ECON 121 Principles of Macroeconomics Practice Exam I (Partial) Solutions

Transcription

1 ECON 121 Principles of Macroeconomics Practice Exam I (Partial) Solutions Dennis C. Plott University of Illinois at Chicago Department of Economics Summer 2015

2 Name (print neatly and clearly): General Instructions 1. Read and follow all instructions/directions carefully. 2. Make sure your exam consists of 11 pages, not including the cover page. 3. An inability to follow instructions/directions will result in points being deducted. 4. The only device allowed is a simple calculator; i.e., anything that can store or retrieve information (including a graphing calculator) is NOT allowed. 5. Use of books, notes, another person, and/or aid of any kind is absolutely NOT allowed. 6. Answer all questions in blue or black ink only; i.e., no pencils or colored inks. The only exception: graphs may be drawn in pencil. Note: use a guide of some sort (e.g., a ruler) for all graphs. 7. Do not use white out or similar products, but neatly cross/scratch out anything you do not want graded. 8. Write, mark, and draw your answers neatly and clearly. If your answer is illegible (i.e., difficult to read in the least), then it will not be graded. It is your job to clearly communicate. 9. Label all graphs fully and completely; i.e., axes, intersections, curves, etc. 10. Support your answers as thoroughly as possible; i.e., graphically, conceptually, and mathematically. Note: this may not be feasible for all questions asked. State and define any concept utilized and list and name any equation used. In other words, show all of your work. 11. For the True/False/Uncertain questions clearly indicate your choice by writing either True, False, or Uncertain underneath the respective question. 12. Unless explicitly instructed otherwise, all questions require a justification to receive credit. 13. Answer all questions using positive economic reasoning. 14. Assume the nominal wage is fixed in the short-run, all markets begin in long-run equilibrium, and capital stock is fixed in both the short-run and long-run except for negative shocks. For changes in the variables of interest, reference the initial level, unless instructed otherwise, in both the short-run and long-run. Original Score (%) Adjustment (%) Actual Score (%) University of Illinois at Chicago (UIC) 1

3 1. Analytic (a) Percent Change versus Percentage Point (b) Rule of 70 (72) (c) Growth Rate 2. General Economics (a) Incentives (b) Opportunity Cost (c) Positive versus Normative (d) Secondary Effects (e) Ceteris Paribus (f) Diminishing Returns (g) Marginal Analysis 3. Logical (Economic) Fallacies Exam I Study Guide (a) Loaded Terminology (b) Counterfactual (ignoring or pretending it is known) (c) Post Hoc (d) Correlation versus Causation (e) Straw Man 4. Gross Domestic Product (GDP) (a) Definition (b) Expenditure Components Consumption Animal Spirits/Irrational Exuberance Investment Inventories Government Spending (c) Criticisms (d) Nominal versus Real (e) Natural Rate (Potential) 5. Unemployment (a) Definitions & Formulas Unemployment Rate, Labor Force, Labor Force Participation Rate (b) Classification (c) Full-Employment (d) Criticisms 6. Inflation (a) Price Level (b) Inflation, Deflation, Disinflation (c) Nominal to Real (d) Fisher Equation (e) Consumer Price Index (CPI) 7. Business Cycle (a) Recession & Expansion 8. Graphs (a) Loanable Funds (Goods) Market (b) AD-LRAS University of Illinois at Chicago (UIC) 2

4 1. True, False, or Uncertain: The unemployment rate and employment cannot both increase at the same time. False Counterexample (there are many): Period 1 P OP = 20 UNE = 5 EMP 1 = 10 LF = UNE + EMP = = 15 Not in LF = = 5 u 1 = UNE LF 100% = 5 100% = 33.3% 15 Period 2 P OP = 20 UNE = 9 EMP 2 = 11 UNE + EMP = LF = 20 Not in LF = = 0 u 2 = UNE LF 100% = 9 100% = 45.0% % = u 2 > u 1 = 33.3% 11 = EMP 2 > EMP 1 = An article in the Wall Street Journal 1 discusses the United States saving rate. See chart Socking It Away below. As depicted in the chart, the All Population saving rate increased from 2007 to Assume this is permanent; i.e., Americans are now saving a larger portion of their incomes and will continue to do as such. 1 Wall Street Journal Young Adults About-Face on Saving by Neil Shah 4 th March 2013 University of Illinois at Chicago (UIC) 3

5 (a) Demonstrate the change in the saving rate using the closed loanable funds (goods) market, ceteris paribus, in the long-run. State explicitly what occurs to the following variables of interest: (i) real interest rate, (ii) quantity of savings, and (iii) quantity of investment; i.e., increase, decrease, unchanged, or ambiguous. Clearly explain the economic rationale for why the curve(s) shift, if at all, and for the change in the variables of interest. r S, I University of Illinois at Chicago (UIC) 4

6 3. You and a friend are preparing for the exam and in your study session they make the following statement: Instead of attending a macroeconomics class for two-and-a-half hours, I could have played a video game or watched a movie. The opportunity cost of attending class is the video game playing and the movie watching I gave up. Is your friend s analysis correct or not? Explain. Your friend s analysis is incorrect. The opportunity cost of an action is the highest-valued alternative forgone, not all alternatives forgone. Their opportunity cost of studying for his/her exam is either the video game or the movie, whichever he/she would have done had they not studied. 4. Explain whether the statement, Hillary Clinton was elected President of the United States in 2012, is a normative or positive statement. The statement is a positive statement because it does not depend on a value judgment. Instead, it is a statement that tries to describe what is and hence is testable. Now, it is indeed the case that Hillary Clinton was not elected president in 2012, so when we test the statement we discover that it is incorrect. But, whether the statement is correct or not has no bearing on whether the statement is positive or normative. Thus, the statement Hillary Clinton was elected President in 2012 is a positive, albeit incorrect, statement. University of Illinois at Chicago (UIC) 5

7 5. The Federal Aviation Administration s (FAA) Next-Gen technology, NextGen Wake Turbulence Recatergorization (Wake RECAT), is designed to save time and fuel while reducing CO 2 emissions. Firms, such as FedEx, are able to increase their flight operations thereby providing more reliable delivery of packages. Assume, for simplicity, this is a permanent change in technology for all air transport in the United States. 2 Note: the two largest air delivery and freight service companies, UPS and FedEx, deliver approximately 6.5 billion packages per year; i.e., this change in technology will affect the entire economy. (a) Demonstrate the permanent change in total factor productivity (TFP) using the closed AD LRAS graph, ceteris paribus, in the long-run. State explicitly what occurs to the (i) price level, (ii) and natural rate of output; i.e., increase, decrease, unchanged, or ambiguous. Clearly explain the economic rationale for why the curve(s) shift, if at all, and for the change in the variables of interest. P Y 2 FedEx Increases Efficiency with Cutting-Edge Technology 12 February 2015 by Jerica Phillips University of Illinois at Chicago (UIC) 6