Principles of Macroeconomics Introductory quiz Academic Program: MSc in Banking and Finance Semester: Fall 2011/12 Instructor: Dr. Nikolaos I. Papanikolaou Office: Luxembourg School of Finance, KB2-E02 Phone: 466644 6938 Email: nikolaos.papanikolaou@uni.lu Home Page: http://npapanikolaou.wordpress.com Office hours: Monday 18:00-19:00, Thursday 14:00-15:00, or by appointment Course web site: https://moodle.fdef.uni.lu/fdef/login/index.php (use your enrollment key to access the course content) The present quiz relies on the material found in Chapters 1 & 2 of N. G. Mankiw, Macroeconomics, 7 th edition, Worth Publishers, 2010. The quiz has to be taken by all of you prior to the commence of the course. Its purpose is to: a) motivate engagement in the course material, b) provide you with an opportunity to assess your personal level of knowledge of fundamental macroeconomic concepts, and c) insure that each of you has a good grasp of these concepts. Once you complete all three parts, enter your name and send it to me via e-mail. It is strongly recommend it to turn the quiz in before classes officially begin preferably a week in advance. Part 1 Match the definitions to the terms listed below: a) A decrease in the overall level of prices b) A sustained period of falling real income c) Goods purchased by individuals and/or firms to add to their stock of capital d) A simplified representation of reality, often using diagrams or equations, which shows how variables interact e) An estimate of the value of a good or service that is not sold in the marketplace and therefore does not have a market price f) The equation showing that GDP is the sum of consumption, investment, government spending, and net exports g) A model that assumes that prices freely adjust to equilibrate supply and demand h) A variable whose value is independent of the model s solution i) Measured in current prices; not adjusted for inflation j) The value of a firm s output minus the value of the intermediate goods the firm purchased 1
k) A measure of the overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in some base year l) A very severe recession m) A measure of the overall level of prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year n) A variable measure as a quantity per unit of time 1) Nominal prices 2) Value added 3) GDP deflator 4) Deflation 5) Flow 6) Depression 7) Exogenous variable 8) Market-clearing model 9) Model 10) National income accounts identity 11) Consumer Price Index 12) Recession 13) Investment 14) Imputed value Part 2 Choose the correct answer for each question: 1 of 30 Which of the following is a flow variable? A. the value of the house in which you live B. the balance in your savings account C. your monthly consumption of hamburgers D. the number of hamburgers in your refrigerator at the beginning of the month 2 of 30 Which of the following is not a stock variable? A. government debt B. the labor force C. the amount of money held by the public D. inventory investment 2
3 of 30 Gross domestic product (GDP) is A. a stock. B. a flow. C. both a stock and a flow. D. neither a stock nor a flow. 4 of 30 GDP measures A. expenditure on all final goods and services. B. total income of everyone in the economy. C. total value added by all firms in the economy. D. all of the above. 5 of 30 Suppose that a farmer grows wheat and sells it to a baker for $1, the baker makes bread and sells it to a store for $2, and the store sells it to the customer for $3. This transaction increases GDP by A. $1. B. $2. C. $3. D. $6. 6 of 30 Which of the following is not included in GDP? A. the salary paid to a federal judge B. the value of housing services enjoyed by homeowners C. the value of automobile services enjoyed by car owners D. the value added by a shipping company that transports goods from the factory to retail stores 3
7 of 30 In which case is total expenditure in an economy not equal to total income? A. If total saving is larger than total investment. B. If net exports are not zero. C. If inventory investment is negative. D. None of the above they are always equal. 8 of 30 All other things equal, GDP will rise if A. imports rise. B. exports fall. C. durable goods consumption rises. D. military spending falls. 9 of 30 Which of the following statements describes the difference between real and nominal GDP? A. Real GDP includes only goods; nominal GDP includes goods and services. B. Real GDP is measured using constant base-year prices; nominal GDP is measured using current prices. C. Real GDP is equal to nominal GDP less the depreciation of the capital stock. D. Real GDP is equal to nominal GDP multiplied by the CPI. 10 of 30 If production remains the same and all prices double, then real GDP A. and nominal GDP are both constant. B. is constant and nominal GDP is reduced by half. C. is constant and nominal GDP doubles. D. doubles and nominal GDP is constant. 11 of 30 Real GDP equals 4
A. nominal GDP minus net exports. B. nominal GDP divided by the GDP deflator. C. nominal GDP multiplied by the GDP deflator. D. GDP minus depreciation. 12 of 30 If production remains the same and all prices double relative to the base year, then the GDP deflator is A. 1/4. B. 1/2. C. 1. D. 2. 13 of 30 Consider the following table: APPLES ORANGES Year Production/Price Production/Price 1995 20/ $0.50 10/$1.00 2000 10/ $1.00 10/$0.50 If 1995 is the base year, what is the GDP deflator for 2000? A. 0 B. between 0 and 1 C. 1 D. greater than 1 14 of 30 To obtain the net national product (NNP), start with the gross national product (GNP) and subtract A. depreciation. B. depreciation and indirect business taxes. C. depreciation, indirect business taxes, and corporate profits. D. depreciation, indirect business taxes, corporate profits, and social insurance contributions. 15 of 30 To obtain national income, start with GNP and subtract A. depreciation. 5
B. depreciation and the statistical discrepancy. C. depreciation, indirect business taxes, and corporate profits. D. depreciation, indirect business taxes, corporate profits, and social insurance contributions. 16 of 30 Approximately what percentage of national income consists of compensation of employees? A. 10 percent B. 25 percent C. 70 percent D. 95 percent 17 of 30 Which of the following is not considered investment? A. A family builds a house in which it plans to live. B. A car dealer stores some of this year's models for next year. C. An individual purchases several pieces of antique furniture. D. A firm buys a computer for word processing. 18 of 30 Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells it to Williams. The total net investment from these transactions is A. zero. B. 1 house. C. 2 houses. D. 3 houses. 19 of 30 The consumer price index (CPI) A. measures the price of a fixed basket of goods and services. B. measures the price of a basket of goods and services that constantly changes as the composition of consumer spending changes. C. measures the amount of money that it takes to produce a fixed level of utility. 6
D. is one of the many statistics in the National Income Accounts. 20 of 30 Suppose that the typical consumer buys one apple and one orange every month. In the base year 1986, the price for each was $1. In 1996, the price of apples rises to $2, and the price of oranges remains at $1. Assuming that the CPI for 1986 is equal to 1, the CPI for 1996 would be equal to A. 1/2. B. 1. C. 3/2. D. 2. 21 of 30 Consider the following table: Consumption Goods Nonconsumption Goods Year Production Price Production Price 1995 20/$0.50 10/$1.00 2000 10/$1.00 10/$0.50 If 1995 is the base year, the CPI in 2000 is A. 0. B. 1/2. C. 1. D. 2. 7
22 of 30 Which of the following statements about the CPI and the GDP deflator is true? A. The CPI measures the price level; the GDP deflator measures the production of an economy. B. The CPI refers to a base year; the GDP deflator always refers to the current year. C. The weights given to prices are not the same. D. The GDP deflator takes the price of imported goods into account; the CPI does not. 23 of 30 All other things equal, if the price of foreign-made cars rises, then the GDP deflator A. and the CPI will rise by equal amounts. B. will rise and the CPI will remain the same. C. will remain the same and the CPI will rise. D. and the CPI will rise by different amounts. 24 of 30 General Motors increases the price of a model car produced exclusively for export to Europe. Which U.S. price index is affected? A. the CPI B. the GDP deflator C. both the CPI and the GDP deflator D. neither the CPI nor the GDP deflator 25 of 30 Which of the following events will cause the unemployment rate to increase? A. an increase in population, with no change in the size of the labor force B. a proportionally equal increase in the labor force and the number of unemployed workers C. an increase in the labor force with no change in the number of employed workers D. an increase in the number of employed workers with no change in the number of unemployed workers 8
26 of 30 An example of a person who is counted as unemployed is a A. retired worker below the mandatory retirement age. B. part-time worker who would like to work full-time. C. senator who resigns her job to run for president. D. student going to school full-time. 27 of 30 Suppose that a factory worker turns 62 years old and retires from her job. Which statistic is not affected? A. number of unemployed B. unemployment rate C. labor force D. labor-force participation rate 28 of 30 Suppose that the size of the labor force is 100 million and that the unemployment rate is 5 percent. Which of the following actions would reduce the unemployment rate the most? A. 1 million unemployed people get jobs B. 2 million unemployed people leave the labor force C. 3 million people join the labor force and they all get jobs D. 10 million people join the labor force and half of them get jobs 29 of 30 Suppose that a Canadian citizen crosses the border each day to work in the United States. Her income from this job would be counted in A. U.S. GNP and Canadian GNP. B. U.S. GNP and Canadian GDP. C. U.S. GDP and Canadian GNP. D. U.S. GDP and Canadian GDP. 30 of 30 9
Suppose that an Italian working in the United States renounces his Italian citizenship and is granted U.S. citizenship. Which of the following will happen? A. Italian GDP will fall; U.S. GNP will rise. B. Italian GNP will fall; U.S. GNP will rise. C. Italian GDP will fall; U.S. GDP will rise. D. Italian GNP will fall; U.S. GDP will rise. Part 3 Answer the following questions by performing the appropriate calculations: 1. Jimmy is an avid candy connoisseur. Last year, he purchased 75 Snickers bars costing $2 each and 100 Butterfinger bars costing $1 each. This year, he purchased 120 Snickers bars for $1.50 each and 90 Butterfinger bars for $1.75 each. a. Assume that a typical consumer basket includes 50 bars of each type. Compute a consumer price index for each year and determine the percentage change in the index over the two years. b. Calculate Jimmy's nominal spending on candy bars in each year. Does nominal spending increase or decrease? c. Using the first year as the base year, determine Jimmy's real spending on candy bars in each year. Does real spending increase or decrease? d. Calculate the implicit price deflator (defined as nominal spending divided by real spending). How does this deflator compare the CPI calculated in part (a)? Which measurement do you think is more relevant in determining the change in Jimmy's cost of living? 2. In some country, the working-age population is 75,000. There were 10,000 discouraged workers and 8,000 unemployed labourers. What is the labour force of this country? a. Calculate the unemployment rate and the labour-force participation rate. b. Suppose that 2,000 of the unemployed workers decided to give up looking for work. Redo the calculations in part (a) and part (b). c. How did the unemployment rate change from part (b)? Using Okun's law, how would this change in unemployment change GDP? Do you think the prediction of Okun's law is realistic in the situation? 3. A farmer (at no cost) grows a bushel of soybean and sells it to a firm for $1.00. The firm turns the soybean into soysauce and sells it to a chef for $6.00. The chef uses the soysauce to make orange chicken and sells it to a professor for $16.00. The professor eats the orange chicken. Compute: a. the value added by the farmer b. the value added by the firm 10
c. the value added by the chef d. the value added by the professor e. the GDP of this simple economy (assuming these are the only goods in the economy) f. Suppose the government imposes a value-added tax of 10% to be imposed on the value added amount at each stage. Compute the total tax revenue collected by the government. 11