1) Suppose in the economy of Wesleyania the following three goods are produced: Pizza, Red Bull and Photocopy machines. The following table summarizes the prices and the produced quantities of these goods for various years. (d) A typical consumer (urban-household) in Wesleyania consumes only pizza and red bull. The quantity of pizza and red bull in the consumers basket of goods is given by q pizza =2, q red bull = 20. Calculate CPI for 2010 taking 2008 as the base year. Years (t) Price of Pizza (P 1 ) Quantity of Pizza(Q 1 ) Price of Red Bull (P 2 ) Quantity of Red Bull (Q 2 ) Price of Photocopy Machines (P 3 ) Quantity of Photocopy Machines(Q 3 ) 2008 12 500 2 4000 1100 9 2009 14 500 3 5000 1000 10 2010 15 700 4 6000 900 12 (a) Calculate the Nominal GDP for 2009 and 2010. (e) Calculate the inflation rate faced by consumers in Wesleyania in 2010 using the CPI. (b) Calculate the Real GDP for 2009 and 2010 taking 2008 as the base year. (c) Calculate the GDP deflator for 2009 and 2010.
2) In 1998 Wonderland economy was prospering at full employment with high level of consumer confidence. The economy s output level was $12 billion (measured as real GDP at 1992 prices) and the price index was steady at 110 (Base year 1992=100). The aggregate supply and aggregate demand curve of Wonderland was estimated empirically and is given in the figure below. P SRAS 150 140 130 d) Suppose AD increased by $4 billion. What would be economy s output after this increase in AD? Economy s output = e) What is the necessary increase in Aggregate Demand to achieve full employment output level? 120 110 100 90 80 70 60 AD 98 50 0 2 4 6 8 10 12 14 16 6 In 1999 citizens of Wonderland realized that their country has not done anything to prevent computer problems that the Y2K bug can cause. Consumer confidence and stock market indices dropped dramatically. Investment and consumer spending dropped to historically low levels. This caused aggregate demand (AD) to decrease by $6 billion. The Aggregate Demand Curve for 1999 consistent with the data given above. Econometric data on consumption pattern of Wonderland consumers indicate an MPC of 0.9. Moreover autonomous consumption is 4. Please answer the following questions a-i based on this data. RGDP a) Please write down the output and price level of the Wonderland economy in 1999. f) List the fiscal policy options that are available to the government if it decides to pursue expansionary fiscal policy to achieve the necessary boost in the aggregate demand? 1. 2. 3. g) Calculate the value of the government spending multiplier. h) Write down the consumption function of a consumer in Wonderland economy. i) Calculate is the necessary increase in government spending which would bring the wonderland economy to full employment output level? Output = Price Level = b) Please describe the state of the Wonderland economy by choosing one or more of the following descriptive states (Recession, inflation, unemployment, boom) c) Write down the magnitude of the GDP gap? GDP gap =
Part II: Multiple Choice 1) Which of the following would help reducing the amount of frictional unemployment in the economy? a) New internet sites provides more readily available information about job openings. b) Congress increases the minimum wage. c) Labor union membership increases. d) Increase in unemployment benefits. e) All of the above are correct. 2) GDP is used as one of the basic indicators of an economy s performance. A better measure of the economic well-being of an individual in a society is a) the consumption component of GDP b) GDP per capita c) the government expenditures per person d) the level of business investment in the economy e) inflation rate in an economy 3) Over time people have come to rely more on market produced goods and services and less on goods and services that they produce for themselves. For example people eat at restaurants relatively more and prepare their meals at home relatively less. By itself this change would a) make GDP rise over time b) make GDP fall overtime c) not make any change over time since the quantities of the goods in GDP is fixed d) not change GDP because GDP excludes these goods and services that are produced and consumed at home 4) Bob buys a new Ford F-150 in February 2001 and then sells it to Norman in June 2002. As a result: a) The value of the truck will be included in 2002 GDP only, since that was the year of the last sale. b) 2001 GDP will include the value of the truck, and 2002 GDP will include the value of the truck minus depreciation. c) 2001 GDP will include the value of the truck, but 2002 GDP will not. d) Both 2001 GDP and 2002 GDP will include the value of the truck, since it was sold in both years. e) Neither 2001 GDP nor 2002 GDP will include the value of the truck. Table 1: Summary of Monetary assets in US Economy Component $ (billion) Saving Account Balances 2482 Treasury Bills ( < $50,000) 867 Traveler's Checks 7 Government Bonds (maturity < 6 months) 1,065 Checking Account Balances 850 Mutual Fund/Money Market Account Balances 480 Credit Card Limits 635 CD's / Time Deposits (< $100,000) 292 Currency in Circulation 512 5) What is the value for M1 based on data given in Table 1: a) 1269 b) 1369 c) 2004 d) 519 e) 3851 6) Suppose you won $90,000 from the state lottery. However, the state will pay you this amount by three equal installments. Thus you will receive $30,000 at the beginning of each year for three years, with the first payment starting right now. So you will receive the first check today, Nov 16 th 2007, the second check on Nov 16 th 2008 and the last check on Nov 16 th 2009. If the interest rates are 5%, what is the present value of your total winnings? a) $77,745 b) $87,142 c) $257,340 d) $81,697 e) $85,782
7) Terminator 2: Judgment Day had a box office revenue of $204,843,000 in 1991. Convert the box office revenue into 2010 dollars. (CPI_1991 = 138.2 and CPI_2010 = 218.9) a) 129,325,274 b) 324,458,268 c) 204,843,000 d) 448,401,327 e) 283,093,026 8) Transactions involving items produced in the past, such as the sale of a 5-year-old automobile by a used car dealership or the purchase of an antique rocking chair by a person at a yard sale, are a) included in current GDP because GDP measures the value of all goods and services sold in the current year. b) included in current GDP but valued at their original prices. c) included in current GDP but valued at the depreciated value calculated using CPI d) not included in current GDP because GDP only measures the value of goods and services produced in the current year. e) not included in current GDP because these items have no current value. 9) An Italian company operates a pasta restaurant in the U.S. The value of the output produced by this pasta restaurant is included in a) U.S. GNP and Italian GNP. b) Italian. GNP and Italian GDP. c) U.S. GDP and Italian GNP. d) U.S. GDP and Italian GDP. e) U.S. GDP and U.S. GNP 11) Assume that the required reserve ratio is 5%. Jaime breaks his giant piggy bank and deposits $300 to his checking account. What is the increase in money supply due to Jaime s initial deposit? a) No change in money supply, since increase in bank deposit will be offset by decrease in currency. b) $15,000 c) $6,000 d) $5,700 e) $3,000 12) Which of the following arguments correctly explain why the Aggregate Demand curve slopes downward? a) As the Price Level goes up, consumers substitute away from expensive goods towards less expensive goods, decreasing the overall consumption rate. b) As the Price Level goes up, national income goes down, therefore consumption is reduced. c) As the Price Level goes up, consumers savings loose purchasing power, therefore consumers feel less wealthy, decreasing the quantity demanded of all goods and services. d) As price level goes up, producers increase production temporarily because of sticky wages. e) As price level goes up, economy adjusts with a shift in short run aggregate supply to full employment output level as argued by classical economists. 10) Which of the following would increase the money supply (M1)? a) an increase in your credit card limit b) A cash withdrawal from a checking account c) Federal Reserve Bank selling treasury bonds d) an increase in the required reserve ratio by Fed e) a decrease in the discount rate by Fed
[Information for Question 13 and 14] A small country (Pleasantville) has an adult population (over 16) of 1200, of which 648 are employed. The labor force participation rate in Pleasantville is 60% 13) What is the size of the labor force in Pleasentville? a) 1200 b) 648 c) 552 d) 720 e) approximately 389 16) Which of the following is included in the calculation of this year s GDP? a) 12 year old Johnny mowing his family s lawn b) Dave Malone buying a used car c) Barbara Wilson buying a stock issued by GM d) Ed Ferguson receipt of a social security payment e) None of the above 17) The following table is taken from the accounting statement of the U.S. economy 14) What is unemployment rate of Pleasantville a) 5 % b) 4 % c) 54 % d) 10 % e) 6.1 % Personal Consumption Expenditure (C) Gross Private domestic Investment (I) Government Purchases (G) Wages (W) Rent, Interest (R) Exports (X) Imports (M) $6,946 billion $1,724 billion $1,689 billion $1,211 billion $ 922 billion $1,031 billion $1,330 billion 15) Mikhail is a ballet dancer living in Devils Lake, North Dakota. He is searching for a job there but none exist. There are jobs in New York City. Which of the following is correct? a) Mikhail is experiencing frictional unemployment b) Mikhail is experiencing cyclical unemployment c) Mikhail is a discouraged worker d) Mikhail is experiencing structural unemployment e) Since he is unemployed, Mikhail is not part of labor force. What is the U.S. Gross domestic product (GDP) as given by the expenditure approach? a) $10,658 billion b) $11,271 billion c) $9,560 billion d) $12,193 billion e) $10,060 billion 18) The balance sheet of Delaware Bank is given below Delaware Bank Assets Liabilities Reserves $25,000 Checkable Deposits $150,000 Loans $125,000 If the reserve requirement ratio is 20%, then Delaware bank a) has $10,000 of excess reserves b) needs $10,000 more of reserves to meet its reserve requirements c) needs $5,000 more of reserves to meet its reserve requirement d) just meets its reserve requirement e) has given too little loans and needs to increase its loan amount
19) Which of the following best illustrates the unit of account function of money? a) You list prices for candy sold on your Web site, www.sweettooth.com in dollars b) You pay for your Linkin Park concert tickets with dollars c) You keep $10 in your backpack for emergencies d) You were paid $1,000 for your summer job as a camp counselor. e) None of the above is correct. 20) The substitution bias in the consumer price index refers to the a) substitution by consumers toward new goods and away from old goods. b) substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods. c) substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive. d) substitution of new prices for old prices in the CPI basket of goods and services from one year to the next. e) substitution of new workers for positions vacated by retirees.