# Introduction to Macroeconomics � Fall 2007 by QOMAGZ6

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```									                          Introduction to Macroeconomics – Fall 2007
Professor Philip J. McLewin

Preparation Guide – Test 2
DRAFT: Oct 4

Date:         TF Sections – Tues, October 16; Wed Section – October 17
Coverage:     Chapters 5 to 7 with associated readings and class notes
Format:       15- 20 multiple choice questions (70%); group test, same questions (10%) one or
more essay questions (20%) – DRAFT … I MIGHT CHANGE THE
PROPORTIONS
Study groups: I encourage them. If you do form one, let me know in writing in advance so up
to four of you can take the test together for the group part of the test. Otherwise,
I’ll assign you to a group of three during the test.
CPS Response: Bring
Cell-phones: Not allowed on desk
Calculators:  Must use the ones I provide
Other:        You will have one hour & 20 minutes (1’20”). If for some reason you miss the
exam, a make-up on different material will be offered on Dec 12 (Wed) or Dec
14 (Fri). This is the only make-up offered for the entire semester, including any
missed future exams or poor performance.

Exam questions will be drawn from the following topics.

1. Macroeconomic Measurement: The Current Approach (Ch 5)
 What are the NIPA conventions regarding capital stocks? How does “investment” differ
from “savings”?
 What is the definition of GDP? What are examples of “intermediate” and “final” goods?
[See discussion question on page 5-9] Why is the distinction necessary?
 How is GDP actually calculated? What is the spending approach? The income
approach? Why, in principle, do they give you the same result? [Note how “Y” is used
on page 30.]
o Be prepared to calculate GDP from a set of spending and income categories (with
dollar amounts) similar to the exercise completed in class.
 What is “real GDP”? How does it differ from “nominal GDP”? Why is the distinction
o If over time real GDP grows more slowly than nominal GDP, what does that
mean?
o Be prepared to calculate real GDP using the formula: R = N/PI; similar to the
exercise completed in class.
 Be prepared to calculate percent changes from one year to the next
o Calculate real and nominal GDP based on a word problem: See Question 6, page
5-35
o Where do the expressions “current dollar,” “constant dollar,” and “chained
dollars” fit into the distinction between real and nominal GDP?
 What is inflation? How can we measure it?
    What is the CPI? Why is it called a “constant weight price index”? Why are weights
necessary?
o How do you interpret the statement “the CPI = 120 in 2001 [1996 = 100].”
o What is the inflation rate if the CPI goes from 120 in Oct 2006 to 150 in Oct
2007?
o Calculate a price index based on a word problem: See Question 7, page 5-35
   What is the “implicit price deflator,” and what it is used for?

2. Macroeconomic Measurement: Environmental and Social Dimensions [Ch 6]
 What are the three functions of the environment? What are some examples?
 How might real GDP be modified to account for environmental and social dimensions?
o What is the GPI? What are its major components? [Recall the concept map in
Chapter 6 PowerPoint ]
o What is “eaNDP?” How does it differ from GDP?
o What is the HDI? What are its major components?

3. Employment and Unemployment [Ch 7]
 Who is unemployed? How is unemployment measured?
o Who are “discouraged workers”? How would including them affect the
unemployment rate?
o What is “underemployment”?
 What are the types of unemployment? Which one is the focus on macroeconomics?
Why?
 What is the classical theory of unemployment?
o Why is there “no involuntary employment”? If there actually is unemployment,
what is the cause according to this school?
o Where do Bozo and laissez-faire fit it?
o What are the requirements for a freely operating market? Recall, fish vs. labor
 What are the imperfect labor market theories?
o What are “sticky wage” theories?
 Efficiency wage theory?
 Insider-outsider theory?
o Can modest inflation really help? [See page 7-15]
 How do Keynesian economists explain unemployment?
o Is there a “natural” rate of unemployment?
 What is “NAIRU”? (you don’t have to know what the initials stand for,
just what the concept is about)
 What are the different meanings of job “flexibility”?

Essay questions:
1. Link to the official U.S. government web sites that publish GDP, CPI and unemployment rate
statistics. Collect data since 2000 in the form of tables or charts or both, include the sources, and
bring them to use during the test. For GDP you may want to collect both annual and quarterly
data. Make no other notes on these pages – but you can create your own charts beforehand.
[Note: You will leave these with me at the start of the test for my review.]
 Describe what has happened to the state of the macroeconomy since 2001 based on the
data you collected.
   What can these measurements tell you about “well-being,” and the related goals of good
living standards, stability and security, and sustainability?
   What are some of the limitations of these measurements? [This may be incorporated into
the question above about “well-being.”] This could also be a question by itself.

2. A problem on determining GDP (real and nominal) or a price index similar to the ones
mentioned above (page 5-35).

3. Create a concept map to show how the macroeconomy is assessed thru various measurements,
conventional and non-conventional. This could, conceivably, be a group essay.

4. Suppose the sub-prime crisis leads to a recession and high unemployment:
 Use the classical model to explain how that would correct itself .
 What would Keynesian economists propose to correct the situation of high
unemployment?
 Is there any evidence of a coming period of high unemployment?

I will write the formulas for the following on the whiteboard:
 Percent change calculation
 Real GDP calculation

You will need to know formulas (and know how to use them):
 GDP = C + I + G + NX
 UR = U/(U + E) = U/CLF

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