Econ Principles of Macroeconomics by alicejenny


									                                    Econ 251 – Principles of Macroeconomics
                                             Exam #1, Spring 2011
                                                   9:35 class


All graphs must be labeled and legible and show all work. Good luck!

Points off total score: _____
1.   In which component of United States’ 2011 Gross Domestic Product (GDP), are the following accounted for?
     (For example, expenditures on French wine are included in import expenditures.) Spell out the name of the
     component for full credit. If it is not in one of the categories, then write none.

                   a.   Initial offerings of stocks for a start up company
                   b.   Expenditures by the Pentagon (U.S. military) to upgrade its computers
                   c.   Gasoline taxes

                   d.   iPads built in 2011 that have yet to be sold because people would rather purchase the iPad 2
                   e.   iPads built in 2010 that have yet to be sold because people would rather purchase the iPad 2
                   f.   State of Minnesota’s expenditures on unemployment benefits

                   g.   Household’s expenditures on tickets to the Super Bowl
                   h.   U.S. government’s expenditures mediating the negotiations between the NFL and NFLPA
                   i.   UST tuition payments made by households

                   j.   American household expenditures on Columbian cut flowers for Valentine’s day
                   k.   Egyptian government’s expenditures on American-made tear gas used to disperse pro-
                        democracy protesters
                   l.   Wells Fargo takeover of Wachovia bank in 2011

2.   Answer ONE of the following questions.
            a. Identify two reasons why GDP per capita is not a good measure of social welfare.



             b. What is the correct order of statements? Assume that buttermilk is one of the main ingredients
                in ice cream.      ___ the price of ice cream rises and the amount of ice cream sold falls
                                   ___ higher buttermilk prices
                                   ___ raises the cost of producing ice cream.
                                   ___ shifts the supply of ice cream to the left

3.   Identify the type of unemployment. (Spell out the word for credit.)

              a.   Mary, a chemist at Boston Scientific, is laid off when the Minnesota office is shut down and she is
                   looking for another chemist job that matches her skills.

              b.   Many landscapers and interior decorators in Vail, CO are unemployed. People are no longer
                   redecorating their homes because there has been a permanent shift in how households spend their
                   discretionary income. They are spending less on decorating and saving more.

              c.   Hutchison Technology closes down its Minnesota plant. Assume these workers will have to
                   retrain to find employment in Minnesota.

              d.   Nurses in the Twin Cities have been laid off because households have been cutting back
                   expenditures on preventive health care due to the poor economy.
4.   Answer ONE of the following two questions.

        a. When traveling through Nicaragua this past summer, I learned if you want to purchase pottery, you
           should visit San Juan De Oriente. If you want to purchase flowers, visit Katarta, but if you want to bring
           back a hammock, you should drive to Tipitapa City. Why I was not surprised to hear that each city
           specializes in production of one item? Explain using macroeconomic concepts. (2-3 sentences)
        b. My father was a better cook than my mother. He also baked all of my birthday cakes growing up.
           Despite this, my mother made dinner every night until my dad retired. Then he cooked dinner. Using
           economic concepts, explain why my father started making dinner after retirement. (1-2 sentences)

5.   While at the Minnesota History Museum last weekend, I learned that Charles Lindbergh’s first airplane was a
     Jenny. It was purchased for $500 in 1923. If the CPI1923 = 16.9 and CPI2011= 220.23, what would be the
     equivalent expenditure today? Show all work.

6.   Economic Indicators: The Wall Street Journal reported yesterday that the initial jobless claims rose by 26,000
     last week.
          a. Is this good news or bad?              Good              Bad                 (Circle one)

              Explain what this statistic measures. (1 sentence)

         b.   Is this the appropriate statistic for jobless claims to use to evaluate the health of the U.S. economy?
              Explain why or why not. (1-2 sentences)
7.   True False Questions

         T     F   Imports may be included in the CPI, but not in the GDP price index.

         T F       If the price level rises, then real wages falls.

         T F The entire length of the business cycle in the United States has gotten shorter.

         T F Price ceilings (set below equilibrium) lead to shortages.

         T F       When the economy is producing near capacity (i.e., the PPF), then unemployment rate is low and
                   the inflation rate is high.

         T     F The U.S. Government debt is a flow variable.

         T F The fallacy of composition is the error of believing a cause-effect relationship between two events
             that are associated in time.

         T F       Mikhail Prokhorov, a Russian billionaire, owns the New Jersey Nets NBA team. As result, the
                   Nets are then part of Russia’s GDP and the US’s GNP.

         T     F Capital per worker is on the vertical axis of the per worker function.

         T F       Advancements in technology shifts the per worker function.

8.   Federal Reserve Chairman Bernanke warned Congress on March 1st that the “recent oil price surge could
     impede U.S. growth.” Explain the reasoning behind Bernanke’s comments by answering the following:

         i.    Using AD-AS analysis, show how you expect the rise in oil prices to affect the U.S.’s GDP and price
               level. Label all axes, curves, shifts of curves, and the market.

         ii.   Explain why aggregate demand/and or aggregate supply changed. (1-2 sentences)
9.   Listed below are the figures for national income accounts for the United States in the year 2010. All figures are
     given in nominal terms. You must show all calculations to get full credit.

              Consumption Expenditures= $10,352                            Export Expenditures = $1837
              Transfer Payments = $1043                                    Savings = $1871
              Investment Expenditures = $1822                              Import Expenditures = $2353
              Government Expenditures = $3002

         a. Calculate nominal GDP.

         b. What piece of data would you need to be given to calculate real GDP? (Identify economic term.)

         c. Given the above figures, what is the size of the trade deficit or surplus? Also, identify if it is a
         deficit, surplus, or balanced.

                  Deficit    Surplus       Balanced     (Circle one.)
                  Size: ____________

         d. Given the above figures, what is the size of the government budget deficit or surplus? Also, identify
         if it is a deficit, surplus, or balanced.

                  Deficit    Surplus       Balanced     (Circle one.)
                  Size: ____________
10. After 28 days of protesting, Tunisia’s longtime president of 23 years was ousted on January 14, 2011.
    Their protest inspired others around the Arab world to revolt in places such as Algeria, Bahrain, Egypt,
    Jordan, Libya, and Yemen. So let us learn about Tunisia that inspired so many. According to the CIA
    World Factbook, the population of Tunisia over age 16 (and not in institutions) in 2010 was 7.4 m people,
    the labor force consisted of 3.83 m people, and the number of employed was 3.29 m people.

            How many people are classified as unemployed? (Show work.)

            How many people are classified as not working and not looking for a job? (Show work.)

            How many people are classified as not working? (Show work.)

            What is the unemployment rate? (Show work.)

11. This past Monday, the Minnesota Legislature passed a bill that would allow unemployed Minnesotans to
    continue collecting unemployment benefits for up to 86 weeks. Without the change, Minnesota's
    unemployed workers would lose out on a 13-week extension of federally authorized unemployment
    benefits. The bill cleared the Senate unanimously after passing the House last month. It now heads to
    Governor Mark Dayton's desk. When deciding whether or not to extend unemployment benefits, what two
    factors must you balance out? (1 sentence each)


12. Economists are trying to estimate the current natural rate of unemployment (NRU). Two studies from the
    San Francisco Fed suggest the NRU has risen to 6.8%. Federal Reserve Bank of Minneapolis President
    Narayana Kocherlakota in his speech at St. Cloud State University talked about the importance of
    estimating NRU correctly and its implications for the Fed’s monetary policy. (Source: “Kocherlakota Says
    Fed Policy Stance Is 'Appropriate'” Wall Street Journal 3/3/11)

    1.   (Complete the sentence) The natural rate of unemployment is the sum of …

    2.   Minneapolis Fed President’s speech focused mostly on the challenges in trying to determine whether
         the high unemployment is structural or cyclical. Why is this distinction so important? (2-3 sentences)

    3.   Why is it important to have an accurate measure of NRU, i.e. to know how high unemployment rate is
         relative to the NRU? (1-2 sentences)

13. Answer ONE of the following two questions:
    a. How does the core inflation rate differ from the regular inflation rate calculating using the CPI? (1-2
    b. Headline in the March 7th edition of the Wall Street Journal: “Central Bankers (such as the Federal
       Reserve) vow to fight inflation” Explain what the Federal Reserve will do to fight inflation and
       explain how this will lower inflation. (2-3 sentences)
14. Answer ONE of the following two set of questions.

A. Answer the following based on “The Productivity and Jobs Creation: The Long and The Short Run of It.”

            How does increasing productivity affect total unemployment in the short-run? Explain why.

            How does increasing productivity affect total unemployment in the long-run? Explain why.

B. Based on the summary of Greg Ip’s article “Greenspan's Final Act: Calculating the Impact of Globalization
on Inflation” answer the following:

         What is the direct effect of globalization on inflation?

         What is the indirect effect of globalization on inflation?

Bonus: We observed that Argentina was producing inside its’ per worker production function and I argued that
it was due to hyperinflation? Explain how hyperinflation led to inefficiency. (2-3 sentences)

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