Macroeconomics
Mr. Goethals
February 8, 2021
Chapter 9 and 11 Test
I.
Trade
1) Draw a graph that represents a situation where a country will export a good. Be
clear what the domestic price is, the world price, and then label regions for
producer and consumer surplus post-trade. (10)
1b) What is the justification for trade in the case above? (5)
2) Draw a graph that represents a situation where country will import and then a
tariff is added. $4 is the domestic price, $2 is the world price and $3 is the price
with the tariff. Label the regions, post trade, for consumer surplus, producer
surplus, deadweight loss, and government revenue. (10)
2b) Who gains more in this scenario – producers or consumers? Explain. (5)
II.
CPI and the Consumer Basket
A very small country known as Fruitville has an economy that revolves around 3
goods. Apples, bananas, and oranges. Here is the output/price over a three year
span:
$ Apples
$1
Q of Apple
15
$ Banana
$ 1.20
Q/Banana
20
P of Orange Q of Orange
$2
10
$1
17
$ 1.30
18
$2.50
8
$2
19
$1.10
30
$4
4
1) The first year is your base year. What is the Value of the CPI in year 2? (5)
2) What is the inflation rate between year 2 and year 3? (5)
3) The cost of living is the amount by which incomes must rise in order to maintain
a constant standard of living. There are three potential problems with using CPI
to measure changes in the cost of living. What are those three potential
problems? Which bias is most evident in the table above? Explain. (5)
III.
Short Answer Questions (5 points each)
1) The minimum wage in 1980 was $3.10. The CPI in 1980 was 82.4. If the CPI in
1990 was 130.7, is $3.60 a fair minimum wage in 1990? Explain.
2) Which would have a greater impact on CPI: a 20% increase in price on bread or a
20% increase in price on Ugg boots. Explain.
3) With a basic loan given out from lender to borrower, who gains when inflation
turns out to be higher than expected? Explain and be as specific as possible in
supporting your answer.
4) Deborah does a calculation where she inflates the 1975 wage using CPI from
1975 and 1995. The 1975 wage was $2.10. The CPI in 1975 was 53.8. If the
inflated (suggested) wage for 1995 is $5.30, what was the CPI in 1995?
5) In a given year, the CPI goes from 120 to X. The Nominal interest rate is 8%. If
the real interest rate ends up being -1.5%, what is X?
6) Canada and the U.S. produce only two goods: socks and shoes. In Canada, one
worker can produce 250 socks in a year or 125 shoes. In the US, one worker can
produce 300 socks or 200 shoes. Should the two countries trade? And if so,
what good should they each export? Explain.