__________________

Q2 (out of 22 points) =__________________

Q2 (out of 22 points) =__________________

TOTAL SCORE: =_____________________

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1. Assume that the U.S. economy’s production possibilities between cars and wheat can be depicted by the figure. Which of the points would represent an inefficient use of the U.S. economy’s resources?

A. I B. II C. III D. All of the above E. None of the above.

2. Two friends, Tyrion and Jorah, decide to open up a blacksmith store. They both work ten hours per day. It takes Tyrion 20 minutes to make a sword, and 4 minutes to make a goblet. It takes Jorah 5 minutes to make a sword, and 6 minutes to make a goblet. Which one of the following statements is true?

A. Tyrion has a comparative advantage in the production of swords.

B. Tyrion has an absolute advantage in the production of both goods.

C. Jorah has a comparative advantage in the production of swords.D. Jorah has an absolute advantage in the production of goblets.E. Tyrion and Jorah would be unable to mutually benefit based on

the theory of comparative advantage.

3. Drinking wine is a popular activity in Paris. Which one of the following will increase demand for wine in Paris, assuming that wine is a normal good?

A. A fall in the price of beer, a popular substitute for wine.B. A fall in the price of cheese, a popular complement with wine.C. A decrease in billboards showing a popular local artist drinking

wine.D. An abundant grape crop.E. A decrease in income of the average Parisian.

Part I: Multiple Choice and Fill In The Blank Questions. Do them ALL.Circle the letter for your answer or fill in the answer in the blank provided.

4. A careless research assistant has presented his professor with the following unlabeled equation representing the market for Jeep Cherokees (a type of car): Q = 300 + 8F - 2J. The professor then spends numerous hours trying to figure out what the equation represents. Which one of the following is a plausible best guess?

A. It is a supply function where F represents the price of Jeep Cherokees.

B. It is a demand function where F represents the price of Jeep Cherokees.

C. It is a supply function where F represents the cost of steel, a key input to jeep manufacturing.

D. It is a demand function where J represents consumer income and Jeep Cherokees are normal goods.

E. It is a demand function where J represents the price of a Chevrolet Traverse, a substitute for the Jeep Cherokee.

5. Migration is a politically sensitive topic. Much of the discussion is centered around the effect of migrants on labor markets. Suppose the government decides to build a wall and decrease the number of migrants allowed into the country. Suppose that the only exogenous effect this policy has is to decrease the supply of labor in the economy. Which one of the following predictions is most correct based on the perfectly competitive model of demand and supply?

A. The equilibrium market price of labor (wages) will definitely increase and the equilibrium quantity traded (employment) could go up or down.

B. Employment will definitely increase but wages could go up or down.

C. Both wages and employment will definitely increase.D. Both wages and employment will definitely decrease.E. Wages will definitely increase and employment will definitely

decrease.

6. Derek is a consultant for the local perfectly competitive bat industry. He knows that the bat supply curve is QS = (1/2)P and that the bat demand curve is QD = 37.5 – (1/8)P.He predicts that the market will clear at what quantity?

A. 30 batsB. 33.33 batsC. 35 batsD. 40 batsE. 60 bats

7. The graph represents the Ithaca market for jelly beans this spring. Q is number of pounds. P is price per pound. Suppose the government imposes a price ceiling of $10 per pound. The consequence of this is that

A. there will be a surplus of 30 pounds of jelly beans.

B. there will be a shortage of 30 pounds of jelly beans.

C. The black market price will be higher than the original equilibrium price.

D. there will be a surplus of 40 pounds of jelly beans.

E. nothing happens, since the price ceiling is not binding.

8. Which one of the following would NOT be counted as “Private Investment” in the United States’ GDP accounts?

A. General Motors building a factory in Ithaca.B. Increases in General Motors’ inventories of cars produced in

Detroit but not sold.C. New residential housing structures in Boston.D. The purchase of a share of stock in General Motors by an

employee of General Motors.E. Walmart buying a fleet of trucks that were made in Detroit.

9. Which one of the following transactions’ value would NOT be represented, one way or another, either in the income loop or the expenditure loop in the calculation of U.S. GDP in 2016? GDP=Gross Domestic Product

A. Legal fees you paid your Ithaca-based attorney for work in 2016 to settle a law suit.

B. Wages paid to legal Mexican farm workers by a farmer located in Arizona in 2016.

C. Body armor made in West Virginia in 2016 and purchased by the defense department for the military to use in Afghanistan.

D. Lumber manufactured in South Carolina in 2016 that was used by Stickley Furniture in Syracuse to make tables in 2016.

E. Transfer payments made by the government in 2016 to families classified as working poor.

TABLE A

10. Refer to Table A. Assume that this economy uses the bundle produced and consumed in year 2 to construct its CPI. If year 2 is the base year, the value for this economy's CPI in year 3 is

A. 136.B. 1.36.C. 73.D. 100.E. 118.

11. The implicit GDP deflator index uses base year (or historical) __________________ to measure inflation whereas the CPI uses base year (or historical) ____________________ to measure inflation.

A. prices, quantitiesB. quantities, pricesC. prices, interest ratesD. interest rates, debt ratiosE. debt ratios, prices.

12. Which one of the following statements is false?

A. One problem with any fixed-bundle index like the CPI as a measure of the cost of living is that it does not account for substitutions that consumers might make in response to price changes.

B. The implicit GDP deflator index is a very broad measure of inflation.

C. The consumer price index would not reflect increases in the prices of items the U.S. military purchases.

D. The consumer price index somewhat understates increases in the cost of living during periods of inflation.

E. The consumer price index reflects, to some degree, increases in the price of higher education.

13. Which one of the following individuals is considered officially unemployed?

A. A former steel worker, now out of work for a year, who is so discouraged he has stopped looking for work 6 weeks ago.

B. A part-time day care worker who is looking for a second job to augment her income.

C. A previously working mother who quit her job to take care of her children because the costs of day care were so high.

D. An auto worker temporarily laid off, who is waiting to be called back to work.

E. A 14-year-old who just lost his paper route, but is looking for another paper route.

14. Nominal (or current value) GDP in the United States in 2016 was roughly

________________________

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1. Suppose the monthly supply and demand curves for jet-skis in Ithaca are described by the following equations: QD = 1,800 - 3P (demand) and QS = -100 + 2P (supply).

a) Graph the demand and supply curves. Make your graph BIG enough to use for the rest of this problem. For full credit you must label demand and supply and the intercept values on the vertical and horizontal axes.

b) Determine the equilibrium price and quantity of jet-skis and label values on your graph.c) Suppose the Cayuga Sailing Club successfully lobbies the local government to put a binding quota of

300 jet-skis on sellers in this market (since sailors hate people on jet-skis!). Calculate the new quantity traded and new price under this regulation. Show on your graph.

d) Considering demanders and suppliers in this market, who “wins” and who “loses” as a consequence of this policy? Briefly defend your position.

ANSWERS

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

ANSWERS

2. Sheldon, Leonard and Raj can do two and only two things with their 400 hours of work each month: do lab experiments (E) or make science fiction movies (M). All units are infinitely divisible.

In a month’s work time Sheldon can do 40 lab experiments and make 0 science fiction movies, or 40 science fiction movies and 0 lab experiments, or any linear combination of these two extremes.

Leonard is different. He can do 60 science fiction movies and do 0 lab experiments, or 44 science fiction movies and 32 lab experiments, or any linear combination between these two points. However, once he reaches 32 lab experiments he gets bored. Beyond the point of making 44 science fiction movies and 32 lab experiments it takes him 2 movies to do each additional lab experiment.

Raj is similar to Leonard. He can create 25 science fiction movies and do 0 lab experiments, 15 science fiction movies and 30 lab experiments, or any linear combination between these two points. However, once he gets to 30 lab experiments, he also tires, and from this point on, each lab experiment costs him 3 science fiction movies.

a) Putting number of science fiction movies on the vertical axis and number of lab experiments on the horizontal axis, graph the individual production possibility frontiers for Sheldon, Leonard and Raj in three separate graphs.

b) Imagine a world with only 2 people- Sheldon and Leonard. In this situation, suppose you start out with no lab experiments. How many science fiction movies are being made? Whom would you ask to do the first lab experiment in this world? Whom would you ask to do the last lab experiment in this world?

c) The public relations team wants to determine the efficient joint production possibilities frontier in a world with all three people. Putting number of science fiction movies on the vertical axis and number of lab experiments on the horizontal axis, construct/graph the efficient joint production possibilities frontier. For full credit make sure to label numerical values at endpoint on the joint PPF and at any kink spots on the joint PPF. Also label the steepness of any segments on your joint PPF.

ANSWERS

ANSWERS

3. Consider a very simple economy with only three items: tutoring, grapes and wine. There is no government, and no international sector and no investment by firms. Note the following: Tutoring and wine are both final goods and final goods only. Grapes are both consumed by households as a final good and used as an intermediate good by

firms in the production of wine. It takes 3 pounds of grapes to make 1 bottle of wine. The wine industry buys all its grapes from

the domestic grape industry.

The table below provides ALL the information you need to know on prices and total output/production in two consecutive years: 2015 and 2016.

Year = 2015 Year = 2016Item Price per unit Quantity Price per unit QuantityTutoring(hours) $50 50 $80 40Grapes (pounds)

$4 1100 $5 1500

Wine(bottles) $16 200 $30 300

a. Calculate nominal/current GDP in both 2015 and 2016.b. What is real GDP in 2016 assuming 2015 is the base year?c. How much did the economy grow or shrink between 2015 and 2016? Defend your answer with

careful calculations.d. What is the implicit GDP deflator index in 2016, assuming 2015 is the base year and is standardized

to an index of 100?e. Calculate how much inflation there was between 2015 and 2016 according to the implicit GDP

deflator index, using 2015 as the base year.

ANSWERS

ANSWERS

ANSWERS

1Makeup ECON 1120 Fall 2017 PRELIM 1 Answers. AAny point inside the frontier of the PPF is an inefficient allocation of resources in the economy.

2. CBased on the information given, Tyrion has to give up 5 goblets to make a sword. Jorah gives up 5 goblets to make six swords. Since 5/6 is less than 5, Jorah’s opportunity cost of making a sword is lower. Jorah has the comparative advantage in making swords while Tyrion has the comparative advantage in making goblets. Furthermore, Tyrion has the absolute advantage in goblets, and Jorah the absolute advantage in swords.

3. BIf the price of cheese decreases, then the demand for wine increases since now there is a larger quantity demanded of its complement. A, C and E are not correct because these all lead to a decrease in demand. D is not correct because a bumper crop would increase supply, not demand.4. AB implies an upward sloping demand curve. C would imply that an increase in costs would increase supply. D implies that Jeep Cherokees would be inferior goods while E implies that the Chevrolet Traverse is a complement.5. EThe decrease in supply shifts the supply curve to the left. This moves the equilibrium point up the demand curve so that wages rise and employment falls.

6. AEquating supply and demand we get P*=$60 Q*=30.

7. CWith the price ceiling, quantity demanded is 60 and quantity supply is 20. Thus there will be a shortage of 40. The quantity sold will be min{20, 60}=20 pound of jelly bean. The black market price would be $30, which is higher than the original equilibrium price of $20.

8 DD just represents financial capital and not something produced for real investment. All the other items are. Note that the cars produced and not sold go into GDP as inventory investment.

9 ESince nothing was produced for the transfer payments they don’t count in GDP.

10 ABase year bundle costs $132 in base year. Base year bundle costs $180 in year 3. (180/132)*100=136.

11 AA main difference between GDP deflator index and CPI is that the GDPDI looks at the quantities from the current year and prices in the current year and then considers the quantities from the current year and the prices from the base year. The CPI uses a base year bundle and looks at what it costs in base year prices and then with current year prices.

12 DD is not correct. CPI somewhat overstates, not understates the cost of living in the period of inflation, because in the period of inflation, consumers would consume less or try to consume cheaper substitutes, but since we use a base year bundle for CPI, this is not taken into account. A is correct, because CPI uses base year bundle which is fixed, so it does not take into account the substitution effect (consumers demand its substitutes more if a product becomes more expensive. B and C are also correct, because CPI only considers products which are related to consumers (so it does not consider military purchases), whereas GDPDI considers every product the country produces. E is also correct, because education is in the CPI bundle, so we can track the increase of price of higher education over time to some degree.

13 DAll other answers are for people either counted as employed or are not in the labor force so do not count as unemployed.

14 Find the answer http://www.bea.gov or in PowerPoint.