Dr. Alston
Economics 2020 - Accelerated
First Midterm
Spring Semester, 2002
NAME:__________________________________
Problem #1 (10 points)
Use the following table to calculate nominal GDP and real GDP, assuming the only two goods produced in
the economy are computers and cars AND that year 1 is the base year.
Year 1
Good
Price
Quantity
(millions)
Price
Year 2
Contribution to Nominal GDP
($millions)
Quantity
(millions)
Year 1
Cars
$25,000
5
$20,000
4
Comp.
$ 4,000
20
$5,000
25
Year 2
Contribution to Real GDP
($millions)
Year 1
Year 2
TOTAL
Nominal GDP from year 1 to year 2
.
Real GDP from year 1 to year 2
The price level (implicit price deflator) in Year 1 was
The price level (implicit price deflator) in Year 2 was
(increased/decreased - circle which) by $
(increased/decreased -circle which) by $
. (Show your work)
(Show your work).
The rate of (inflation / deflation - circle which has occurred) between year 1 and year 2 was
(Show your work)
%.
Problem #2 (5 points each): Carefully define each of the following terms:
2a. Spending in the Circular Flow Model
(use a properly labeled diagram to illustrate the model with personal consumption,
private investment, government purchases, net exports, and factor incomes):
2b. Gross Domestic Product, National Income, and Disposable Personal Income (Illustrate
by showing two different ways to calculate NI: Hint: one uses the factor income approach, the other
uses the expenditure approach). You're answer should clearly show the relationship between GDP,
NI, and DPI in the National Income and Product Accounts.
2c. Describe the consumer price index and the implicit price deflator; what is the major
difference between the two price indices.
2d. Short-run Equilibrium with a recessionary gap:
(illustrate using an AD/SRAS/LRAS)" diagram) :
Problem #3 (10 points)
Suppose the economy has a recessionary gap. We know that if we do nothing, the economy will close
the gap on its own. Alternatively, we could arrange for an increase in aggregate demand (say, by
increasing government spending) to close the gap. How would your views about the degree of price
stickiness in the economy influence your views on whether such a policy would be desirable? Use
Graph A to illustrate the situation if you believe prices and wages tend to be very flexible in the short
run. Use Graph B to illustrate the situation if you believe prices and wages tend to be quite rigid in
the short run.
Graph A
Graph B
4a.
(5 points) Using a graph of the Labor Market, a graph of the economy-wide Production Function,
and a graph of real GDP and the Price Level, show how to derive the Long-Run Aggregate Supply
Curve. Carefully label all axes and curves. Explain in words the relationship between each of the
graphs (i.e., explain your derivation of the LRAS).
4b.
(5 points) Explain and illustrate the impact of a technological change that increases the economy's
output at each level of labor input in the long run, using properly labeled diagrams similar to those
in Problem 4a.