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Econ 1120 – INTRO MACRO - Wissink – S2010 – March 4, 2010
PRELIM #1
YOUR NAME: ______________________________________ Your C.U. Netid: _____________

YOUR C.U. STUDENT NUMBER: ____________________________



Check YOUR TA’s NAME:

_____________TA=Lingwen Zheng <lz77@cornell.edu> (Tuesday mornings)

_____________TA=Yang Song <ys337@cornell.edu> (Monday afternoons)

_____________TA=Roland Heinze<reh228@cornell.edu> (Thursday mornings)

_____________TA=Peilin (Billy) Hsieh <ph77@cornell.edu> (Friday mid mornings)


INSTRUCTIONS:

There are two sections in this exam
    Part I: 14 multiple choice questions @ 3 points each
    Part II: 4 problems @ 14.5 points each
    ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes

HINTS:
   Read all questions carefully.
   Write legibly and remember to label all graphs and axes in diagrams.

EXAM TAKIING POLICY:

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 you 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.
NO ASKING THE PROCTORS ANY QUESTIONS ABOUT THE EXAM.

GOOD LUCK!

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GRADING------------------------------------------------------------------------------------------------------

_________(mc) ___________(q1) _________(q2) __________(q3) ____________(q4)

TOTAL: ______________
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Part I: Multiple Choice. Do them ALL. Put letter for answer in square box.

1. Pick the normative statement from the list below:

A. If we doubled the size of transfer payments directed toward the poor, we could eliminate
poverty.
B. Old age pensions raise the living standard of the elderly.
C. Increased female unemployment is due, in part, to the increased number of women looking
for jobs.
D. We need to expand the food stamp program to make the lives of the poor more tolerable.
E. An increase in the minimum wage tends to increase involuntary unemployment.


2. Suppose that for each hour of Nate’s time he can cook 10 pancakes or he can snow shovel 20
feet of the driveway. Suppose that for each hour of Ronda’s time she can cook 8 pancakes or she
can snow shovel 12 feet of the driveway. Nate and Ronda both have 4 hours of time to devote to
either cooking or shoveling or some combination of both. For Nate and Ronda it is clear that

A. Nate should do both the cooking and the shoveling, since he is better at both.
B. Nate should shovel and Ronda should cook if they need to both eat and get out of the
driveway.
C. Nate should cook and Ronda should shovel if they need to both eat and get out of the
driveway.
D. Ronda should do both the cooking and the shoveling, since she is the woman.
E. Nate’s marginal productivity for cooking exhibits diminishing marginal returns.

3. Suppose that the demand function for compact disc players is typical and is written as
follows: QD = 1600 – 3A + 2B – 16C. Which one of the following statements is most true?

A.   B could be the price of the compact disc player.
B.   B could be the price of a Bruce Springsteen compact disc.
C.   C could be the price of the compact disc player.
D.   A could be the price of plastic used to make the compact disc player.
E.   A could be the price of an Apple I-touch.




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4. The supply curve for “X” will shift with changes in

A.   tastes and preferences.
B.   income.
C.   the market price of X.
D.   the price of a substitute in consumption.
E.   the price of factors of production.

5. Which one of the events below is most likely to cause an increase in the demand curve for
snow shoes?

A.   An increase in the price of the titanium used to make snow shoes.
B.   A new study that shows the adverse health effects of a sedentary life style in the winter.
C.   A decrease in the price of snow shoes.
D.   A decrease in the price of cross-country skis.
E.   An increase in the price of snow shoes.

6. The market for tricycles is in equilibrium. Demand suddenly increases. At the same time, the
price of metal used in making tricycles increases. Mr. Clause is currently interested in buying
tricycles; he should expect that the new equilibrium price for tricycles has __________ and the
equilibrium quantity of tricycles in the market has ___________.

A.   increased; increased
B.   increased; decreased
C.   decreased; increased
D.   decreased; changed in an ambiguous fashion
E.   increased; changed in an ambiguous fashion


7. To get the economy out of a slump, Keynes believed that the government should

A.   cut both taxes and government spending.
B.   increase both taxes and government spending.
C.   increase taxes and/or decrease government spending.
D.   decrease taxes and/or increase government spending.
E.   do nothing.

8. Which one of the following is an example of a final good or service?

A. wheat a bakery purchases to make bread
B. coffee beans Starbucks purchases to make coffee
C. lumber purchased by a construction company to used in building houses
D a computer purchased by Ezra Smith, a new Cornell Freshman.
E. Mao’s time, purchased by Cornell, to be used in making intro 1120 go more smoothly for
students.



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9. Which of the following would NOT be counted in 2010's GDP via the income approach or the
expenditure approach?

A.   the sale of a 2009 model car you purchase from a new car dealer in 2010
B.   the 2010 salary of a used motorcycle salesperson for sales efforts in 2010
C.   the sale of an oven manufactured in 2010 and purchased in 2010 by a pizza parlor
D.   the value of a refrigerator manufactured in 2010 but not sold in 2010
E.   government expenditures on repairing pot holes in highways in 2010

10. Real gross domestic product in 2010 is (basically) measured

A.   with a base year bundle of final goods and services, but at current 2010 prices.
B.   with 2010’s bundle of final goods and services, but at the base year’s prices.
C.   with 2010’s bundle of final goods and services and current 2010 prices
D.   as the difference between 2010’s GDP and last year's GDP.
E.   with a base year bundle of final goods and services and at the base year’s prices.

11. The implicit GDP deflator index in year 2 is 95 using year 1 as a base year. This means that,
on average, the price of goods and services is

A.   105% higher in year 2 than in year 1.
B.   5% higher in year 2 than in year 1.
C.   5% higher in year 1 than in year 2.
D.   105% higher in year 1 than in year 2.
E.   experiencing inflation.

12. Because the Consumer Price Index (CPI), as formulated by the U.S. Bureau of Labor
Statistics, uses a base year bundle to compare prices in the base year against prices in some other
year, the

A. CPI tends to exaggerate the impact of inflation.
B. CPI tends to understate the impact of inflation.
C. CPI will be a much broader measure of inflation, as compared to the implicit GDP deflator
index.
D. CPI will not be useful in periods of price deflation.
E. CPI will always be more useful as compared to the implicit GDP deflator index.

13. Bart graduate from high school in 2002. Homer gave him $500 as a graduation gift. Lisa is
graduating from college this year. If the CPI for 2010 is 125 and the base year for the CPI is
2002, then to keep up with inflation, as reflected by the CPI, Homer should give Lisa

A.   $500
B.   $0
C.   $625
D.   $375
E.   $525



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14. Uncle Ezra retired from working full time at Cornell at age 55. He started working 10 hours
a day at a paid job in the local hospital. Ezra is considered

A.   employed.
B.   a discouraged worker.
C.   unemployed.
D.   not in the labor force.
E.   eligible for social security benefits.


Keep going…..




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        Part II:

        1. Marty, Nancy and Gaye are spending the summer together at a shore house making dinners. They
           each can do two things each week with their time: make soup and/or bake bread. The production
           possibilities frontiers (PPF) for each of them are given below.
                                                                                                  ounces of
ounces of                                              ounces of                                  soup 15
soup                                                   soup
                                                                      slope=-1/2
                                                              12                   Nancy
                     Marty
       10
                                                               8
                                                                                                              Gaye

                      slope=-1
                                                                                       slope=-2                slope=-3




                                      10    grams of                                       12     grams of       5        grams of
                                                                                   8
                                            bread                                                 bread                   bread



        a. Between just Marty and Gaye, who has the comparative advantage in the production of bread?
        b. The threesome wants to determine the efficient joint production possibilities frontier for their group.
           Putting grams of bread on the horizontal and ounces of soup on the vertical, sketch out the efficient
           joint production possibilities frontier.
        c. What is the slope on each segment of your PPF in part b?
        d. At each “kink” in your PPF in part b, indicate what activity, or activities, Marty, Nancy and Gaye are
           each doing.
        e. Ignoring Nancy again for this part, if Marty is making bread and selling it to Gaye for soup, what are
           the upper and lower bounds for the price of bread in terms of soup if trade is voluntary between Marty
           and Gaye?




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2. Consider the market for cow bells in Vancouver, Canada in January 2010 and assume the market is
   perfectly competitive and is best described using the typical demand and supply model.
   Suppose the market demand is given by: QD = 2,500 - 100P.
   Suppose the market supply is given by: QS = 400P.

a. Carefully graph and label the demand curve and the supply curve.
b. Find the equilibrium values for quantity (Q*) and price (P*).
c. Indicate the market equilibrium on your graph.
d. Suppose there is an increase in cow bell demand, since spectators use them during the Winter
   Olympics to cheer on their athletes. Demand increases to: QDnew = 4,500 - 100P. Supply does not
   change. Find the new equilibrium values for quantity (Q*) and price (P*).
e. Indicate the new demand and market equilibrium on your graph.
f. Suppose the Olympic organizers think the new equilibrium price is way too high and so they
   successfully lobby the local government to step in and slap on a price ceiling. To be binding, (no pun
   intended to the skiers in the class) what will need to be true for the possible value for the price
   ceiling? Illustrate the market consequence of a binding cow bell price ceiling on your graph.
g. Suppose just after the price ceiling goes into effect, it turns out that spectators with IPhone and
   ITouch devices can download a cow bell “app” for $.99cents that sounds just like a cow bell when
   you shake your device (this is true!). How might this impact your discussion for part f?




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         3. Consider the economy of Wistler which uses Wistler dollars ($) as their currency.
             NOTES:
             1) The Bureau of Labor Statistics of this economy uses the representative urban consumer’s
             bundle in the base year of 2008 as including only the following: 5 apples and 10 books.
             2) All military guns are purchased by the government for use in the army.

         a. Fill in all the missing cells in the table.
         b. Determine the Implicit GDP Deflator Index for 2009 (using 2008 as the base year) - show
            some work.
         c. Determine the Consumer Price Index for 2009 (using 2008 as the base year) - show some
            work.


                       total           total
                     number          number
                     of units        of units      per unit     per unit                                  Real 2009 GDP
                    produced        produced        prices       prices     Current 2008   Current 2009       (base
                     in 2008         in 2009       in 2008      in 2009         GDP            GDP         year=2008)

apples                      100             200       $0.50         $0.70

books                       300             250       $5.00         $7.00

military guns                50              55       $3.00         $3.50




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4. Assume the following is a complete description of everything you need to know (and
    possibly more) about the economy of Ivyland in 2009, whose currency is the Ivy dollar($).

a. Calculate the value of current or nominal 2009 GDP using the expenditure approach.
b. Briefly, but concisely, explain what we must do (and why we need to do it) with the value of
   imports in order to correctly calculate GDP for Ivyland.
c. Identify and briefly discuss two reasons why the way in which we calculate current or
   nominal GDP for Ivyland might lead us to conclude that it is not really an accurate indicator
   of social welfare in Ivyland.
d. Suppose that the government of Ivyland decides to impose outrageous taxes on markets
   throughout the country. In response, buyers and sellers in Ivyland start to trade with each
   other without using money. They barter, trading goods & services for goods & services.
   What impact do you think this will have on reported GDP in Ivyland? Briefly defend your
   position.
e. Suppose we know that Ivyland’s citizens never leave the country, but that many of the firms
   in Ivyland are actually owned by people from the country of Weedsport. If this is the case,
   how will Ivyland’s GDP compare to its GNP? Briefly defend your position.



  Item    Description                                                          millions of 2009 dollars

    1     Consumption expenditures on final goods and services by households                $2,030.00

    2     Total government expenditures plus transfer payments                                $640.00

    3     Government transfer payments                                                         $80.00

    4     Gross investment in new plants and facilities                                       $350.00

    5     Investment via inventory accumulation                                                $50.00

    6     Depreciation (also known as capital consumption allowance)                          $210.00

    7     Exports                                                                              $70.00

    8     Imports                                                                              $60.00




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ANSWERS TO ALL THE MULTIPLE CHOICE QUESTIONS

1      D
Positive economics is an approach to economics that seeks to understand behavior and the
operation of systems without making judgments. Normative economics is an approach that
analyzes outcomes of economic behavior and evaluate whether they are good or bad. Certainly,
only D involves such an evaluation, or judgment.

2      B
This question tests your understanding of comparative advantage. Though Nate is good at both
cooking pancake and snow shovel, he should not do both. D is not correct for the same reason
(and also unfair from a normative economist point of view!) E is incorrect because Nate’s
marginal productivity for cooking has constant marginal returns. C is incorrect because Nate has
comparative advantage for shovel instead of cooking. For cooking one more pancake, Nate needs
to give up shoveling 2 feet of snow. For Ronda, the number is 1.5. Therefore, Nate has a
comparative advantage in shoveling the snow.

3       C
A is incorrect because the law of demand suggest that quantity demanded should decrease in
price. B is incorrect because demand decreases in the price of complements. D will affect supply
curve. An Apple I-touch is a substitute for the compact disc player. Therefore, an increase of
price of Apple I-touch would increase the demand for compact disc player.

4      E
A, B, D shift demand function and C will affect quality demanded.

5      B
A shifts the supply function. C and E cause a change in quantity demand instead of a shift of
demand curve. D will cause a decrease in demand curve.

6      E
This causes a increase of demand curve and a decrease of supply curve, which result in a
increase of price, but the equilibrium quantity can increase or decrease.

7      D
Doing nothing and simply keeping the figure crossed is not suggested by Keynes. He suggested
decreasing taxes and increasing spending to get the economy out of a slump, though this policy
may result in a deficit. A is wrong because cut government spending is the wrong policy in
Keynes’s mind. B is wrong because increasing tax is not suggested by Keynes. C is not correct
because neither of policies is suggested by Keynes.

8      D.
A, B, C and E are not correct because they are used to produce some other goods or services.



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9      A
Because the car is made in 2009. However, please notice that the brokerage fee earned by the
dealer will be counted as part of 2010 GDP! The question may change next time.

10     B
“Real” means that the GDP is measured in based year. However, as we want to know the real
GDP of year 2010,the bundle of goods should come from 2010. A is not correct even if we
consider 2010 as the base year because the final goods and services are not from year 2010. C
measures nominal 2010 GDP. It is straightforward that D is wrong. E measures both real and
nominal GDP of the base year.

11     C
The index in base year is 100. The index in year 1 is 95. Therefore, C is correct. Please note that
though is rare to see deflation in reality, the economy in the problem experiences a deflation.

12     A
A is correct because CPI does not consider the possibility that people can change consumption
bundle based on change of prices. For example, if Cornell now increases the meal plan price to
$100,000 per year, all of you will eat in college town or start to cook for yourself. B is incorrect.
GDP inflator has a broader measure of inflation than CPI because the latter only consider
consumption goods. It is not fair to say that CPI will not be useful in periods of price deflation
and that it is “always” be more useful than GDP deflator.

13    C
Remember that the price index in base year is 100. Therefore, the answer is obtained by
500*125/100=625

14     A
The answer is self-explanatory. Though he is officially retired, he earns wages and is employed.




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