TWO BONUS POINTS FOR GETTING YOUR TA AND SECTION RIGHT

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1 TWO BONUS POINTS FOR GETTING YOUR TA AND SECTION RIGHT COURSE EXAM #1 (Two Hours) October 3, MACROECONOMICS NAME TA Section# Section 1 (20 points) Fill in the item from the list below that is most closely associated with each of the following 20 phrases. (Some items may provide the answer to more than one question). Absolute advantage Invisible hand Aaron Sorkin J. M. Keynes Adam Smith Labor force Adverse selection Labor force participation rate Aggregate demand Labor Productivity Aggregate demand Long term sustainable growth Aggregate expenditure model Marginal analysis Art Okun MPC Artificial demand MPS Business cycles Microeconomics Complements Milton Friedman Closed economy National income Command based economy Net National Product Comparative advantage Normative analysis Consumer Price Index Okun s Law CPI: Core Open economy CPI: Core Goods Opportunity costs Consumption Paul Samuelson Cyclical unemployment Payroll employment Deflation PCE deflator Depreciation Personal income Disinflation Positive analysis Disposable personal income Production possibility frontier Economic model Property rights Elastic demand Quit ratio Final sales Real GDP Final sales to domestic purchasers Real GNP Frictional unemployment Real wage income GNP Recession Great Recession Seasonal Adjustment Great Depression Structural unemployment Great Moderation Substitutes Gross Domestic Product U6 unemployment rate Inelastic demand Value added method Investment Voluntary exchange Government ` Walras Law

2 Section 1 (20 points) 1. The sum of wages, rents, interest and profits. 2. An economy that does not trade with other economies. 3. A situation wherein both buyer and seller of a product are made better off. 4. An aggregate measure of U.S. activity that excludes both inventories and net exports. 5. The concept that a large change in price will result in a very small change in the quantity purchased. 6. Two or more consecutive quarters of negative growth of real GDP. 7. An economist who posited in the 1930s that sometimes free markets fail and government intervention is needed to restore economic health. 8. Analysis that involves comparing the extra benefit you receive from consuming an additional unit of an item. 9. A simplified version of reality used to analyze real-world economic questions. 10. An estimate reflecting the sum of expectations for long term gains in productivity and expectations for the long term growth in the labor force. 11. A phrase that describes the up the escalator, down the elevator macroeconomic pattern that recurs around the world and throughout history. 12. A depiction of the maximum possible combinations of output an economy can produce, given available resources and current technology. 2

3 13. A U.S. inflation index that allows for the fact that consumers change their mix of purchases over time 14. Economic analysis that makes judgements about what ought to be. 15. The component that represents roughly 70% of U.S. final goods and services and 35% of Chinese final goods and services. 16. A technique for calculating GDP that adds up the market value that firms add to a product. 17. A sub-index of overall consumer prices focused upon goods, excluding food and energy. 18. The market value of final goods and services produced by U.S. citizens and U.S. corporations. 19. Jobless individuals who lack work because their skills don t match the skills needed by employers. 20. When the price of item A jumps, you use more of item B. What are these items? 3

4 Section 2 (12 POINTS) In country Alpha, cigarette smoking is forbidden, so people trade cigarettes in a black market. The cigarette demand is QD= P and cigarette supply is QS=P. 1. (2 points) Label the chart provided and draw the supply and demand curves. 2. (3 points) What are the equilibrium levels for price and quantity? 3. (2 points) Suppose the government begins to put pressure on suppliers. Suppose that this leads suppliers to insist that they are paid twice as much for any given quantity of cigarettes they provide. Does this shift the supply curve or the demand curve? Draw in the new curve. 4

5 4. (3 points) Solve algebraically for the new equilibrium levels. 5. (2 points) Has the new curve become more elastic or more inelastic? Briefly explain. Section 3 (10 points) In Millions Adult Population 250 No. of non-working adults not looking for work 75 No. of adults working part time, that would welcome a full time job 17.5 Employed workers (2 points) How many individuals are there in the labor force? 2. (2 points) What is the labor force participation rate? 3. (2 points) How many individuals are unemployed? 5

6 4. (2 points) What is the unemployment rate? 5. (2 points) What is the U6 unemployment rate? Section 4 (10 points) Consider the following data for Country A: Hat Production Hat Prices Grapefruit Grapefruit Prices Production Q Q Q (3 points) Calculate nominal and real GDP for Q2, using Q1 as the base year. What are their annualized values? 2. (2 points) Calculate the growth rate growth rate for real GDP from Q1 to Q3. 3. (2 points) Write down the formula that allows you to calculate the annualized growth rate for real GDP, Q3 versus Q1. 6

7 4. (3 points) Looking at the Q2 and Q3 data for grapefruits, what likely happened to supply and demand over these two quarters? Section 5 (12 points) Countries Abala, Bobo, and Cinch have the same resources. Their PPF s below: Abala Bobo Cinch Guns Cars (2 points) Define absolute advantage and identify which country has absolute advantage in gun production. 2. (2 points) Define comparative advantage and identify which country has the Comparative advantage in car production. 3. (4 points) Draw, in the space directly below, the PPF for each country separately, and then draw the PPF for all countries combined with trade. 7

8 4. (3 points) Why is the combined graph shaped the way it is? Section 6 (14 points) Canada long term projections for key variables: Expected long run annual growth rate for population = 1% per year Population growth due to births minus deaths = 0.75 percentage points Population due to net immigration = 0.25 percentage points (Note: all immigrants enter the labor force) Expected long run annualized growth rate for labor force = 1% per year Expected long run annualized growth rate for labor productivity = 1.5% per year (Note: 20 years of 1.25% growth/year = a 28% increase) (Note: 20 years of 1.00% growth/year = a 22% increase) (Note: 20 years of 0.75% growth/year = a 16% increase) (Note: 20 years of 0.50% growth/year = a 10% increase) Okun s Coefficient = :Q4 levels for key economic variables are as follows: Labor force: 100 million Population: 200 million Unemployment = 5% 1. (2 points) What is Canada s labor force participation rate in 2016:Q4? 2. (4 points) What do the projections listed above suggest Canada s LFPR will be in 20 years? 8

9 3. (4 points) Assume Okun s law works. Over the next 4 years what annualized growth rate will Canada have achieved if it has a 7% unemployment rate in 2020:Q4? a. 0.6% b. 1.6% c. 2.6% d. 3.6% 4. (4 points) Suppose the participation rate for the local Canadian population is determined by demographics. Now suppose a politician in Canada, in late 2016, convinces the nation to vote on SEALING CANADA S BORDERS. If Canadians agree, and net immigration immediately goes to zero, is Canada s LFPR higher, or lower in 20 years? Calculate an estimate for their LFPR in 20 years time. Section 7 (20 points) 9

10 Consider an open economy with these characteristics in 2009 ($ trillions): Autonomous consumption = 1 MPC = 0.75 Planned investment = 1 Government expenditures = 2 Net Exports = (2 points) Label the two axes. Draw the line representing aggregate expenditure/income equilibrium. 2. (4 points) Draw: a) consumption b) consumption + planned investment c) consumption + planned investment + government expenditures + net exports d) identify the AE line. 3. (1 point) Identify on the chart the equilibrium value for income and AE. 4. (4 points) Derive, algebraically, the equilibrium level for income. 10

11 5. (2 points) Suppose income in actual income in 2009 equals $16 trillion, what variable adjusts to ensure that actual income equals actual expenditures? What is the value for this variable? 6. (4 points) Suppose policy makers, in late 2009, decide to increase government spending to $3 trillion in If no other variables changed, what will be the resultant value for equilibrium income? 7. (3 points) In 2010, however, it is also likely that another variable changed, in reaction to the developments that unfolded in 2009? What variable is likely to have changed and is the change likely to contribute to higher or lower income in 2010? 11

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

COURSE MACROECONOMICS EXAM #1 (Two Hours) SEPTEMBER 29, Section # COURSE 180.101 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