Aadland Spring 2014

ECON 3010 Intermediate Macroeconomics

Solutions to Exam #1
Multiple Choice Questions. (25 points; 2.5 pts each)
1. The unemployment rate:
A) was zero during the 1990s in the United States.
B) was zero on average between 1900 and 1950 in the United States.
C) has never been zero in the United States.
D) is usually zero when the economy is not in a recession or depression.

2. GDP is all of the following except the total:

A) expenditure of everyone in the economy.
B) income of everyone in the economy.
C) expenditure on the economy's output of goods and services.
D) output of the economy.

3. Which of the following is a flow variable?

A) wealth
B) the number unemployed
C) government debt
D) income

4. The best measure of the economic satisfaction of the members of a society is:
A) nominal GDP.
B) real GDP.
C) the rate of inflation.
D) the value of corporate profits.

5. If the adult population equals 250 million, of which 145 million are employed and 5
million are unemployed, the labor force participation rate equals ______ percent.
A) 50
B) 58
C) 60
D) 67

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6. The two most important factors of production are:

A) goods and services.
B) labor and energy.
C) capital and labor.
D) saving and investment.

7. The marginal product of capital is:

A) output divided by capital input.
B) additional output produced when one additional unit of capital is added.
C) additional output produced when one additional unit of capital and one additional
unit of labor are added.
D) value of additional output when one dollar's worth of additional capital is added.
8. If output is described by the production function Y = AK 0.2L0.8, then the production
function has:
A) constant returns to scale.
B) diminishing returns to scale.
C) increasing returns to scale.
D) a degree of returns to scale that cannot be determined from the information given.

9. The government spending component of GDP includes all of the following except:
A) federal spending on goods.
B) state and local spending on goods.
C) federal spending on transfer payments.
D) federal spending on services.

10. The factor that makes national saving equal investment, in equilibrium, is:
A) the interest rate.
B) private saving.
C) public saving.
D) fiscal policy.

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Problem Solving / Essay Questions. (75 points)

#11. (30 pts) Consider a macroeconomy that produces three goods. Use the information below to
answer the following questions.
Quantity
Product
A
B
C

2010
50
20
10

Price
2012
80
10
30

2010
$2
$4
$2

2012
$2
$8
$2

(a) (10 pts) Calculate nominal and real GDP for 2010 and 2012 using 2010 as the base year. Is the
economy growing? If so, how much?
= ( $) + ( $) + ( $) = $ + $ + $ = $

= ( $) + ( $) + ( $) = $ + $ + $ = $
= = $

= ( $) + ( $) + ( $) = $ + $ + $ = $

Yes, the growth rate for real GDP is 30%. Real GDP is a better measure of economic growth
because it holds prices constant and directly measures the change in the production of goods
and services.

(b) (10 pts) Assuming that the typical consumers basket of goods is given by 2010 quantities, calculate
the CPI for 2010 and 2012 using 2010 as the base year. What is the inflation rate?

=
=

( $) + ( $) + ( $)
$
=
=
( $) + ( $) + ( $)
$

The CPI inflation rate is 40%.

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(c) (10 pts) Calculate the inflation rate from the GDP deflator and compare it to CPI inflation? Which
measure is larger and why?
=

$
=

$

Inflation from the GDP deflator is 15%. The CPI inflation rate is larger because households
substituted away from Good B, but the CPI basket is fixed at 2010 quantities.

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#12. (30 pts) Consider the following Neoclassical model of the economy, where is in percentage terms.
Show all your work.
Supply
= (, ) = 2
= /
= /
= 100; = 400

Demand
= 10 + 0.8( )
= 50 5
= 200, = 200
= 0

(a) (10 pts) What is real GDP for the economy? What share of national income goes to workers? Show
your work.
The level of real GDP is = = = .
The real wage is

= = / = / = . .

The real rental price of capital is = = / = / = .

The amount of GDP going to workers is

= . = .

The amount of GDP going to the owners of capital is = = .

(b) (10 pts) Find the interest rate that produces equilibrium in the goods market. Use a demand-supply
diagram (with on the vertical axis) to show the equilibrium interest rate. Then show how the
demand-supply diagram changes if the economy experiences technical innovation that increases the
productivity of capital and labor.
To find the equilibrium interest rate, we set = + + .
= + . ( ) + +
= + + +
=

=
= %

The vertical supply curve would shift right causing the real interest rate to fall.

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(c) (10 pts) Assume the fixed part of consumption increases from 10 to 20. Re-calculate the
equilibrium real interest rate. Households are now consuming more and saving less. Does
investment still equal saving? If so, why?
To find the new equilibrium interest rate, we again set = + + .
= + . ( ) + +
= + + +
=

=
= %

At = %, investment equals = () = .

Saving equals = = , so the loanable funds market clears.

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#13. (15 pts) True or False. If False, correct the statement to make it true.
(a) (5 pts) A recent academic study shows that economic mobility (i.e., the ability to move to a higher
rung on the income distribution ladder than your parents) has not changed significantly over time.
True.

(b) (5 pts) A young job seeker drops out of the labor force and goes back to school. This causes the
unemployment rate to rise.

False. If the unemployed job seeker drops out of the labor force, then it will cause the
unemployment rate to fall. This is a bit misleading because it does not necessarily reflect an
improving labor market. The individual may have dropped out of the labor market because
he/she was discouraged by the available job prospects.

(c) (5 pts) The most recent U.S. federal government surplus was in the 1940s during World War II.

False. The U.S. federal government ran a deficit, not a surplus, during World War II. The most
recent government surplus was in 2001 at the end of the Clinton administration.