COURSE MACROECONOMICS EXAM #1 (Two Hours) SEPTEMBER 29, Section #

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1 COURSE MACROECONOMICS EXAM #1 (Two Hours) SEPTEMBER 29, 2015 NAME TA Section # Section 1 (20 points) Fill in the item from the list below that is most closely associated with each of the twenty phrases that appear on the next two pages. Note: Some of the listed items may provide the correct answer for more than one of the phrases that follow. Conversely, many of the items listed do not correspond to any of the phrases on the next two pages. A tranche mortgages J.K. Galbraith Absolute advantage John Maynard Keynes Adam Sandler Labor force Adam Smith Labor force participation rate Additive Separability Labor Productivity Aggregate demand Long term sustainable growth Aggregate expenditure model Malthusian dilemma Art Okun Marginal analysis Business cycles Marginal propensity to consume Complements Marginal propensity to save Construction employment Marginal employment rate Comparative advantage Microeconomics Consumer Price Index Milton Berle CPI: Core Milton Friedman CPI: Core Services National Income CPI: Owners Equivalent Rent Net National Product Deflation Okun s Law Depreciation Opportunity Costs Disinflation Paul Samuelson Expansion Payroll Employment Final sales PCE deflator Final sales to domestic purchasers Production possibilities frontier GDP deflator Property Rights GNP Quit Ratio Great Recession Real GDP Great Depression Real GNP Great Moderation Recession Gross Domestic Product Seasonal Adjustment Household employment survey Substitutes Initial unemployment claims ` Unemployment rate Invisible hand U6 unemployment rate 1

2 Section 1 (20 points) 1. If the price of item A falls, consumption of item B goes up. Items A and B are what? 2. The sum of the number of those who have jobs plus the number of those who are looking for jobs. 3. An economist who posited in the 1930s that sometimes free markets fail and government intervention is needed to restore economic health. 4. A formula that allows us to link changes in the unemployment rate to the growth rate for real GDP. 5. Rising output with no increase in labor hours is a consequence of an increase in what? 6. Two or more consecutive quarters of negative growth of real GDP. 7. A U.S. inflation index that allows for the fact that consumers change their mix of purchases over time. 8. The dollar value of the flow of all final goods and services produced by U.S. entities. 9. The macroeconomic pattern of economic recovery/expansion/recession that is a recurring feature of economies around the world and throughout history. 10. A measure of the increase in saving that will occur, from a given increase in income. 2

3 11. An estimate reflecting the sum of expectations for long term gains in productivity and expectations for the long term growth in the labor force. 12. A period in which prices are rising but the rate at which prices are increasing is slowing. 13. A depiction of the maximum possible combinations of output an economy can produce, given available resources and current technology. 14. The name for the period of deep economic decline experienced in the 1930s. 15. A key piece of social infrastructure that was instituted in China in the 1980s, and played a key role in china s economic miracle. 16. A statistical technique used to allow economists to compare December retail sales and January retail sales. 17. An index of consumer prices that excludes food and energy prices. 18. a tally of individuals that have jobs at U.S. companies. 19. The difference between gross and net investment. 20. There are two kinds of economists, those who know they don t know, and those who don t know they don t know. Who said this? 3

4 SECTION 2 (12 POINTS) In 2015 a total of 3 million bicycles were sold in the US for $200 each. Following the U.S. Presidential election in 2016 a big increase in funding for bike lanes is enacted. Suppose that by 2018 there are 6 million bikes sold at $250 each. 1. What curve(s) shift in 2018? (1 point) (a) Demand Curve (b) Supply curve (c) Demand and Supply curve 2. Label the graph below and show the shift in the relevant curve(s) (3 points) 4

5 3. Did the change in bicycle production reflect movement move along the supply or demand curve? (1 point) 4. What is likely to happen to the supply curve for bicycle helmets given this change in the bicycle market? (Explain briefly) (2 points) 5. Are bicycles and bicycle helmets substitutes or complements? (1 point) 6. Suppose that at $30/helmet half of all bicycles sold in the US would be sold with a helmet. At $40/helmet only one third of bicycles would be sold with a helmet. No other helmets are sold in the US. Draw the demand curves for bike helmets in both 2015 and (4 points) 5

6 Section 3 (16 points) Q1:16 Q2:16 Q3:16 Q4:16 Q1:17 CPI 2.20% 2.30% 2.70% 2.90% 1.00% Core CPI 2.90% 3.20% 4.00% 4.75% 2.00% non-farm payrolls (Q/Q, annualized) 1.32% 1.30% 0.9% 0.75% 0.90% GDP (Current $, Q/Q, annualized)??? 4.30% 3.90% 4.25% 3.5% Real GDP, (Q/Q,annualized) 1.20% 2.0% 1.20% 1.35% 2.50% Real Consumption, (Q/Q/, annualized) 1.30% 2.60% 3.50% 1.80% 1.25% real exports-real imports ( real $, trillions) USE The INFO ABOVE TO ANSWER THE FOLLOWING: 1) Over the four quarters of 2016, (choose 1): (a) Inflation rose despite plunging food and energy prices (b) Inflation held steady despite surging food and energy prices (c) A mild disinflation unfolded. (d) Inflation rose mainly due to surging food and energy prices 2) Given the information available in the table provided, what is your best guess for the quarterly annualized pace of advance for nominal GDP, over the first quarter of 2016, (choose 1): (a) 3.00% (c) 3.75% (b) 3.4% (d) 4.10% 6

7 3) Use the information on prices to calculate the quarterly annualized rate of change for food and energy prices for the first quarter of (show work) 4) In the first quarter of 2017, real GDP growth rose at a 2.5% annualized rate. Yet real consumption, around 2/3 of GDP, rose at a 1.25% annualized rate. Use a piece of data provided to explain how a quarter GDP growth can be 2.5% despite such weak growth in real consumer spending? 7

8 Section 4 (12 points) Fastolia s economists offer the following long term projections for key macroeconomic variables for their Nation: Expected long run annual growth rate for population = 10% per year Expected long run annualized growth rate for labor force = 4% per year Expected long run annualized growth rate for labor productivity = 2% per year Okun s Coefficient = :Q4 levels for key economic variables are as follows: U-3 Unemployment: 10% LFPR: 80% Prime working age LFPR: 100% (Use the data provided above to answer the next 4 questions; Show your work) 1. What is Fastolia s expected long term sustainable growth rate (LTSG)? 2. Use Okun s Law to calculate the growth rate for real GDP, Q4:2014 to Q4:2015, if the unemployment rate averages 8% in Q4:2015? 3. If the economists long run projections are correct for the next four quarters, roughly speaking, what will be the value for the LFPR, in one year s time? a. 91% b. 86% c. 76% d. 66% 8

9 Section 5 (20 points) Consider the following data for Akerlof, a nation with two products: Time (in quarters) Umbrellas Umbrellas I-pads I-pads Unemployment Rate Price Quantity Price Quantity 2015:Q4 $ $ % 2016:Q2 $ $ % 2019:Q4 $ $ % 1. What is the quarterly level of total expenditures in 2015:Q4? What is annualized nominal GDP in 2015:Q4 and in 2019:Q4? Calculate annualized real GDP for both 2015:Q4 and 2019:Q4. Use 2015:Q4 as the base. 9

10 4. Write the equation to calculate the annualized growth rate of nominal GDP between 2015:Q4 and 2019:Q4? (only write it, don t solve it) 5. From 2015:Q4 to 2019:Q4 which grew more quickly, real GDP or nominal GDP? 6. Based upon you previous answer, the economy, 2015:Q4 to 2019:Q4 experienced: a. Rising inflation b. disinflation c. deflation 10

11 Section 6 (20 points) Consider a closed economy (no exports or imports) with these characteristics: Autonomous consumption = 2 MPC = 0.5 Planned investment = 1 Government expenditures = 1 1. Label the two axes. Draw the line representing aggregate expenditure/income equilibrium. (3 points) 2. Draw: a) consumption b) consumption + planned investment c) consumption + planned investment + government expenditures d) identify the AE line. (4 points) 3. Identify on the chart the equilibrium value for income and AE. (2 points) 11

12 4. Derive, algebraically, the equilibrium level for income. (4 points) 5. Suppose in period 1 income equals 6. What level of AE corresponds to an income level of 6? And what will be the resultant level for I u? (show work) (4 points) 6. What do you suppose will happen to planned investment in period 2? Will this move the economy closer or further away from equilibrium? (3 points) 12

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