Economics 201
NAME ______________________
Prof. Robert J. Gordon
Second Midterm
Fall 2009
Put your name on the answer sheet and circle your T.A. Section!
Answer all questions in the space provided below. Do not detach the answer sheet from the rest
of the exam.
Each multiple choice question is worth 1 point and has a single best answer. There is no guessing
penalty so answer all the questions.
TA:
Heffner
Time:
9am
Kent
O'Quinn
Roy
3pm
WRITE YOUR MULTIPLE CHOICE ANSWERS IN CAPITAL LETTERS!
If we can't read it, it's wrong.
1
6
11
16
21
26
2
7
12
17
22
27
3
8
13
18
23
28
4
9
14
19
24
29
5
10
15
20
25
30
MC Total:
______
Short Answer:
Question 1: 7 total points, 1 point per question (except “e,” which is 2 points).
a) The price without international trade is ___________.
b) ___________ pineapples will be ___________ (imported/exported).
c) Tariff should be ___________ per pineapple.
d) Tariff should be ___________ per pineapple.
e) Minimum tariff should be ___________ per pineapple, and tariff revenue would be ___________.
f) The total quota rent would be ___________.
Question 2: 6 total points, 1 point per blank.
a) GDP in 2008 at 1990 prices is ________.
GDP in 2007 at 2008 prices is ________.
b) The (LN) growth rate of nominal GDP between 2007 and 2008 is _______.
c) The chained real GDP growth between 2007 and 2008 is _______.
d) It will take Romania _______ years to catch up with Poland.
The ratio of Polish to Romanian GDP (at 1990 prices) in 2040 will be ________.
Question 3: 8 total points, 1 point per blank.
a) Real GDP in 2005 at 2005 prices was ________.
Real GDP in 2006 at 2005 prices was ________.
b) The value of GDP deflator in 2006 (base year 2005) is ________.
The (LN) inflation rate implied by the GDP deflator is ________.
c) Real GDP in 2005 at 2006 prices was ________.
The growth rate of the GDP deflator (base year 2006) was ________.
Chained GDP deflator growth rate (LN) between 2005 and 2006 is ________.
d) Starting from 2006, it will take _______ years for the prices to triple.
Question 4: 4 total points, 1 point per blank.
a) GDP is ________.
b) C’s value added is ________.
c) Total wage bill is _______.
d) B’s wage bill is ________% of the total wage bill.
Question 5: 5 total points, 1 point per blank.
a) The size of the Labor Force is _______.
b) The Labor Force Participation Rate is _______.
c) The Employment to Working Age Population Ratio is _______.
d) The Unemployment Rate is _______.
e) The Cyclical Rate of Unemployment is _______.
Section 1: Multiple Choice (30 points)
(In this section each question is worth 1 point)
1 The business cycle takes place
A) within the span of a single day
B) over the course of a single year
C) over the course of several years
D) over the course of several decades
2 In the lecture discussion of what will determine a student’s future income as an educated adult,
which of the following was not discussed as a factor determining future income?
A) Scarcity
B) State of the macro business cycle in a student’s senior year
C) Social value of future career
D) All of the above
3 If quota rents do not accrue to the government, then the net loss from a quota is ______ the
deadweight loss from an equivalent tariff.
A) less than
B) greater than
C) equal to
D) unrelated to
4 Firms pay efficiency wages because:
A) it reduces the risk of losing the best workers.
B) it is required by law.
C) they don't have to offer health insurance if they pay efficiency wages.
D) it reduces the employee's income tax liability.
5 Whether or not a country runs a trade surplus or trade deficit depends upon
A) what part of the business cycle the country is currently in
B) whether or not the country is experiencing deflation or inflation
C) whether the country is employing fiscal or monetary policy
D) decisions about saving and investment spending in the country
6 Countries that trade based on the Heckscher-Ohlin model will find that:
A) their import goods tend to utilize their relatively scarce factor of production most
intensively
B) the goods they export tend to utilize their relatively scarce factor of production most
intensively
C) countries with a relative abundance of capital will Ohlin-dominate countries with less
capital
D) countries with a relative abundance of labor will Ohlin-dominate countries with less labor
E) they export less than they would under autarky
7 The opposite of an open economy is one under
A) autonomy
B) autarky
C) autokinesis
D) autocracy
8 Which of the following statements about GDP is correct?
A) Social security payments are part of GDP while medicare payments are not
B)
C)
D)
E)
A stock market boom has no effect on GDP because capital gains are excluded from GDP
A stock market boom raises GDP even though capital gains are excluded from GDP
A) and B)
A) and C)
9 Consider an economy, where the aggregate real output is growing faster than the total
population, then:
A) real GDP per capita is rising.
B) the standard of living is declining.
C) the national income is falling.
D) nominal GDP per capita is rising.
10 According to Keynesian economics, a depressed economy is a result of
A) inadequate spending
B) irrational behavior on the part of individuals and firms operating in the economy
C) scarce resources
D) monetary and fiscal policy
Table: GDP
11 (Table: GDP) The GDP for 2007, was:
A) $94 billion.
B) $188 billion.
C) $168 billion.
D) $139 billion.
12 The World Trade Organization:
A) assists importers and exporters in conducting their trade
B) prevents political instability in member nations to ensure free flows of goods
C) organizes the negotiations involved in trade agreements
D) seeks to protect the interests of the “primary” trading nations
13 With reference to the lecture’s diagram showing supply and demand curves for skilled vs.
unskilled workers, “globalization” (movement toward more trade of goods and people)
A) Shifts the demand curve to the right and the supply curve to the left
B) Shifts the demand curve to the left and the supply curve to the right
C) Shifts the demand curve to the right with no effect on the supply curve
D) Shifts the demand curve to the left with no effect on the supply curve
14 The intermediate goods are not counted in the calculation of GDP, because:
A) that involves double-counting.
B) these goods are not produced for the market.
C) these are produced in the underground economy.
D) these goods involve financial transactions.
15 In a Ricardian model of international trade the production possibility frontiers are _______,
indicating that the opportunity cost of increasing the production of one item relative to another
_________.
A) convex; increases
B) concave; decreases
C) straight lines; is constant
D) non-maximized; is zero
16 Suppose that a country has a progressive income tax code, where taxable income is calculated in
nominal terms but the schedule of income tax rates is NOT indexed to inflation. An individual
whose income keeps up with inflation will find that, overtime, she will pay:
A) the alternate minimum tax.
B) a lower percentage of her income in taxes over time.
C) the same percentage of her income in taxes over time.
D) a higher percentage of her income in taxes over time.
17 Chapter 4 shows how to calculate the deadweight loss (DWL) effect of government
interventions, while Chapter 5 calculates the benefits of free trade. The lecture emphasized that
A) The deadweight loss concept is limited to Chapter 4, it has no relevance to Chapter 5
B) Quotas and taxes create DWL in Chapter 4, nothing described in Chapter 5 creates DWL
C) The change in surplus caused by a tariff is the same concept as DWL
D) In an open economy trade raises welfare whether the government intervenes or not
18 Jim has a part-time job and would prefer to have a full-time job, but has been unable to find fulltime work. Jim's labor market status is classified as:
A) a discouraged worker.
B) an underemployed worker.
C) an unemployed worker.
D) out of the labor force.
Use the following graph to answer question 19:
Figure: Technological Progress and Productivity Growth
19 If there is a significant increase in human capital per worker (all other factors remaining
unchanged), then this is best indicated by a move from:
A) A to B.
B) B to A.
C) C to B.
D) B to C.
20 The convergence hypothesis helps explain why:
A) highly educated people converge in high-income countries.
B) high-income individuals marry other high-income individuals.
C) high-income countries continue their high growth rates.
D) high-income countries tend to have slower growth rates compared to lower-income
countries.
21 Deflation is a(n):
A) decrease in the purchasing power of a unit of money.
B) appreciation of the nation's currency.
C) decrease in the average level of prices.
D) increase in the average level of prices.
22 Studies of happiness and GDP conclude
A) Rising GDP raises happiness
B) Rising GDP reduces happiness for most people because rich people get most of the benefits
C) Happiness depends on the absolute level of income
D) Happiness depends on the relative level of income
23 Economists claim that the unemployment rate can understate the true level of unemployment,
for all of the following reasons, except in the case of:
A) discouraged workers.
B) marginally attached workers.
C) underemployed workers.
D) frictionally unemployed workers.
24 Government borrowing is:
A) the amount of funds raised by government in the financial markets.
B) government spending on goods and services.
C) government tax revenues.
D) the amount of funds raised by government in the financial markets, government spending
on goods and services, and government tax revenues.
25 When hyperinflation forces Emily to visit her bank very frequently to keep her cash holdings to
a minimum, economists say that Emily is experiencing a:
A) shoe-leather cost.
B) menu cost.
C) unit-of-account cost.
D) Fisher effect.
26 Of all the following inventions, the greatest increase in the speed of communication was
accomplished by the invention of
A) Telegraph
B) Telephone
C) Television
D) Internet
27 The belief that trade must be bad for exporting countries because those workers are paid very
low wages by our standards is the:
A) poverty labor fallacy
B) sweatshop labor fallacy
C) third-world fallacy
D) Nike fallacy
28 During the later half of the twentieth century, the Soviet Union had made more physical capital
available to its workers, but this increase in capital resulted in successively smaller increases in
worker productivity. This can be explained by:
A) diminishing returns to human capital.
B) decline in technology.
C) declining standard of living.
D) diminishing returns to physical capital.
29 If nominal GDP of 2009 is higher than nominal GDP of 2008, we can state that:
A) production in 2009 is higher than production in 2008, while prices remain unchanged.
B) production or prices or both are higher in 2009, compared to 2008.
C) prices in 2009 are higher than prices in 2008, while production remains unchanged.
D) production in 2009 has gone down while prices have increased.
30 Trade-adjustment assistance (TAA) provides job training to workers who lose their jobs because
of foreign competition. It has been criticized because
A) It is unfair to workers who lose their jobs because of domestic competition
B) It is ineffective for many middle-aged workers who lose their life-long jobs
C) It is ineffective because workers are retrained for jobs that don’t exist
D) A) and B)
Section 2: Short Answer Questions (30 points)
Question 1: 7 points total
International Trade
The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for pineapples
(yes! more fruit!). Suppose the world price of pineapples is $2.00 per pineapple.
Price of pineapple
(dollars)
4.00
3.75
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
Quantity of pineapples
demanded (thousands)
2
3
5
8
12
18
26
36
48
64
88
128
180
Quantity of pineapples supplied
(thousands)
10
10
9
8
7
6
5
4
3
2
0
0
0
a) (1 pt.) What is the domestic price without international trade?
(Qd = Qs = 8, so p = $3.25)
b) (1 pt.) With free trade, how many pineapples will the United States import or export?
(import 45 thousand)
c) (1 pt.) What tariff per pineapple would completely eliminate international trade of pineapples to/from the
U.S.?
(autarky free market price = 3.25, so tariff must be 3.25-2.00 = $1.25 per pineapple)
(HINT: Notice that all the quantity numbers in the table are listed in thousands. Thus 9 in the table for
the quantity supplied at a price of $3.50 is written in the questions below as 9 thousand or as 9,000)
d) (1 pt.) Suppose the U.S. government wants to protect the domestic pineapple growers by imposing a tariff.
What tariff per pineapple will set imports to 5 thousand pineapples?
(Qd – Qs = 5 at p = $3.00, so tariff = $3.00 – 2.00 = $1.00 per pineapple)
e) (2 pts.) Suppose the U.S. domestic pineapple growers want revenues to be at least $9,000. (A firm’s revenue
equals price times quantity sold.) What is the minimum amount of a tariff per pineapple that would guarantee
this? What will tariff revenues be under that tariff?
(Revenues = 9,000 at Qs = 4 and p = $2.25; so tariff = $2.25 - $2.00 = $0.25 per pineapple; at p = $2.25,
pineapple imports = Qd – Qs = 36 - 4 = 32, so tariff revenues = $0.25 x 32,000 = $8000)
f) (1 pt.) Suppose the U.S. government replaces an import quota of 21,000 pineapples. If the U.S. government
issues licenses (at no cost) to foreign countries to sell pineapples in the U.S., what will be these countries' total
quota rents?
(Qd – Qs = 21 at p = $2.50, so per-unit quota rent = $0.5 and so TQR = $0.50 x 21,000 = $10,500)
Question 2: 6 points total
Real GDP and Growth
Imagine that you are a macroeconomic analyst at Bank of America. The bank considers opening a new branch in
Romania and you are asked to prepare a general report about Romania's macroeconomic situation. Suppose that
you found the following pieces of information (all growth rates are LN rates).
1990
2007
2008
GDP at 1990 prices
in US$ (millions)
80,277
102,176
109,408 =
80277*EXP(18*0.0172)
GDP at 2007 prices
in US$ (millions)
199,859
246,528
272,456
GDP at 2008 prices
in US$ (millions)
205,855
261,320
=280,548/EXP(0.071)
280,548
“Romanian GDP (at 1990 prices) grew on average by 1.72% every year between 1990 and 2008. This was a
very poor performance compared to Poland, which grew by 3.86%. As a result Polish GDP was 3.6 times higher
than GDP of Romania in 2008 (at 1990 prices).”
“Between 2007 and 2008 Romanian real GDP (at 2008 prices) grew by 7.1%.”
a) (2 pts.) Fill in the missing cells in the table, using information provided to you in the two quoted passages.
b) (1 pt.) What is the (LN) growth rate of nominal GDP between 2007 and 2008? Round to two decimal places.
100*(LN(280,548)-LN(246,528))=12.93
c) (1 pts.) What is the chained real GDP growth between 2007 and 2008? Round to two decimal places. You can
calculate this without using the second filled-in cell in the table.
growth at 2007 prices: (LN(272456)-LN(246528))*100=10%
(10+7.1)/2=8.55
d) (2 pts.) How long (starting from 2008) will it take for Romania to catch up with Poland (in terms of GDP at
1990 prices) if Romania grows 8% per year forever whereas Poland grows perpetually at 4% per year? What
will be the ratio of Polish GDP to Romanian GDP (at 1990 prices) in 2040 (round to two decimal places)?
LN(1)+0.08s=LN(3.6)+0.04s
s=32 years
ratio=1
Question 3: 8 points total
GDP Deflator
Suppose that the following table gives the following table gives the breakdown of nominal GDP between
different products together with their prices (given in brackets) in some southeast Asian country:
2005
2006
quantities
prices
quantities
prices
Computers
24
8
290
2
Food
110
5
100
6
a) (2 pts.) Compute real GDP in both years at 2005 prices.
realGDP2005=8*24+5*110 = 742
realGDP2006=8*290+5*100 = 2820
b) (2 pts.) What is the value of GDP deflator in 2006 (base year 2005)? What is the (LN) inflation rate for 20052006 implied by this value of the GDP deflator? Round to two decimal places.
GDP2006=2*290+6*100=1180
GDPdeflator=100*GDP2006/realGDP2006=100*1180/2820=41.84
inflation rate= LN(41.84/100) * 100 = -87.12%
c) (3 pts.) Compute real GDP in 2005 at 2006 prices. What is the growth rate of the deflator using 2006 prices?
What is the value of the chained GDP deflator growth rate between 2005 and 2006? Round to two decimal
places.
GDP2005(at 2006 prices)=24*2+110*6=708
GDPdeflator2005(base year 2006)=742/708=104.80
growth rate of GDP deflator at 2006 prices = 100*(LN(100/104.80)) = -4.69%
chGDPgrowth=(100*(LN(100/104.80))+100*(LN(41.84/100)))/2 = -45.91%
d) (1 pts.) Suppose prices in this economy grow at 5% per year after 2006. How long will it take for the price
level to triple (take year 2006 as starting point)? Round up to full years.
0.05 = LN(3)/s => s = 22 years
Question 4: 4 points total
Three ways of calculating GDP
The economy of Harappa consists of three firms: A, which produces cotton; B, which buys all of A's cotton and
produces cloth; and C, which buys all of B's cloth and produces shirts. C sells all of its shirts to consumers.
There are no other firms or goods in the economy.
A sells $200 worth of cotton to B. B sells $500 worth of cloth to C. C sells $1000 of cloth to consumers.
Economy-wide, there is $100 of profit, $200 spent on rent, and $100 paid as interest. The rest of total factor
income is paid as wages.
a) (1 pt.) What is the GDP of Harappa?
agg spending = $1000
b) (1 pt.) What is C's value added?
C’s sales – C’s intermediate inputs = $1000 - $500
c) (1 pt.) What is the total wage bill in the economy of Harappa?
agg wage bill = $1000 - $100 - $200 - $100 = $600
d) (1 pt.) If B's wage bill is half of its value added, what percentage of the total wage bill is paid by B?
B’s VA = $500 - $200 = $300
B’s wage bill = 0.5 * $300 = $150
% of agg wage bill paid by B = $150/$600 = 25%
Question 5: 5 points total.
Unemployment Calculations
Demographic Group
Number of Residents
Full-time workers
7000
Part-time workers
2000
Unemployed and looking for work
600
Unemployed and not looking for work due to
discouragement over job prospects
500
Not working due to disability
300
Not working due to retirement
900
Under the age of 16
Total Population
3000
14300
a) (1 pt.) What is the size of the labor force in this economy?
LF = 7000+2000+600 = 9600
b) (1 pt.) Calculate the Labor Force Participation Rate for this economy. Report as a percentage to two decimal
places.
LFPR=(7000+2000+600)/(14300-3000) = 84.96%
c) (1 pt.) Calculate the Employment to Working Age Population Ratio for this economy. Report as a percentage
to two decimal places.
EPR=9000/11300 = 79.65%
d) (1 pt.) Calculate the Unemployment Rate for this economy. Report as a percentage to two decimal places.
UR=600/(7000+2000+600) = 6.25%
e) (1 pt.) Suppose that the natural rate of unemployment is considered to be 5%. What is the rate of
unemployment caused by cyclical factors? Report as a percentage to two decimal places.
CUR=6.25-5 = 1.25%