UNIVERSITY OF THE INCARNATE WORD
H-E-B School of Business
Department of Economics
SUMMER 2014
PRINCIPLES OF MACROECONOMICS
MINI EXAM #3
MACROECONOMIC THE BIG PICTURE
TRACKING THE MACROECONOMY
Dr. Nürşen Albayrak Zanca
TOTAL 101%
(Yes, 1% extra!)
Please follow the below listed instructions:
(1) Make sure to demonstrate ALL your calculations.
NO clearly shown calculations = NO Credit
(2) Please do NOT use extra paper! Attachments/additional
papers will NOT be accepted. ONLY utilize the space
provided for each question.
Please make sure to answer ALL parts of each question.
(3) I have ZERO tolerance for any form of cheating.
Be warned! Be smart! (Please read Course Outline)
THANK YOU for your cooperation in maintaining a great
class!
zanca@uiwtx.edu
Dr. Nürşen Albayrak Zanca
I  ECON
QUESTION-1:
(16%)
The consumer price index, or CPI, measures the cost of living for a typical urban household by
multiplying the price for each category of expenditure (housing, food, and so on) times a measure
of the importance of that expenditure in the average consumer’s market basket and summing over
all categories. However, using data from the consumer price index, we can see that changes in the
cost of living for different types of consumers can vary a great deal.
Let’s compare the cost of living for a hypothetical retired person and a hypothetical college student.
Let’s assume that the market basket of a retired person is allocated in the following way: 10%
on housing, 15% on food, 5% on transportation, 60% on medical care, 0% on education, and 10%
on recreation. The college student’s market basket is allocated as follows: 5% on housing, 15%
on food, 20% on transportation, 0% on medical care, 40% on education, and 20% on recreation.
The accompanying table shows the November 2007 CPI for each of the relevant categories.
Housing
Food
Transportation
Medical care
Education
Recreation
CPI (July 2011)
220.2
228.3
216.6
400.3
206.2
113.5
(A) Calculate the overall CPI for the retired person and for the college student by multiplying the
CPI for each of the categories by the relative importance of that category to the individual and then
summing each of the categories.
(10%)
The CPI for all items in November 2007 was 210.2.
(B) How do your calculations for a CPI for the retired person and the college student compare to
the overall CPI?
(6%)
Dr. Nürşen Albayrak Zanca
I  ECON
QUESTION-2:
(16%)
Assume that the below given data is from an URBAN city in the U.S., and a typical consumer
utilizes only six types of goods and services: Housing, food, transportation, medical care,
education and recreation. The hypothetical unit prices of the six goods and services are given in
the accompanying table. Assume that the typical consumer purchases 1 units of housing, 6 units
of food, 2 units of transportation, 1 units of medical care, 2 units of education and 2 units of
recreation. Answer the following questions:
(A) What is the percent change in the price of HOUSING from 2000 to 2009?
(2%)
(B) What is the percent change in the price of FOOD from 2000 to 2009?
(2%)
(C) What is the percent change in the price of TRANSPORTATION from 2000 to 2009?
(2%)
(D) What is the percent change in the price of MEDICAL CARE from 2000 to 2009?
(2%)
(E) What is the percent change in the price of EDUCATION from 2000 to 2009?
(2%)
(F) What is the percent change in the price of RECREATION from 2000 to 2009?
(2%)
(G) Using 2000 as a base year, create a price index for ALL SIX commodities for ALL years (4%)
(H) What is the percent change in the price index from 2000 to 2009?
2000
2003
2006
2009
HOUSING
FOOD
TRANSPORTATION
$500
600
750
800
$100
120
140
150
$20
25
30
40
Dr. Nürşen Albayrak Zanca
MEDICAL
CARE
$100
110
120
125
(4%)
EDUCATION RECREATION
$150
200
210
225
$50
60
70
80
I  ECON
QUESTION-3:
(20%)
How do economists in the United States determine when a recession begins and when it
ends?
(4%)
Distinguish between Self-Regulating vs. Keynesian economics.
(4%)
Demonstrate business cycle over graph.
(4%)
What causes business cycle?
(4%)
How do you compare previous U.S. recessions.
(4%)
Dr. Nürşen Albayrak Zanca
I  ECON
QUESTION-4:
(6%)
Which of the following questions are relevant for the study of macroeconomics and which for
microeconomics?
(A) How will Ms. Martin’s tips change when a large manufacturing plant near the restaurant
where she works closes?
 MACRO
 MICRO
(B) What will happen to spending by consumers when the economy enters a downturn?
 MACRO
 MICRO
(C) How will the price of oranges change when a late frost damages Florida’s orange groves?
 MACRO
 MICRO
(D) How will wages at a manufacturing plant change when its workforce is unionized?
 MACRO
 MICRO
(E) What will happen to U.S. exports as the dollar becomes less expensive in terms of other
currencies?
 MACRO
 MICRO
(F) What is the relationship between a nation’s unemployment rate and its inflation rate?
 MACRO
 MICRO
QUESTION-5:
Which of the following transactions will be included in GDP for the United States?
(6%)
(A) Coca-Cola builds a new bottling plant in the United States.
 INCLUDED
 EXCLUDED
(B) Delta sells one of its existing airplanes to Korean Air.
 INCLUDED
 EXCLUDED
(C) Ms. Moneybags buys an existing share of Disney stock.
 INCLUDED
 EXCLUDED
(D) A California winery produces a bottle of Chardonnay and sells it to a customer in
Montreal, Canada.
 INCLUDED
 EXCLUDED
(E) An American buys a bottle of French perfume in Tulsa.
 INCLUDED
 EXCLUDED
(F) A book publisher produces too many copies of a new book; the books don’t sell this year, so
the publisher adds the surplus books to inventories.
 INCLUDED
 EXCLUDED
Dr. Nürşen Albayrak Zanca
I  ECON
QUESTION-6:
(8%)
Below is a list of domestic output and national income figures for a given year.
All figures are in millions of USD. Compute Net Exports and GDP.
Net Exports :
GDP
:
Personal consumption expenditures
Net foreign factor income earned
Transfer payments
Rents
Consumption of fixed capital (depreciation)
Social security contributions
Interest
Proprietors’ income
Exports
Imports
Dividends
Compensation of employees
Indirect business taxes
Undistributed corporate profits
Personal taxes
Corporate income taxes
Corporate profits
Government purchases
Gross private domestic investment
Personal saving
Dr. Nürşen Albayrak Zanca
$2,450
40
120
140
270
200
130
330
110
160
2,230
180
210
260
190
560
720
530
420
2,450
I  ECON
MULTIPLE CHOICE QUESTIONS (29 questions, 1% each, 29% total)
1.
a.
b.
c.
d.
Which of the following is a microeconomic variable?
the overall level of prices
the price of coffee
the overall level of employment
the current account
2.
a.
b.
c.
d.
Which of the following is a macroeconomic variable?
the overall level of output
the price of legal services
the price of medical services
the seasonal fluctuation in rental prices for vacation homes
3.
a.
b.
c.
d.
The long-run effect of macroeconomic growth is to
allow for a higher standard of living.
discourage people from saving.
contribute to inflation.
eliminate the business cycle.
4.
a.
b.
c.
d.
The tools of fiscal policy are
control over the interest rate and the level of investment spending.
control over the interest rate and the quantity of money.
price controls and export subsidies.
government spending and taxation.
5.
a.
b.
c.
d.
The tools of monetary policy are
control over the interest rate and the quantity of money.
government spending and taxation.
controlling the level of the minimum wage.
export subsidies and job training.
6. The most important effect of a recession is its effect on
a. the overall level of prices.
b. the ability of workers to find jobs.
c. the trade balance.
d. the percentage of Americans without health insurance coverage.
7.
a.
b.
c.
d.
The business cycle is
the length of time it takes for a new product to be developed.
the length of time it takes for an unemployed person to get a job.
the length of time it takes for an entrepreneur to start a new business.
the short-run alternation between economic recessions and expansions.
8. Which of the following statements is true?
a. Over the business cycle, the economy's level of output and its unemployment rate move in opposite directions.
b. During recessions, the unemployment rate typically falls.
c. During expansions, aggregate output typically declines.
d. Because unemployment is a microeconomic variable, it does not have any correlation with the business
cycle.
Dr. Nürşen Albayrak Zanca
I  ECON
9.
a.
b.
c.
d.
Overall output
typically declines as employment rises.
typically declines during recessions.
typically increases during recessions.
is a microeconomic variable.
10. Fiscal policy attempts to
a. forecast the timing of recessions.
b. forecast the severity of recessions.
c. stabilize the economy through changes in the interest rate.
d. stabilize the economy through changes in taxation and government spending.
11. Long-run growth refers to
a. the expansion phase of the business cycle.
b. the recession phase of the business cycle.
c. the growth of the economy over several decades.
d. the stimulative effect of spending on health care.
12. A nation's gross domestic product (GDP):
A)
can be found by summing C + Ig + G + Xn.
B)
is the dollar value of the total output produced by its citizens, regardless of where they are living.
C)
can be found by summing C + S + G + Xn.
D)
is always some amount less than its NDP.
13. The GDP is the:
A)
monetary value of all final goods and services produced within a nation in a particular year.
B)
national income minus all non-income charges against output.
C)
monetary value of all economic resources used in producing a year's output.
D)
monetary value of all goods and services, final and intermediate, produced in a specific year.
14. Net exports are:
A)
that portion of consumption and investment goods sent to other countries.
B)
exports plus imports.
C)
exports less imports.
D)
imports less exports.
15. Net exports are negative when:
A)
a nation's imports exceed its exports.
B)
the economy's stock of capital goods is declining.
C)
depreciation exceeds domestic investment.
D)
a nation's exports exceed its imports.
16. GDP is equal to:
A)
C + Ig + G + Xn.
B)
C + Ig + G - Xn.
C)
C + In + G + Xn.
D)
C + In + G - Xn.
Dr. Nürşen Albayrak Zanca
I  ECON
17. The smallest component of aggregate spending in the United States is:
A)
net exports.
B)
government purchases.
C)
investment.
D)
consumption.
18. In calculating GDP, governmental transfer payments, such as social security or unemployment
compensation, are:
A)
not counted.
B)
counted as government spending.
C)
counted as investment spending.
D)
counted as consumption spending.
19.
A)
B)
C)
D)
The largest component of total expenditures in the United States is:
net exports.
government purchases.
consumption.
gross investment.
Government purchases
Consumption
Gross investment
Consumption of fixed capital
Exports
Imports
20.
A)
B)
C)
D)
$15
90
20
5
8
12
Refer to the above data. GDP is:
$116.
$121.
$125.
$150.
Personal taxes
Social Security contributions
Indirect business taxes
Corporate income taxes
Transfer payments
U.S. exports
Undistributed corporate profits
Government purchases
Gross private domestic investment
U.S. imports
Personal consumption expenditures
Consumption of fixed capital
Net foreign factor income earned in the U.S.
21.
A)
B)
C)
D)
E)
$ 40
15
20
40
22
24
35
90
75
22
250
25
10
Refer to the above data. GDP is:
$390.
$417.
$422.
$492.
$512.
Dr. Nürşen Albayrak Zanca
I  ECON
22. A price index is:
A) a comparison of the price of a market basket from a fixed point of reference.
B) a comparison of real GDP in one period relative to another.
C) the cost of a market basket of goods and services in a base period divided by the cost of the
market basket in another period.
D) a ratio of real GDP to nominal GDP.
same
23. Which of the following activities is excluded from GDP, causing GDP to understate a nation's wellbeing?
A)
the services of health care workers
B)
the services of military personnel
C)
the construction of new buildings
D)
goods and services produced in the underground economy.
24.
A)
B)
C)
D)
A large underground economy results in an:
understated GDP.
understated GDP price index.
overstated GDP.
overstated GDP price index.
25. The GDP tends to:
A) overstate economic welfare because it does not include certain nonmarket activities such as the
productive work of housewives.
B) understate economic welfare because it includes expenditures undertaken to offset or correct pollution.
C) understate economic welfare because it does not take into account increases in leisure.
D) overstate economic welfare because it does not reflect improvements in product quality.
26.
A)
B)
C)
D)
The growth of GDP may understate changes in the economy's economic well-being over time if the:
distribution of income becomes increasingly unequal.
quality of products and services improves.
environment deteriorates because of pollution.
amount of leisure decreases.
27.
A)
B)
C)
D)
GDP data are criticized as being inaccurate measures of economic welfare because:
they do not take into account changes in the amount of leisure.
they do not take into account all changes in product quality.
they do not take into account the adverse effects of economic activity on the environment.
of all of the above considerations.
28. Assume that the size of the underground economy increases both absolutely and relatively over
time. As a result:
A)
real GDP will rise more rapidly than nominal GDP.
B)
GDP will tend to increasingly understate the level of output through time.
C)
GDP will tend to increasingly overstate the level of output through time.
D)
the accuracy of GDP will be unaffected through time.
29.
A)
B)
C)
D)
The U.S. government agency responsible for compiling the national income accounts is the:
Census Bureau.
Bureau of Labor Statistics (BLS).
Commerce Department's Bureau of Economic Analysis (BEA).
Government Accounting Office (GAO).
Dr. Nürşen Albayrak Zanca
I  ECON