Principles Macro 102 2021 Spr
1. Suppose when you are 21 years old, you
deposit $1,000 into a bank account that pays
annual compound interest, and you do not
withdraw from the account until your retirement
at the age of 65, 44 years later. How much more
will be in your account if the interest rate is 6
percent rather than 5 percent?
A. $440
B. $1,549
C. $4,428
D. $8,557
Answer: C
2. Real GDP per person in both Alpha and
Omega is equal to $2,000. Over the next 100
years, real GDP per person grows at a 1.5 percent
annual rate in Alpha and at a 2.5 percent annual
rate in Omega. After 100 years, real GDP per
person in Alpha is ______ smaller than real GDP
per person in Omega.
A. $2,000
B. $5,410
C. $8,864
D. $14,763
Answer: D
3. If the share of population employed in two
countries is the same, average living standards
will be higher in the country with:
A. the smaller population.
B. the larger population.
C. higher average labor productivity.
D. lower average labor productivity.
Answer: C
4. The population of Omega totals one million
people, 30 percent of whom are employed.
Average output per worker in Alpha is $30,000.
Real GDP per person in Alpha totals:
A. $9,000.
B. $21,000.
C. $30,000.
D. $100,000.
Answer: A
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5. Suppose that average labor productivity in
Country C is $5,000, and that Countries C and E
have the same real GDP per capita. Based on the
information in the table, what must be the
average labor productivity in Country E?
Country Population
(millions)
A
B
C
D
E
100
150
75
250
95
Share of
Population
Employed
(%)
60
55
50
45
40
A. $1,000
B. $1,500
C. $4,500
D. $6,250
Answer: D
6. High Tech, Inc. produces plastic chairs that sell
for $10 each. The following table provides
information about how many plastic chairs can
be produced per hour.
Number of
Workers
0
1
2
3
4
5
Chairs Produced
Per Hour
0
10
18
24
28
30
For simplicity, assume that labor is the only
input. How many workers will be hired if the
hourly wage for workers is $70?
A. 1
B. 2
C. 3
D. 4
ANS B
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7. If the price of TVs produced by XYZ-TV
Company increases from $1,000 to $1,250 per TV
set, then the:
A. supply of labor to the XYZ-TV Company
increases.
B. supply of labor to the XYZ-TV Company
decreases.
C. demand for labor by the XYZ-TV Company
increases.
D. demand for labor by the XYZ-TV Company
decreases.
Answer: C
C. George is an unskilled worker who mows
lawns in the summer, but is unemployed the rest
of the year.
D. Jim had a job as an engineer, but quit when his
wife was transferred to another state. He looked
for a month before finding a new job that he
liked.
Answer: B
11. Based on the labor market diagram below, if
the minimum wage is set at $10 per hour, there
will be ______ unemployed workers.
8. Holding other factors constant, an increase in
the capital stock ______ the real wage and ______
employment.
A. increases; increases
B. increases; decreases
C. increases; does not change
D. decreases; increases
Answer: A
9. Macroland produces dishes and glassware.
Before trade, a set of dishes sells for $100 and a
set of glasses sells for $50. When Macroland
opens to trade, foreign demand for domestically
produced china is strong, raising the price of a set
of dishes to $125. But foreign competition reduces
the demand for domestically produced glasses, so
they now sell for $25 a set. Assuming workers
cannot move between industries, the wages of
workers producing dishes will ______ and the
wages of workers producing glasses will ____.
A. increase; increase
B. increase; not change
C. increase; decrease
D. decrease; increase
Answer: C
10. Which of the following is an example of
cyclical unemployment?
A. Dora lost her job when the textile factory
closed. She does not have skills to work in
another industry and has been unemployed for
over a year.
B. Marsha was laid off from her job with the
airline because the recession reduced demand for
airline travel. She expects to get her job back
when the economy picks up.
A. 7
B. 15
C. 22
D. 27
Answer: C
12. An increase in unemployment insurance
benefits will:
A. increase the demand for labor.
B. decrease the demand for labor.
C. increase job search efforts of unemployed
workers.
D. decrease job search efforts of unemployed
workers.
Answer: D
13. Pat earns $1,000 per week and spends $850
per week on living expenses, puts $50 in a
savings account, and buys $100 worth of shares
in a stock mutual fund. Pat's saving is _____, and
Pat’s saving rate is _____.
A. $50; 5.0%
B. $50; 5.9%
Principles Macro 102
C. $100; 10%
D. $150; 15%
Answer: D
14. Jordan has the following assets and liabilities:
Two cars
House
Mortgage
Cash
Car loans
Checking account balance
Credit card balance
$10,000
$200,000
$100,000
$1,000
$3,000
$2,000
$1,000
What is Jordan’s wealth?
A. $107,000
B. $109,000
C. $111,000
D. $213,000
Answer: B
15. Joan purchases a beautiful rug for $25,000.
After several years of wear and tear, Joan has the
rug appraised and finds that it is now worth only
$20,000. Based on this information:
A. Joan’s saving this year has increased by $5,000.
B. Joan has a $5,000 capital gain.
C. Joan has a $5,000 capital loss.
D. Joan’s wealth is unchanged.
Answer: C
16. Which of the following is an example of the
life-cycle motive for saving?
A. Pat puts $400 per month in his 401(k)
retirement account.
B. Jordan sets aside $200 per month in case she
has to pay for a new roof for her house.
C. Gerry and Terry put $2,000,000 in a trust fund
that will go to their children when they die.
D. Chris keeps $15,000 in a money market
account to pay expenses in case he loses his job.
Answer: A
17. Suppose the following information describes
the economy:
GDP
2,000
Consumption
1,500
Government spending 300
Net taxes
400
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Private saving equals ____; public saving equals
______; national saving equals ____.
A. 100; 200; 100
B. 100; 100; 200
C. 200; 100; 300
D. 200; 100; 500
Answer: B
18. When a bank makes a loan by crediting the
borrower's checking account balance with an
amount equal to the loan:
A. money is created.
B. the bank gains new reserves.
C. the bank immediately loses reserves.
D. the Fed has made an open-market purchase.
Answer: A
19. There is $5,000,000 of currency in Econland,
all held by banks as reserves. The public does not
hold any currency. If the banks' desired
reserve/deposit ratio is 0.25, then the money
supply equals:
A. $5,000,000
B. $6,250,000
C. $10,000,000
D. $20,000,000
Answer: D
20. When the central bank sells $1,000,000 worth
of government bonds to the public, the money
supply:
A. decreases by more than $1,000,000.
B. decreases by $1,000,000.
C. decreases by less than $1,000,000.
D. increases by $1,000,000.
Answer: A
21. If real GDP equals 1,500, nominal GDP equals
3,750, and the price level equals 2.75, then what is
velocity if the money stock equals 1,875?
A. 0.8
B. 1.5
C. 1.75
D. 2
Answer D
22. In Macroland there is $1,000,000 in currency
that can either be held by the public as currency
or deposited into banks. Banks' desired
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reserve/deposit ratio is 10%. If the public of
Macroland decides to hold more currency,
increasing the proportion they hold from 50% to
75%, the money supply in Macroland will ______.
A. increase.
B. decrease.
C. remain the same.
D. either increase or decrease
Answer B
SHORT ANSWER / PROBLEMS (3) each 11.33 points
1. Harrison, Carla and Fred are housepainters. Harrison and Carla can paint 100 square feet per hour
using a standard paintbrush and Fred can paint 70 square feet per hour. Any of the three can paint
160 square feet per hour using a roller.
a. Assume there are only paintbrushes available. What is the average labor productivity in
terms of square feet per painter-hour. Assume the three painters always work the same
number of hours.
b. Repeat part a for the cases in which the team has one, two, three, or four rollers available.
Are there diminishing returns to capital ?
c. An improvement in paint quality increases the area that can be covered per hour (by either
brushes or rollers) by 20%. How does this technological improvement affect your answers to
part b? Are there diminishing returns to capital ? Does the technological improvement
increase or reduce the economic value of an additional roller ?
ANS
a. The average labor productivity is (100 + 100 + 70)/3 = 90 sq ft per hour
Assign roller to the person first who will benefit the most (Fred)
b. 1 roller: (100 + 100 + 160)/3 = 120 sq ft per hour
2 rollers: (100 + 160 + 160)/3 = 140 sq ft per hour
3 rollers: (160 + 160 + 160)/3 = 160 sq ft per hour
4 rollers: same as 3 rollers;
For returns to scale: first roller added 30, second & third added 20 and fourth added 0, so there is
diminishing returns
c. 20% improvement:
1 roller: (120 + 120 + 192)/3 = 144 sq ft per hour
2 rollers: (120 + 192 + 192)/3 = 168 sq ft per hour
3 rollers: (192 * 3)/3 = 192 sq ft per hour
4 rollers: same as 3;
RTS: first roller added 54, second & third 24, fourth 0 so diminishing
2. Alexandra owns a bicycle valued at $2000, cash of $1500 and a checking account of $4000. She also
has credit card debt of $1000, an unpaid electric bill of $40 and a due tuition payment of $2000.
Draw her balance sheet and calculate her initial new worth. For the following transactions show the
changes on her balance sheet and state the change in her net worth. Note any transaction which
includes savings.
a) Alexandra buys a pair of shoes worth $200 using her credit card.
Principles Macro 102
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b) Alexandra writes a check to pay off her entire credit card balance (ignoring transaction in part a)
c) Alexandra spends $1000 of her salary and buys a share in Apple with the remaining $300 (ignoring
transactions in parts a and b)
ANS
a. Assets rise by $200 and credit card debt rises by $200, no savings, no change in NW
b. Checking falls by $1000 and credit card debt falls to zero; no savings, no change in NW
c. New asset share in Apple $300, NW rises by $300; savings has increased, increase in NW
3. In Freezlandia over the years 2018 and 2019, velocity is constant at 5 and real GDP is constant at 4,000.
a) Find the price level for 2018 and 2019 if the Money supply was 1000 and 1100 respectively. What
is the inflation rate between 2018 and 2019?
b) Calculate the inflation rate if 2018 M = 2000 and 2019 M = 3000.
c) Calculate the inflation rate if the 2018 M = 1000, real GDP = 4000, but 2019 M = 1100 while real
GDP rose to 4400. Assume velocity constant at 5 in both years. Compare to answer in part a.
Answers:
a) Rearrange formula to P = MV/Y so P = 1000 * 5/ 4000 for 2018. P = 1.25. For 2019, P = 1100 * 5/4000
or P = 1.375. Inflation therefore is (1.375 – 1.25)/1.25 = 10%
b) so for 2018 P = 10,000/4,000 or 2.5. For 2019 P = 15,000/4,000 = 3.75 so inflation is 50%
c) In 2018, P = 1.25 as in part a. But 2019, P = 5500/4400 = 1.25 so inflation is 0. The 2019 money supply
increase was sufficient to satisfy money demand for the rise in GDP compared to part a.