Economics 211
Macroeconomic Principles
Due date:
1 July 2014
The value of an exam returned late on or before 8 July is 85
points. No exam will be accepted after 8 July 2014.
Exam #2
Name ___________________________________
Instructor: Brian B. Young
The value of this exam is 100 points.
Please show your work where appropriate!
Short Answer
10 points each
1) General Electric makes turbofan jet engines for airliners. It sells some of these engines to Boeing and some to
Airbus. Why are some of these sales counted in GDP while some are not?
2) Refer to http://www.bls.gov/news.release/empsit.a.htm for data from the household Survey (CPS) and to
http://www.bls.gov/news.release/empsit.b.htm for data from the establishment survey (CES).
a. What were the unemployment rate and the labor force participation rate in May?
b. How did nonfarm payrolls change in May?
c. What was the change in the labor force in May?
d. How large was the civilian noninstitutionalized working-age population in May?
e. Was this “good news” or “bad news” for the economy? I.e., did the announcement “beat” expectations or
was it a disappointment?
f. From which survey (household – CPS or establishment – CES) does each number (U3, LFPR, and change in
nonfarm payrolls) originate? Which survey is generally more accurate, CPS or CES?
3)
a)
Personal Consumption Expenditure Gross Private Domestic Investment Government Expenditures Exports Imports
1034.4
230.2
357.7
138.7
122.7
The data above are U.S. expenditures (in billions of U.S. dollars) for the year 1975. Use the expenditures approach
to calculate nominal Gross Domestic Product (GDP) for 1975.
b)
Compensation of Employees (wages)
949
Net Operating Surplus Indirect Taxes less Subsidies (net taxes)
(interest + rent + profits)
351
131
Depreciation
(consumption
of capital)
190
The data above are U.S. income streams (in billions of U.S. dollars) for the year 1975. Use the incomes approach to
calculate nominal Gross Domestic Product (GDP) for 1975.
c)
How much was the “statistical discrepancy” in 1975?
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4) Explain how GDP is measured according to the expenditure approach and the income approach. Why is
depreciation (capital consumption) accounted for when using the income approach to calculating GDP and, yet, not
accounted for when using the expenditure approach to GDP? What other adjustments must be made so that the
two approaches are equal?
5) Price indices:
a) The minimum wage in 1974 was $2.00 per hour. If it were indexed to the CPI, what would the minimum
wage be today?
Hint: Use the BLS inflation calculator to answer this question.
http://www.bls.gov/data/inflation_calculator.htm
b) If the nominal interest rate is 5 percent and the rate of inflation is 7 percent, what is the real rate of interest?
The nominal interest rate is bounded from below by zero. Is the real interest rate bounded from below by
zero?
c) Why does our central bank, the Federal Reserve System, prefer the “core” CPI to the “headline” number?
6) According to the World Economic Forum 2011-12 Global Competitiveness Report, at what stage of development
is the United States? From the same report, at which factors does the United States excel and at which factors is it
deficient? In your own words, i.e., don’t just cut-and-paste out of the text, what does the WEF mean when they
discuss the “macroeconomic environment” and “macroeconomic stability?”
7) Why did Keynes believe that in fact, in the “real” world, nominal wages do tend to be downwardly sticky? Why
would workers refuse a cut in their nominal wage but not resist a reduction in their real wage due to an increase in
the price level?
8) The table below gives data on the production and prices in a small economy. Use 2003 as the base period.
Item
Hot dogs
Pepsi
a)
b)
c)
d)
e)
Data for 2003
Quantity
Price
4
2
$2.00
$1.50
Data for 2004
Quantity
Price
6
3
$2.25
$2.00
What does nominal GDP equal in 2003?
What does real GDP equal in 2003?
What does nominal GDP equal in 2004?
What does real GDP equal in 2004?
What is was the rate of inflation between 2003 and 2004
9) Offer two likely explanations for the decline in the labor force participation rate since 2000. In the coming years,
should we expect the LFPR to rise, decline, or remain steady?
10) “When the unemployment rate is going down, the economy must be improving.” The preceding statement is
ordinarily true; however, it is not always true. Explain how a situation could arise in which the unemployment rate
is going down but the economy continues to deteriorate. You may wish to refer to Why did the unemployment rate drop?,
7 September 2012, Wall Street Journal.
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