QUIZ 1: Macro – Fall 2015 (ANSWERS)
Name: ________________________________
Section Registered:
Tuesday a.m.
Tuesday p.m.
Wednesday a.m.
Question 1 (8 points total)
Suppose an economy produces five goods: A, B, C, D, and E. Below is the quantity sold and the
average transaction price of the five goods in three periods: 2013, 2014, and 2015. This economy has a
price index (1) whose base year is 2013 and (2) whose quantities are fixed at 2013 levels when creating
their price index. When providing price indices, use 1.xxx (four significant digits). When providing
inflation rate or growth rate in GDP, use x.xx% (three significant digits).
2013
2014
2015
Good
Price
Quantity
Price
Quantity
Price
Quantity
A
$60
25
$70
35
$70
40
B
$50
15
$50
10
$60
15
C
$20
40
$30
50
$30
60
D
$100
10
$90
5
$100
15
E
$40
10
$50
5
$60
10
A.
Given the above information, what is the inflation rate in this economy between 2014 and 2015?
(4 points total, graded on a 0/2/4 scale, show work to receive full credit, put answers in box)
𝑃𝐴2014 𝑄𝐴2013 + ⋯ + 𝑃𝐸2014 𝑄𝐸2013
𝑃𝐴2013 𝑄𝐴2013 + ⋯ + 𝑃𝐸2013 𝑄𝐸2013
70 × 25 + 50 × 15 + 30 × 40 + 90 × 10 + 50 × 10
$5,100
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2014 =
=
= 1.146
60 × 25 + 50 × 15 + 20 × 40 + 100 × 10 + 40 × 10 $4,450
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2014 =
𝑃𝐴2015 𝑄𝐴2013 + ⋯ + 𝑃𝐸2015 𝑄𝐸2013
𝑃𝐴2013 𝑄𝐴2013 + ⋯ + 𝑃𝐸2013 𝑄𝐸2013
70 × 25 + 60 × 15 + 30 × 40 + 100 × 10 + 60 × 10 $5,450
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2015 =
=
= 1.225
60 × 25 + 50 × 15 + 20 × 40 + 100 × 10 + 40 × 10 $4,450
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2015 =
Inflation Rate 2014 − 2015 = (
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2015
1.225
− 1) 100% = (
− 1) 100% = 6.86%
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2014
1.146
(6.89% is also acceptable, the difference is due to rounding in the price indices)
Price Index 2014 = 1.146
Price Index 2015 = 1.225
Inflation Rate 14-15 = 6.86%
B.
Given the above information, what is real GDP growth in this economy between 2014 and 2015?
Use the exact formula. (4 points total, graded on 0/2/4 scale, show work to receive full credit, put
answers in box)
Real GDP in 2014 (2013 Base Year)
=
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 2014
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 2014
=
70×35+50×10+30×50+90×5+50×5
5100/4450
5150
= 5100/4450 = 4493.627
Real GDP in 2015 (2013 Base Year)
=
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 ′15
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 ′15
=
70×40+60×15+30×60+100×15+60×10
5450/4450
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 2015
−
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 2014
Real GDP Growth 2014-2015 = (
=
7600
5450/4450
= 6205.505
6205.50−4493.63
) 100%
4493.63
1) 100% = (
= 38.10%
(Notice, we solved for real gdp in 2013 prices. You may have used a different year. This will not affect
the growth rate, but will affect the levels in 2014 and 2015. We gave credit if you put real gdp answers
in 2014 prices or 2015 prices).
Real GDP in 2014 = $4,493.627
Real GDP in 2015 = $6,205.505
Real GDP Growth 14-15 = 38.10%
Question 2 (6 points, 2 points each)
For each of the following, circle the true answer. There is only one true answer to each question stem.
A. Given the Cobb-Douglas production function developed in class, which of the following is true?
i.
ii.
iii.
iv.
Capital and labor are substitutes in production.
Jointly doubling labor, capital and TFP will double output.
Both (i) and (ii) are true.
Neither (i) nor (ii) are true.
Neither of these statements is true. Capital and Labor are COMPLEMENTS in Cobb-Douglas.
See supplemental notes for details. Additionally, doubling all factors will more than double GDP.
Doubling only labor and capital will double GDP. There are constant returns in TFP and there are
constant returns in N and K (jointly). There are NOT constant returns in TFP, K, and N (jointly).
This came off the practice quizzes.
B. Given the Cobb-Douglas production function developed in class, which of the following are true?
Assume the parameters of the production function are exogenously given.
i.
ii.
iii.
iv.
The share of aggregate income going to workers is constant over time.
The employment rate in the economy is constant over time.
Both (i) and (ii) are true.
Neither (i) nor (ii) are true.
Only the first answer is true. The CD production function implies that (W/P*N)/Y is constant. We
proved this in class last week. See supplemental notes for details. The CD production function
does not imply anything about the aggregate employment rate. As we will see in class this week, the
aggregate employment rate is a function of labor demand (which is determined by CD production
function) and labor supply. Shocks to labor supply could cause employment rate to move that has
nothing to do with labor demand. The key to this is that we only talked about share of income
going to workers being constant in class.
C. Given what we have learned in class, which of the following are true about macroeconomic
equilibrium?
i.
ii.
iii.
iv.
Aggregate income per person equals aggregate expenditure per person.
Total savings in the economy equals total investment in the economy (if the economy is closed).
Both (i) and (ii) are true.
Neither (i) nor (ii) are true.
Both of these are true. Aggregate Income = Aggregate Expenditure in macroeconomic
equilibrium. Also, S = I in the economy in equilibrium (when NX = 0; we defined a closed economy
as having NX = 0).
Question 3 (3 points)
Many countries attempt to grow through increasing the capital stock (holding TFP and N fixed). While
this does lead a country to experience a growth in income per capita, it does not lead to sustained
increases in income per capita. Why does a policy of sustained increase in K/N not lead to sustained
economic growth? Your answer should be cast in terms of concepts learned in class. Your answer
should not exceed 10-12 words. My preferred answer is 5 words.
Diminishing marginal product of capital. This was straight out of the notes and mentioned in class.
If you keep increasing K holding N and A fixed, you eventually run into diminishing marginal
product of capital. As a result, the change in Y/N gets smaller and smaller as K increases.
Some people talked about “deprecation” as well. That is another acceptable answer (as discussed
in the slides). As K increases, depreciation on the capital stock keeps increasing. That means more
and more I is needed to just replace depreciation (which slows down the change in K). See slides
for additional details. One or two people talked about depreciation – most everyone else had
diminishing marginal product of capital.
Question 4 (3 points total)
For this question, circle the answer to the following question. There is only one true answer. In the
Economist Article “Right on Target” (7/18/2015), there was a discussion about the mismeasurement of
macroeconomic statistics within China during the recent year. Which of the following statistics did the
article suggest was likely misreported during the first quarter of 2015?
a. Employment statistics
d. Export statistics
b. Price statistics
e. Nominal GDP statistics
c.
Consumption statistics
This came straight from the readings. Basically, the article talked about how REAL GDP
GROWTH was too high because the inflation rate was too low. The stated government
inflation rate (which was negative) didn’t match other types of data in the economy. If the
inflation rate was reported accurately, real gdp growth would have been lower.