Principles of Macroeconomics (Econ 001)
Drake University, Fall 2006
William M. Boal
Signature:
Printed name:
MIDTERM EXAMINATION #2 VERSION A
"National Income and Product Accounts"
October 9, 2006
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing
calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be
correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points
are 100.
I. Multiple choice: Circle the one best answer to each question. [1 pt each, 21 pts total]
(1) Over time, a graph of real GDP shows
a. long-run growth.
b. short-run fluctuations.
c. both (a) and (b).
d. neither (a) nor (b).
(2) Which of the following shows a strong upward
trend for the U.S. over the last century?
a. The unemployment rate.
b. Real GDP per capita.
c. The inflation rate.
d. The interest rate.
(3) In the United States, GDP, population, and the
price level are all rising. Which must be growing the
slowest?
a. real GDP.
b. nominal GDP.
c. real GDP per capita.
d. nominal GDP per capita.
(6) In recent years, Japan experienced a negative
inflation rate of around -1%. This is an example of
a. reflation.
b. recession.
c. disinflation.
d. deflation.
(7) Suppose a bank pays an interest rate of 5 percent
on deposits and the expected inflation rate is 3
percent. The real rate of interest is
a. 2 percent.
b. 3 percent.
c. 5 percent.
d. 8 percent.
(8) Monetary policy concerns
a. taxes.
b. government spending.
c. government borrowing.
d. the money supply.
(4) The period beginning at the peak of a business
cycle and ending at the next trough is called
a. a boom.
b. an expansion.
c. a recovery.
d. a recession.
(9) Figures for GDP and its components are
computed for the United States by the
a. Bureau of Labor Statistics.
b. Department of the Treasury.
c. Bureau of Economic Analysis.
d. Federal Reserve.
(5) At the trough of a business cycle, actual GDP is
a. above potential GDP.
b. below potential GDP.
c. equal to potential GDP.
d. cannot be determined from information given.
(10) Consumption spending in the national accounts
does not include
a. purchases of necessities like food and clothing.
b. purchases of new houses.
c. spending on internet access.
d. spending on visits to doctors and dentists.
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2006
Midterm Examination #2 Version A
Page 2 of 6
(11) Investment spending in the national accounts
does not include purchases of
a. stocks and bonds.
b. new factories.
c. new homes.
d. business software.
(17) The rate at which you can buy euros with your
dollars is called the
a. market exchange rate.
b. purchasing-power parity exchange rate.
c. real interest rate.
d. trade balance.
(12) Government purchases in the national accounts
do not include
a. salaries of elected officials.
b. pay for members of the armed services.
c. social security payments.
d. school construction.
(18) In markets for foreign exchange, demand for
U.S. dollars comes in part from
a. companies in the U.S. who export goods to other
countries.
b. companies in the U.S. who import goods from
other countries.
c. both of the above.
d. none of the above.
(13) Consumption spending in the U.S. national
accounts is
a. less than one-quarter of GDP.
b. between one-quarter and one-half of GDP.
c. between one-half and three-quarters of GDP.
d. more than three-quarters of GDP.
(14) Suppose a pizzeria produces and sells $50,000
of pizzas using ingredients it purchases for $5,000;
workers it hires for $25,000; and a store it leases for
$10,000. The value added by the pizzeria is
a. $10,000.
b. $20,000.
c. $45,000.
d. $50,000.
(15) According to the income approach to computing
GDP, the profits from an American company's
operations in Germany should
a. be included in U.S. GDP but not in Germany's
GDP.
b. be included in Germany's GDP but not in U.S.
GDP.
c. be included in both U.S. GDP and Germany's
GDP.
d. not be included in U.S. GDP or Germany's GDP.
(19) If a basket of goods bought by a typical
consumer costs €100 (100 euros) in Europe and costs
$125 in the United States, then the purchasing-powerparity exchange rate is
a. €0.80 per U.S. dollar.
b. €1.25 per U.S. dollar.
c. €80 per U.S. dollar.
d. €125 per U.S. dollar.
(20) Suppose the exchange rate for British pounds is
£0.50 per U.S. dollar. Then a book which cost £10
would cost how much in U.S. dollars?
a. $0.50.
b. $10.
c. $20.
d. $50.
(21) If the exchange rate was 105 Japanese yen per
U.S. dollar a year ago, and the rate is 115 Japanese
yen today, then the
a. dollar has depreciated against the yen.
b. yen has appreciated against the dollar.
c. both of the above.
d. none of the above.
(16) The largest share of national income is
a. labor income.
b. interest income.
c. dividends.
d. rental income.
II. Problems: Insert your answer to each question in the box provided. Feel free to use the margins for scratch
workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for
questions in this section.
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2006
Midterm Examination #2 Version A
Page 3 of 6
(1) [GDP: 16 pts] Consider each of the following items. Should it be counted as part of U.S. GDP for the year
2006—yes or no? If yes, in which spending component of GDP—consumption (C), investment (I), government
purchases (G), or net exports (X)—does it belong? If no, explain why not.
Part of U.S. GDP for
If YES, then which spending component
2006? (YES or NO)
(C, I, G, or X)? If NO, why not?
a. A Boeing passenger jet, sold to Japan
Air Lines.
b. A share of Microsoft stock, sold to a
person saving for retirement.
c. A new computer system, sold to a
doctor's office.
d. A 1955 Ford Thunderbird, sold to Bill
Gates.
(2) [Components of GDP: 16 pts] The imaginary country of Concrete Land has just four industries: the Birdbath
Industry, the Raw Concrete Industry, the Building Industry and the Road Construction Industry. There are no other
goods and no foreign trade. In a recent year:

The Building Industry produced and sold $50 billion of concrete buildings (a capital good) to each industry
(including itself) for a total of $200 billion in sales.

The Raw Concrete Industry produced and sold $50 billion of raw concrete to the Birdbath Industry, $50 billion
to the Building Industry, and $50 billion to the Road Construction Industry for a total of $150 billion in sales.

The Birdbath Industry produced and sold $500 billion of birdbaths to consumers.

The Road Construction Industry produced $100 billion of roads for the government.
a. Compute the spending components of Concrete
Land’s GDP.
Consumption (C)
$
billion
b. Compute value added by each industry in
Concrete Land.
Building Industry
$
billion
Investment (I)
$
billion
Raw Concrete Industry
$
billion
Government
purchases (G)
Total GDP (Y)
$
billion
Birdbath Industry
$
billion
$
billion
Road Construction
Industry
$
billion
(3) [Spending components of GDP: 4 pts] The table below shows 2001 data for the United States as reported by the
Bureau of Economic Analysis. [Hint: Some of the data are extraneous and not needed for solving this problem.]
Business fixed investment
$1.18 trillion
Residential investment
$0.47 trillion
Compensation of employees
$5.94 trillion
Change in private inventories
- $0.03 trillion
Depreciation ("Consumption of Fixed Capital")
$1.08 trillion
Corporate profits
$0.77 trillion
a. Compute gross investment (I)
b. Compute net investment
$
$
trillion
trillion
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2006
Midterm Examination #2 Version A
Page 4 of 6
(4) [Spending components of GDP: 6 pts] The table below shows 2003 data for the United States as reported by the
Bureau of Economic Analysis. [Hint: Some of the data are extraneous and not needed for solving this problem.]
Gross investment
$1.66 trillion
Government purchases
$2.09 trillion
Imports
$1.54 trillion
National defense
$0.50 trillion
Exports
$1.04 trillion
Corporate profits
$0.99 trillion
Consumption
$7.70 trillion
a. Compute net exports (X).
$
$
$
b. Compute GDP
c. Compute national saving (S).
trillion
trillion
trillion
(5) [Real GDP and inflation: 12 pts] The following table shows nominal (or “current-dollar”) GDP and the growth
rate of real GDP for the U.S. Compute real GDP, the GDP price index, and the rate of inflation and fill in the
unshaded boxes below.
GDP price index
Nominal GDP
Real GDP
or price deflator
Rate of inflation
(billions of Growth rate of
(billions of 1998
(base year = 1998) (to the nearest tenth of
Year
dollars)
real GDP
dollars)
to the nearest tenth
a percent)
1998
1999
2000
$8,747
$9,268
$9,817
$8,747
4.4%
3.7%
100.0
$
$
(6) [Inflation and the CPI: 2 pts] According the U.S. Bureau of Labor Statistics, a gallon
of gasoline cost $0.63 in January 1978, when the CPI was 62.5. The CPI is now about
204. Compute the price of a gallon of gasoline in 1978 in today's dollars to the nearest
cent.
(7) [Inflation: 2 pts] According the U.S. Bureau of Labor Statistics, the CPI was 183.9 in
July 2003 and 189.4 in July 2004. Compute the annual rate of inflation from July 2003 to
July 2004 to the nearest tenth of a percentage point.
%
%
$
%
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2006
Midterm Examination #2 Version A
Page 5 of 6
(8) [GDP and real GDP: 16 pts] In an imaginary country, only two final goods are produced—food and clothing—
as shown in the following table.
Year
2004
2005
Food
Price
Quantity
$1
200
$1
240
Clothing
Price
Quantity
$2
100
$3
100
Use the data above to complete the following table. Compute the growth rate of real GDP, the level of real GDP,
and the GDP deflator using the same method used by the U.S. Bureau of Economic Analysis.
2004
GDP (also called "nominal
GDP" or "current-dollar GDP")
Real GDP (base year = 2004)
GDP deflator or price index, to
the nearest tenth (base year =
2004)
2005
Growth rate
$
$
%
$
$
%
100.0
%
Principles of Macroeconomics (Econ 001)
Drake University, Fall 2006
Midterm Examination #2 Version A
Page 6 of 6
III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). Full credit
requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate
spelling. [5 pts]
(1) Could the economy experience a recession while nominal GDP continues to grow? Explain why or why not.
(2) Suppose people took better care of their health and lived 10 more years after retirement than they do now.
Would GDP increase, decrease, or be unaffected? Justify your answer.
Which question are you answering, (1) or (2)? _________ . Please write your answer below:
[end of exam]