Final Exam. Friday, July 7. 1 hour, 30 minutes

Transcription

1 San Francisco State University Michael Bar ECON 102 Summer 2017 Final Exam Friday, July 7 1 hour, 30 minutes Name: Student ID: Instructions 1. This is closed book, closed notes exam. 2. No calculators or electronic devices of any kind are allowed. 3. Show all the steps and calculations. 4. If you need more space, use the back of the page. 5. Fully label all graphs. 6. Use a ruler to draw neat graphs. Good Luck 1

2 1. (10 points). Two countries produce avocado (X) and cars (Y). The time required for an average worker to produce one unit of each good is given in the next table. Time required (in hours) to Country make one unit Opportunity cost of one unit X Y X Y A 1 4 1/4 4 B /5 5 a. Calculate the opportunity costs of X and Y for each country, and complete the above table. b. Which country has absolute advantage in X? In Y? A has absolute advantage in X and A has absolute advantage in Y. c. Which country has comparative advantage in X? In Y? B has comparative advantage in X and A has comparative advantage in Y. d. Both countries can gain from trade if A reallocates resources from X to Y and B reallocates resources from Y to X. 2

3 2. (3 points). Economists assume that all the people take any action (circle the correct answer): a. In a random and unpredictable way b. In a selfish manner, and are never influenced by feelings and emotions c. If their perceived cost from taking the action is zero d. If their perceived benefits from taking the action are greater or equal to their perceived cost from taking the action 3. (3 points). Which statement about scarcity is correct? (circle the correct answer): a. Scarcity forces us to make choices b. Scarcity is the same as poverty c. Scarcity doesn t affect the super-wealthy d. Scarcity only affects individuals, but not governments 4. (3 points). The statement college students deserve tuition-free education is a. A positive statement b. A normative statement c. An example of scarcity d. An example of discretionary fiscal policy 3

4 5. (10 points). The next table presents data from the National Income and Product Accounts of some country. Personal Consumption Expenditures 6,000 Gross Investment 2,000 Government Consumption Expenditures 1,500 Exports 500 Imports 600 Compensation of Employees 4,000 Net Interest 1,000 Rental Income 500 Proprietors income 800 Corporate profits 1,200 Indirect business tax net of subsidies 500 Consumption of fixed capital 1,000 Statistical Discrepancy? a. (3 points). Based on the above data calculate the GDP using the expenditure approach. GGGGGG = CC + II + GG + XX IIII = 6, , , = 9,400 b. (4 points). Calculate the GDP using the Income approach. GGGGGG = WW + IIIIII + RRRRRRRR + ππ + TT ii + DDDDDD = 4, , ( ,200) ,000 = 9,000 c. (3 points). A family buys a new home. This transaction will be recorded in the NIPA as part of (circle the correct answer): i. Consumption and Imports ii. Imports only iii. Consumption and Investment iv. None of the above 4

5 6. (8 points). The following table contains data from the labor market of some country (in millions). Civilian noninstitutional population 100 Civilian labor force 50 Employed 47 Unemployed 3 Not in the labor force 50 a. Complete the above table. b. Find the unemployment rate in this country. Express your answer in %. UUUUUUUUUU. RRRRRRRR = #UUUUUUUUUU #LLLLLLLLLL FFFFFFFFFF = 3 50 = 6% c. Find the labor force participation rate in this country. Express your answer in %. LLLLLLLL = #LLLLLLLLLL FFFFFFcccc #CCCCCCCCCCCCCCCC NNNNNNNNNNNNNN. PPPPPP. = = 50% d. Suppose that 4% of unemployed became discouraged and stop looking for jobs. As a result (circle the correct answer): i. Unemployment rate decreases and labor force participation rate increases ii. Unemployment rate increases and labor force participation rate decreases iii. Both unemployment rate and labor force participation rate increase iv. Both unemployment rate and labor force participation rate decrease 5

6 7. (10 points). Consumer Price Index (CPI) at the end of 2017 is 208, and at the end of 2016 the CPI was 200. a. (3 points). Calculate the inflation rate in iiiiff 2017 = = = = 4% b. (3 points). Suppose that nominal interest rate in 2017 is 1%. Find the approximate real interest rate in rr ii ππ = 1% 4% = 3% c. (4 points). Suppose that you earned $50,000 in 2016, and got a raise of $2,000 in What is the approximate percent change in your real wage? The nominal wage growth is %ΔΔΔΔ = (52 50)/50 = 2/50 = 4% Thus, the approximate change in real wage is %ΔΔ ww %ΔΔΔΔ %ΔΔΔΔ = 4% 4% = 0% pp 6

7 8. (6 points). Suppose that the U.S. economy is described by the macroeconomic model consisting of a production function and a labor market. Illustrate the impact of influx of immigrants into the country on the potential real GDP, equilibrium real wage and equilibrium employment. YY YY 2 Production function YY 1 LL 1 LL 2 LL ww LL SS Labor market ww 1 ww 2 LL DD LL 1 LL 2 LL Potential real GDP and employment increase, and equilibrium real wage decreases. 7

8 9. (12 points). Suppose that real GDP of a country grows at 4% per year and the population grows at 3%. a. What is the growth rate in standard of living? %ΔΔ RRRRRRRR %ΔΔ(RRRRRRRR) %ΔΔ(PPPPPP) = 4% 3% = 1% PPPPPP b. Using the rule of 70, approximately how many years will it take the real GDP to double? tt dddddddddddd 70 4 = 17.5 yyyyyyyyyy c. Using the rule of 70, approximately how many years will it take the standard of living to double? tt dddddddddddd 70 1 = 70 yyyyyyyyyy d. Draw a graph of a country s Production Possibilities Frontier (PPF), and illustrate the effect of technology improvement in both goods (XX and YY). YY PPF PPPPFF 1 PPPPFF 2 XX 8

9 10. (5 points). Using a fully labeled diagram of a loanable funds market, illustrate the crowding out effect of an increase in government deficit. Clearly indicate what happens to the equilibrium real interest rate and to equilibrium investment. Assume no Ricardo-Barro effect. rr Loanable funds market LLFF SS The demand for loanable funds increases. The real interest rate goes up, and private investment goes down (from II 1 to II 2 ). rr 2 rr 1 C.O. II 2 II 1 LLFF DD LLLL 11. (3 points). Calculate the interest rate on a bond that trades at $98 and has face value of $100. Write the formula that you would plug in a calculator, without providing the final answer. ii = FFFF PP PP = % 12. (3 points). When the price of a bond decreases, the interest rate on the bond increases/decreases (circle the correct answer). 9

10 13. (8 points). Using the AS-AD model, answer the following questions a. On a fully labeled diagram, illustrate an economy in recession, and indicate the recessionary gap. AS-AD PP LLLLLLLL AAAA Recessionary gap = YY ff YY. The fiscal stimulus shifts the aggregate demand from AADD 1 to AADD 2. PP 2 PP 1 AADD 2 AADD 1 YY rec. gap YY ff RRRRRRRR b. On the above graph illustrate the effect of fiscal policy which successfully ends the recession. c. Suppose that the size of the recessionary gap is 500, and the government expenditure multiplier is 2. What should be the size of the fiscal stimulus, which will end the recession and will restore full employment? ΔΔΔΔ = mm kk ΔGG 500 = 2 ΔGG ΔGG = =

11 14. (5 points). Suppose that that real GDP in the Philippines is growing at 6% per year, and the velocity of circulation is constant. Using the quantity theory of money, find the approximate growth rate of the money supply that would achieve inflation rate of 2% per year. The quantity Theory of Money in approximate growth rates: MM + VV = PP + YY MM + 0% = 2% + 6% = 8% 15. (5 points). Suppose that the central bank of New Zealand conducts its monetary policy by setting the interest rate according to the Taylor rule: ii tt = ππ tt + rr tt + 0.5(ππ tt ππ tt ) yy tt yy tt 100 rr tt - long-run real interest rate ππ tt - target inflation rate, ππ tt - actual inflation yy tt - potential real GDP, yy tt - actual RGDP a. Suppose that the economy is at full employment, rr = 3%, and the actual inflation is equal to the target of 2%. Calculate the recommended interest rate by the Taylor rule. yy tt ii tt = ππ tt + rr tt % % = 2% + 3% = 5% b. Now suppose that inflation increased to 3%, all else remaining the same. Calculate the recommended interest rate by the Taylor rule. ii tt = ππ tt + rr tt + 0.5(ππ tt ππ tt ) = 3% + 3% + 0.5(3% 2%) = 6.5% 11

12 16. (3 points). Suppose that iphones are traded goods. The price of an iphone in the U.S. is $600 and the price of the same iphone in Japan is 60,000. What should be the exchange rate between the $ and if Purchasing Power Parity holds for iphones? Definition of PPP: $PP ee $ = PP That is, 100 Yen per dollar. $600 ee $ = 60,000 ee $ = 60, = 100 $ 17. (3 points). Suppose the U.S. inflation 4% and inflation in China is 7%. What does our theory predict about the exchange rate between the two currencies? Circle the correct answer. a. The U.S. dollar is predicted to appreciate by 8%. b. The U.S. dollar is predicted to appreciate by 4%. c. The Chinese Yuan is predicted to depreciate by 3%. d. The Chinese Yuan is predicted to depreciate by 12%. e. None of the above. 12