COURSE EXAM #1 (Two Hours) OCTOBER 02, Section # Labor force participation rate. CPI: Owners Equivalent Rent

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1 COURSE EXAM #1 (Two Hours) OCTOBER 02, 2018 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 Additions to output 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 employment rate Construction employment Microeconomics Comparative advantage Milton Friedman Consumer Price Index National Income CPI: Core Net Exports CPI: Core Services Net National Product CPI: Owners Equivalent Rent Nominal GDP Deflation Nominal GNP Depreciation Opportunity Costs Disinflation Paul Samuelson Expanded loanable funds model Payroll Employment Final sales PCE deflator Final sales to domestic purchasers Production possibilities frontier GDP deflator Quit ratio GNP Real GDP Great Recession Real GNP Great Depression Ricardian Equivalence Great Moderation Seasonal Adjustment Gross Domestic Product Statistical discrepancy Household employment survey Structurally Unemployed Imputed output addition ` Unemployment rate! 1

2 Initial unemployment claims Invisible hand U6 unemployment rate Value added Section 1 (20 points) Labor Force 1. The sum of the number of those who have jobs plus the number of those who are looking for jobs. John Maynard Keynes 2. An economist who posited in the 1930s that, at times, free markets fail and government intervention is needed to restore economic health. 3. The Value-added incremental contribution to GDP that a manufacturer of knives embeds into a roll of steel. 4. Labor Productivity Rising output with no increase in labor hours is a consequence of an increase in what? Recession 5. Two or more consecutive quarters of negative growth of real GDP. 6. A PCE Deflator U.S. inflation index that allows for the fact that consumers change their mix of purchases over time. 7. GNP The or Nominal GNP dollar value of the flow of all final goods and services produced by U.S. entities. 8. The Business Cycles macroeconomic pattern of economic recovery/expansion/recession that is a recurring feature of economies around the world and throughout history. 9. Final A Sales measure of total U.S. final expenditures that excludes inventory investment.! 2

3 10. The Ricardian Equivalence assertion that consumers given tax cuts will save the funds, anticipating that the government will be forced to raise their taxes in the future. 11. Long An Term Sustainable Growth estimate reflecting the sum of expectations for long-term gains in productivity and expectations for the long-term growth in the labor force. 12. Analysis Marginal that involves comparing the extra benefit you receive from consuming an additional unit of one item. 13. A Production Possibilities Frontier depiction of the maximum possible combinations of output an economy can produce, given available resources and current technology. 14. The Net Exports component of AE that represents sales of goods and services to foreigners, minus domestic purchases of foreign goods and services. Statistical Discrepancy 15. The Depreciation difference between Net National Product and National Income. 16. Adam Invisible Hand Smith wrote about this unobservable force in The Wealth of Nations. 17. Jobless Structurally Unemployed individuals who cannot find employment because they lack the skills that employers want in a candidate. 18. a Payroll Employment tally of individuals that have jobs at U.S. companies. 19. The Depreciation difference between gross and net investment.! 3

4 20. There J.K. Galbraith 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?! 4

5 SECTION 2 (12 POINTS) In 2017 a total of 2 million electric scooters were sold in the US for $500 each. In 2018 a national scooter infrastructure plan is implemented in all large cities. A large number of dedicated lanes are built, making scooters a more attractive commuting option. Suppose in 2019 there are 4 million electric scooters sold at $600 each. 1. Did the supply or demand curve for electric scooters shift? (1 point) Demand shifts up as the construction of infrastructure makes it more attractive to use scooters. Other correct answers: demand curve shift to the right, shifts outward 2. Label the graph below and show the shift in the relevant curve (3 points)! 5

6 Price New Demand Curve Supply $500 Demand 2 million Quantity 3. Did electric scooter production move along the supply or demand curve? (1 point) Move along the supply curve as demand curve shifts 4. What is likely to happen to the supply curve for helmets given this change in the electric scooter market? (2 points) An upward shift in demand curve for helmets. A move along the supply curve of helmets if the demand for helmets increases given a fixed price. Complements with scooters.! 6

7 5. Are electric scooters and helmets substitutes or complements? (1 point) Complements 6. Suppose that at $40/helmet half of all electric scooters sold in the US would be sold with a helmet. At $60/helmet only one third of electric scooters would be sold with a helmet. No other helmets are sold in the US. Draw the demand curves for helmets in both 2017 and (4 points) $60 $ /3 ml 1 mil 4/3 mil 2 mil Section 3 (20 points) Three countries, Akerlof, Bertrand and Chetty, produce both wheat and sunflower oil. The number of square miles of farmland for each country is different, and varying climates mean the productivity per square mile of farmland is also different in each! 7

8 country. The table below gives some basic stats on each country, to be use in the questions following. Akerlof Bertrand Chetty Total Farmland 100 sq miles 150 sq miles 50 sq miles Wheat/sq mile 4 tons 10 tons 8 tons Sunflower oil/sq mile 8 barrels 2 barrels 12 barrels 1. What is the maximum amount of wheat each country can produce if all farmland is used for growing wheat? (3 points) Akerlof: 100*4=400 Bertrand: 150*10 =1500 Chetty: 50*8 = What is the maximum amount of sunflower oil each country can produce if all farmland is used for growing sunflowers? (3 points) Akerlof: 100*8 =800 Bertrand: 150*2 =300 Chetty: 50*12 = What is the opportunity cost of one barrel of sunflower oil in each country? (3 points) Akerlof: 4/8 =0.5 Bertrand: 10/2 =5 Chetty: 8/12=2/3 = 0.66 in units:tons of wheat 4. Define absolute advantage and state which country has the absolute advantage in Sunflower oil production? (2 points) Absolute advantage: A has AA over B in producing one good if it produces more of the good using same amount of inputs. Akerlof has the absolute advantage in producing Sunflower oil as it produces the most among three countries, 800. Notes: Chetty can be also correct if measured by per sq mile.! 8

9 ! 5. Define comparative advantage and state which country has the comparative advantage in wheat production? (2 points) Comparative Advantage: A has CA over B in producing good X relative to Y if the opportunity cost of producing X is lower than B. Bertrand has the comparative advantage in producing wheat than the other two countries. 6. Draw the PPF for each country separately below (3 points) Wheat 1500 Bertrand 400 Chetty Akerlof Sunflower Oil 7. Draw the combined PPF for all countries when there is free trade between them. (4 points) Wheat Sunflower Oil

10 Section 4 (8 points) Ricardoland s economists offer the following long term projections for key macroeconomic variables for their Nation: Expected long run annual growth rate for population = 5% per year Expected long run annualized growth rate for labor force = 2% 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: 8% LFPR: 70% Prime working age LFPR: 100% (Use the data provided above to answer the next 3 questions; Show your work) 1. What is Ricardoland s expected long-term sustainable growth rate (LTSG)? (2 points) Annual LTSG = annual growth rate for labor force + annual growth rate for labor productivity = 2%+2% = 4% 2. Use Okun s Law to calculate the growth rate for real GDP, Q4:2017 to Q4:2018, if the unemployment rate averages 6% in Q4:2018? (4 points) One year difference between 18Q4 and 17Q4 Then by Okun s Law: Real ((Y_18Q4/Y_17Q4)-1)*100 GDP_18Q4 - Real GDP_17Q4 = LTSG - Coefficient (UE_18Q4 - UE_17Q4) That is Real GDP_18Q4 ((Y_18Q4/Y_17Q4)-1)*100 - Real GDP_17Q4 = 4% - 2 * (6% - 8%) = 8% 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? (2 points) a. 84% b. 76% c. 68% d. 61% Current LFPR = 70 /100 Without loss of generality, assuming current population = 100 and labor force = 70 Next year: Population grows by 100 * 5% = 5, population = 105 Labor force grows by 70 * 2% = 1.4, labor force = 71.4 Next year LFPR = 71.4/105 approximately equal to 68%! 10

11 Section 5 (20 points) Consider the following data for Keynesania, a nation with two products: Time (in quarters) Gramophon e Gramophon e Price Quantity Price Quantity Bentley Bentley Unemploymen t Rate 1925:Q4 $ $ % 1926:Q2 $ $ % 1929:Q4 $ $ % 1. What is the quarterly level of total expenditures in 1925:Q4? What is annualized nominal GDP in 1925:Q4 and in 1929:Q4? Both are nominal: Total Exp in 1925Q4 = 20* * 30 = Annualized nominal GDP = *4 = Total Exp in 1929Q4 = 50* *70 = = Annualized nominal GDP = * 4 = ! 11

12 2. Calculate annualized real GDP for both 1925:Q4 and 1929:Q4. Use 1925:Q4 as the base. Both are real in 1925 Q4 base price Total Exp in 1925Q4 = 20* * 30 = Annualized real GDP = *4 = Total Exp in 1929Q4 = 20* *70 = = Annualized real GDP = * 4 = Write the equation to calculate the annualized growth rate of nominal GDP between 1925:Q4 and 1929:Q4? t2-t1 = 4 years Annualized growth rate of Nominal GDP between 1925 Q4 to 1929 Q4 = (( / )^(1/4) - 1) * 100% = (2^0.25-1) *100% = 19% ~20%! 12

13 4. From 1925:Q4 to 1929:Q4 which grew more quickly, real GDP or nominal GDP? t2-t1 = 4 years Annualized growth rate of Real GDP between 1925 Q4 to 1929 Q4 = ( / )^(1/4) - 1 > ( / )^1/4-1 Real grows faster than nominal 5. Based upon you previous answer, the economy, 1925:Q4 to 1929:Q4 experienced: a. Rising inflation b. disinflation c. deflation c. Deflation. Real GDP grows faster than nominal GDP implies the price level lowers over the same period. This is driven by the the price of Bentley, from $1000 to $500, although the price of Gramophon increases in the same period, from $20 to $50.! 13

14 ! Section 6 (20 points) Y = AE AE Equilibrium Y = AE =16 c and d) AE = C + I_p + G = Auto C * Y + I_p + G = * Y b) C + I_p = * Y slope of the line: 0.5 a) C = * Y uto C + I_p +G Auto C Y: income Consider a closed economy (no exports or imports) with these characteristics: Autonomous consumption = 4 MPC = 0.5 Planned investment = 2 Government expenditures = 2 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)! 14

15 3. Identify on the chart the equilibrium value for income and AE. (2 points) 4. Derive, algebraically, the equilibrium level for income. (4 points) Y = AE Y = Y -> Y* =16 5. Suppose in period 1 income equals 12. What level of AE corresponds to an income level of 12? And what will be the resultant level for Iu? (show work) (4 points) AE_1 = * Y_1 = 8+ 6 =14 I_u = Y - AE = = 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) Negative unplanned investment implies inventory will be drawn down in current period. Next period Y will increase and it will move closer to equilibrium! 15

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