# EC 50312 Midterm L2 AK

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Midterm Exam 1
Economics 503
Foundations of Economic Analysis
Session 4
Multiple Choice ( ½ point each)

1.     Which of the following is NOT included in GDP calculated using the expenditure
method?
A) government purchases
B) government transfer payments
C) residential investment
D) exports of services
_____B_____________

CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for
\$300 and uses its labor and intermediate goods to make the canoe. It sells the finished
canoe to a retail canoe store for \$800. The retail canoe store then sells the canoe to a
consumer for \$1,200.

2.     Refer to the paragraph above. The value added of CANOES-R-US for each canoe
equals
A) \$1,200.
B) \$800.
C) \$500.
D) \$400.
_________C_________

3.     Refer to the paragraph above. The value of each canoe in gross domestic product
equals
A) \$1,200.
B) \$800.
C) \$500.
D) \$400.
_______A___________
4.     The law of demand states that holding everything else constant:
A) there is a positive or upward sloping relationship between price and quantity.
B) there is an inverse or downward sloping relationship between price and quantity.
D) buyers decrease the amount of a good bought when there is more in the market.

_____B_____________

5.     Which of the points in the below graph are possible short run equilibriums but not
long run equilibriums? Assume that Y1 represents potential GDP.

A) A and C
B) C and D
C) B and D
D) A and B
_______C___________

6.     If the number employed is 190 million, the working age population is 230 million,
and the number unemployed is 10 million, then the unemployment rate is
A) 50%
B) 5%
C) 10%
D) 8%
E) 5.2%
______B____________
Calculation

1.      (2 points) According to the OECD, the real GDP and the potential GDP are listed
in the following table. Calculate the output gap.
2009 GDP           Potential
Australia  \$1,101,327.01 \$1,152,105.78

Yt  Yt P
Gap 
Yt P

2009
Output Gap           -4.41%

2.     (1 point) Define qD = ln(QD), qS = ln(QS), and p = ln(P). The supply and demand
equations for an economy are given by
qD  a  p
. Assume that the supply curve shifts out by 1%, Estimate the % change in the
qS  c  p
price.

-.5%
3.     (3 points) There is a country called Pizzaland. There are two consumer goods
produced in Pizzaland, pizza and soda. The following chart shows the market prices of
each good and the quantities that people buy.
Pizza                     Soda
P              Q          P            Q
2007           100         100           10           600
2008           100         200           12           300
a. Calculate nominal GDP, real GDP and the GDP deflator in 2007 and 2008
using 2007 as the market basket. Assume that the average market basket
of the typical consumer in 2007 is 1 pizza and 6 sodas. Calculate the CPI
in 2007 and 2008. Calculate the inflation rate in 2008 using both the CPI
and the GDP deflator.
Nominal Real        GDP        CPI         CPI           Deflator
GDP       GDP       Deflator Index         Inflation     Inflation
2007      16000    16000           1           1

2008       23600     23000 1.02609           1.075   0.075     0.026

GDPt  Pt PIZZA  QtPIZZA  Pt SODA  QtSODA

Yt  P2007  QtPIZZA  P2007  QtSODA
PIZZA             SODA

Pt PIZZA 1  Pt SODA  6
CPIt  PIZZA
P2007 1  P2007  6
SODA

GDPt
Pt 
Yt
4.      (2 points) The following chart shows the HK CPI (Base year, 2005). The price of
a square meter in a Class E Residential Apartment on HK Island was \$81,593 in 1999.
The price of the same real estate in 2008 was \$140, 295. Convert both prices into 2002
dollars. Which is greater in inflation adjusted terms?
CPI
1990          63.6
1991          70.8
1992          77.5
1993          84.4
1994          91.8
1995         100.1
1996         106.4
1997         112.7
1998         115.9
1999         111.3
2000         107.1
2001         105.4
2002         102.1
2003          99.5
2004          99.1
2005         100.0
2006         102.0
2007         104.1
2008         108.6

CPI 2002
N t2002  N t 
CPI t
Price of          Price in 2002
Real              dollars
Estate
1999   \$81,593                  102.1
81,593        =
111.3
74848.57
2008   \$140,295                   102.1
140, 295        = 131897.9696
108.6
5.      (2 points) In the European economy, the value of stocks, fall sharply. Using the
AS-AD model, demonstrate the effect that this would have in the short-run and in the
long run after the self-correction process has kicked in.

P                                                            AS

AS’

1

2

3

Y
6.     (2 points) Show in a diagram the effect on the demand curve, the supply curve,
the equilibrium quantity in the newspaper market of each of the following events.
Case 1: The cost of newsprint goes up.

P                                               S´         S

2

1

D

Q
Case 2: There is a big event in town, which a lot of people want to read about.

P                                                           S

2

D´
1

D

Q

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