Midterm Exam 1
Foundations of Economic Analysis
Multiple Choice ( ½ point each)
1. Which of the following is NOT included in GDP calculated using the expenditure
A) government purchases
B) government transfer payments
C) residential investment
D) exports of services
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
3. Refer to the paragraph above. The value of each canoe in gross domestic product
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.
C) buyers increase the quantities they buy when their incomes increase.
D) buyers decrease the amount of a good bought when there is more in the market.
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
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
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
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
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.
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
Pt PIZZA 1 Pt SODA 6
P2007 1 P2007 6
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?
N t2002 N t
Price of Price in 2002
1999 $81,593 102.1
2008 $140,295 102.1
140, 295 = 131897.9696
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.
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
Case 2: There is a big event in town, which a lot of people want to read about.