Exam1_solFA2022

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Feb 20, 2024

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Econ 002- INTRO MACRO Prof. Luca Bossi October 03, 2022 EXAM #01 TO BE TYPED UP IN CANVAS QUIZ SECTION FOR ONLINE EXAM DELIVERY. Exam rules and instructions will be posted there. MULTIPLE CHOICE QUESTIONS Identify the letter that best completes the statement or answers the question. 1) The graph below gives the percent change in the US population (in red) and the percent change in US Real GDP (in blue) between the third quarter of 2019 and the first quarter of 2022. Using only this graph, between Q1 and Q2 of 2020 which of the following must be correct? a) RGDP decreased, RGDP per capita increased b) RGDP decreased, for the RGDP per capita we don’t have enough information c) RGDP decreased, RGDP per capita decreased d) RGDP decreased, NGDP increased 2) At Henry’s nursery, he can only grow plants during plant season, August through October. Each plant has a constant price of $10. In 2015, by the end of October Henry grew 450 plants. From November to December, Henry managed to sell 70 plants, and from January to May in 2016, he managed to sell the remaining 380 plants. How does Henry’s business activity contribute to GDP?. a) +$700 of consumption in 2015, +$3800 of investment in 2016 b) +$4500 of consumption in 2015 c) +$700 of consumption in 2015, -$3800 of GDP in 2016 d) +$700 of consumption in 2015 and +$3800 of investment in 2015

Page 2 of 11 3) Which of the following is NOT a valid criticism of the CPI? a) The CPI can overstate inflation because it doesn’t reflect improvement in the quality of technology over time. b) The CPI can overstate inflation because it doesn’t take into account the way consumers tend to substitute away from more expensive goods. c) The CPI can be biased because it doesn’t take into account the quantities of different goods families actually buy. d) The CPI can be biased if consumer tastes change drastically from year to year. 4) Jerry and Barbara are going on a date for their anniversary. They go to a fancy restaurant and spend $200 on a multi-course meal. They also asked their neighbors to babysit their son, Braden, for the evening. The usual rate for babysitting (through a babysitting app) would be $50, but Jerry and Barbara instead give their neighbors a gift: a large basket of fruits that they buy from the store for $80 on their way home. They also offer to return the favor and babysit their neighbors’ child (again, a $50 market value) in the future. What is the total contribution to GDP from these transactions? a) $200 b) $250 c) $280 d) $330 5) A seafood restaurant in Maryland made $5,000 off crab cake sales to its customers in one night. Since blue crabs are currently out of season in the United States, the restaurant imported $2,000 worth of crab meat from Venezuela to make the crab cakes. The restaurant also purchased $250 of Old Bay spices and various secret ingredients from a local supplier, as well as paid the chef $400 for the night to make the crab cakes. What is the total impact on GDP from these various activities using the value added approach? a) 2,750 b) $7,650 c) $3,150 d) $5,250 6) Which of the following GDP components are surely not counted as a part of the CPI calculation? a) Consumption services b) Investment goods c) Imported consumer goods d) All of the items in the other answers are counted 7) US consumers really like Canadian maple syrup with their pancakes. If the maple syrup industry in Canada increases the price of maple syrup that it exports to the United States, the price hike should increase a) The CPI of the US, and the GDP Deflator of Canada b) The GDP Deflator of the US, and the CPI of Canada c) The GDP Deflator of Canada only

Page 3 of 11 d) The CPI of the US, and the CPI of Canada 8) Following the volcanic eruption in Tonga, the country (and neighboring countries) have drastically reduced their exports of fish. As a result, the price of fish in New Zealand (NZ) has increased whereas the price of beef has not changed. Given the price increase, consumers in NZ have substituted away from eating fish and are instead consuming more beef. In this case the level of inflation calculated by CPI in NZ will be biased: a) Upwards due to substitution bias b) Downwards due to substitution bias c) Upwards due to unmeasured quality change d) Downwards due to unmeasured quality change 9) You work for the government of a small country that only produces burgers and fries. The prices (P) and quantities (Q) of each are presented in this table. 2019 is the base year. 2019 2020 P Q P Q Burgers 6 9 ??? 11 Fries 4 15 6 20 Unfortunately, the information of the price of burgers in 2020 has been lost, but you know that the 2020 inflation rate using the GDPD is 34.9315%. What was the price of Burgers in 2020? a) 7 b) 2 c) 15 d) 12 GDPD2019 = 100 In order to have inflation at 34.9315% you must have the GDPD2020 = 134.9315 NGDP2020 = 11*x+6*20 = 11*x+120 RGDP2020 =6*11+4*20 = 146 GDPD2020 = 𝟏𝟏𝟏𝟏𝟏𝟏 ∗ 𝟏𝟏𝟏𝟏𝟏𝟏+𝟏𝟏𝟏𝟏∗𝒙𝒙 𝟏𝟏𝟏𝟏𝟏𝟏 this must be set equal to 134.9315 Solve for x the following equation: 134.9315 = 𝟏𝟏𝟏𝟏𝟏𝟏 ∗ 𝟏𝟏𝟏𝟏𝟏𝟏+𝟏𝟏𝟏𝟏∗𝒙𝒙 𝟏𝟏𝟏𝟏𝟏𝟏 1.349315 = 𝟏𝟏𝟏𝟏𝟏𝟏+𝟏𝟏𝟏𝟏∗𝒙𝒙 𝟏𝟏𝟏𝟏𝟏𝟏 197 = 𝟏𝟏𝟏𝟏𝟏𝟏 + 𝟏𝟏𝟏𝟏 ∗ 𝒙𝒙 77 = 11*x x = 7

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Page 4 of 11 10) The following graph plots the percent change of the CPI over time for the US. The gray shaded regions represent recessions. Focus on 2002 and 2009. Given the plot, what can you say about the price level of the typical market basket of the US consumer? a) In 2002 the price level increased, but in 2009 the price level decreased. b) In 2002 the price level decreased, but in 2009 the price level increased. c) The price level increased in both 2002 and 2009. d) The price level decreased in both 2002 and 2009. 11) What is the difference between marginally attached and discouraged workers? a) Marginally attached workers are considered unemployed but discouraged workers are not b) Marginally attached workers have worked at least 8 hours in the past week while discouraged workers have not worked at all c) Marginally attached workers have looked for a job sometime in the prior 12 months while discouraged workers have not d) Marginally attached workers may have not actively searched for a job in the past 4 weeks for any reason, discouraged workers specifically believe there are no jobs available which they would qualify for 12) Which of the following people would be in the labor force? a) A college student involved in the Student Union. b) A stay at home mother who met with a job recruiter 10 days ago to apply for a job. c) A carpenter who was laid off 6 weeks ago and has been renovating his sister’s basement for free since he was laid off. d) A retiree who still answers questions from old coworkers but doesn’t get paid for it. 13) During the last year the unemployment rate of both men and women stayed constant. The male labor force stayed constant as well, but the female labor force increased. Which of the following must be true? a) The number of women unemployed stayed the same and the number of men unemployed increased. b) The number of women unemployed increased and the number of men unemployed stayed the same.

Page 5 of 11 c) Both the number of women unemployed and the number of men unemployed increased. d) Both the number of women unemployed and the number of men unemployed stayed the same. 14) The city of Gardaland has 5,000 inhabitants, of which 500 are too young to work. 100 people work guarding the city walls, 2,200 work in the local industries, and 220 work for the local government. If 80% of the people in working age currently are either employed or actively looking for a job, what is the unemployment rate of the city? a) 5% b) 10% c) 20% d) 30% AP = 5000 – 500 = 4,500 E = 100 + 2200 + 220 =2520 LF = 0.8*4,500 = 3,600 => U = 3600-2520 = 1080 UR = 1080/3,600 = 20% 15) The following graph plots the Lorenz curve for country X and for country Y. Based on the information in the graph, which of the following is true? a. The top 20 percent of households in Country X received 60 percent of the total income in country X. b. Income is less equally distributed in Country X than in Country Z. c. The average income in Country X is higher than the average income in Country Z. d. The top 20 percent of households in Country Z received 60 percent of the total income in country Z.

Page 6 of 11 16) Suppose that in 2020 many Americans started buying “The Witcher 3: Wild Hunt”, a Polish video game originally released in 2015 which takes place in the same universe as the hit Netflix show. Before 2020 sales for this game were zero in the US. Next suppose that CD Projekt, the Polish company that produces that video game, raises prices in response to this newly increased demand. Further suppose that the Statistical Agency last created the typical market basket of goods for the CPI in 2019. How will the price increase of “The Witcher 3: Wild Hunt“ affect US price indexes in 2020? a. The US GDP Deflator will increase because price levels increased; the US CPI will increase because the basket cost of consumption goods increased. b. The US GDP Deflator will remain constant because “The Witcher 3” is produced in Poland; the US CPI will increase because the basket cost of consumption goods increased. c. The US GDP Deflator will increase because price levels increased; the US CPI will stay the same because “The Witcher 3” isn’t in the CPI’s typical market basket. d. The US GDP Deflator will remain constant because “The Witcher 3” is produced in Poland; the US CPI will stay the same because “The Witcher 3” isn’t in the CPI’s typical market basket. 17) Due to the pandemic many older individuals (still of working age) quit their jobs out of fear of complications from the virus and lack of health insurance and retire early. Which of the following is necessarily true then? a. Unemployment would go up b. Unemployment rate would go down c. Labor force participation rate would go up d. Labor force participation rate would go down 18) Due to the pandemic many older individuals (still of working age) distributed uniformly across all sectors of the economy quit their jobs out of fear of complications from the virus and lack of health insurance and retire early. Which of the following is very likely to be true then? a. Equilibrium real wage would decrease. b. The same minimum wage policy with the same minimum wage level is now more likely than before the pandemic to create unemployment. c. We should observe inflation in the economy due to the wage inflation spiral mechanism. d. According to the theory of efficiency wage this should not have any impact on the economy. 19) In 2018, Laputa’s GDP was 240 euro and population was 10. Additionally, GDP in Wakanda was $20,000 and population was 325. Suppose the PPP exchange rate was 0.8€ per 1$. We would conclude that for 2018: a. PPP adjusted GDP in Laputa was $192. b. PPP adjusted GDP per capita in Laputa was $24. c. PPP adjusted GDP in Laputa was roughly twice that of Wakanda. d. PPP adjusted GDP per capita in Wakanda was more than twice that of Laputa. 20) Suppose that the Michael Scott Paper Company sells 100 packages of paper to consumers every quarter. To do this, it produces 150 packages of paper during odd quarters (Q1 and Q3) and 50 packages during even quarters (Q2 and Q4). This means that the company puts 50 packages into inventory in odd quarters. Suppose that the company can sell each package of paper for $2 in Q1 and Q2, and can sell it for $1 in Q3 and Q4. What is the Michael Scott Paper Company’s contribution to GDP each quarter? a. Q1 = $100, Q2 = $100, Q3 = $200, Q4 = $200 b. Q1 = $300, Q2 = $100, Q3 = $150, Q4 = $50 c. Q1 = $150, Q2 = $50, Q3 = $300, Q4 = $100

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Page 7 of 11 d. Q1 = $100, Q2 = $100, Q3 = $100, Q4 = $100 21) The primary target of job finding websites (such as Glassdoor, Monster etc.) and governmental employment agencies is to reduce: a. Structural Unemployment b. Frictional Unemployment c. Cyclical Unemployment d. None of the other answers 22) There are only two countries in the world: country A and B. The GDP of A is 300; the GNP of B is 500. Income earned by country A citizens located in country B is 50; income earned by country B citizens located in country A is 20. There are 5 citizens of country B living in country A, 5 citizens of country A living in country B, 5 citizens of country A living in country A and 48 citizens of country B living in country B. What are the GNP per capita of country A and the GDP per capita of country B respectively? a. 33; 47 b. 27; 47 c. 33; 10 d. 27; 10 Numerical Exercise A Refer to the following table of employment data for a fictitious “Fortnite” economy to answer the questions below. Number of people Total Adults 50,000 Last actively looked for work more than 8 weeks ago 10,000 Last actively looked for work 5-8 weeks ago 5,000 Last actively looked for work 2-4 weeks ago 0 Last actively looked for work within last 2 weeks 2,500 Working part-time while also seeking work 2,000 Paid employees 11,500 Unpaid in a family business 1,000 Self-employed 18,000 23) Refer to Numerical Exercise A info. What is the labor force participation rate in Fortnite? a. 92.9% b. 70% c. 42.9% d. 62.9% 24) Refer to Numerical Exercise A info. What is the unemployment rate in Fortnite? a. 1.1% b. 4.1% c. 7.1% d. 10.1%

Page 8 of 11 25) Refer to Numerical Exercise A info. If 1,000 of the adults who last sought a job within 2 weeks begin to search for work again today, what is the change in the unemployment rate? a. 0 percentage points b. 2 percentage points c. 4 percentage points d. 6 percentage points 26) Refer to Numerical Exercise A info. If 1,000 of the adults who last sought a job 5-8 weeks ago begin to search for work again today, what is the new unemployment rate in Fortnite? a. 12% b. 11.7% c. 10% d. 9.7% Solutions Number of employed adults = Paid employees + Working part-time while also seeking work + Unpaid in a family business + Self-employed = 11,500 + 2,000 + 1,000 + 18,000 = 32,500 Labor force = Adults who are employed + Adults who sought work within the past 4 weeks who are not actively employed Labor force = 32,500 + 2,500 = 35,000 Labor Force participation rate = (Labor force/Adult Population) * 100 = 70% Unemployed = Adults who have sought work within the past 4 weeks who are not actively employed Number of unemployed adults = 2,500 Unemployment rate = (Number unemployed / Labor force) * 100 = 7.1% If 1,000 of the adults who last sought a job within 2 weeks begin to search for work again today, this does not affect the unemployment rate. These adults were already included in the number of adults who are unemployed because they sought work within the past 4 weeks. So the change in the unemployment rate is 0 percentage point because there is no change. If 1,000 of the adults who last sought a job 5-8 weeks ago begin to search for work again today, then Yes, this affects the unemployment rate. These adults were previously not part of the labor force because they did not seek work within the past 4 weeks, but now they are considered unemployed. The new unemployment rate is: (New number of unemployed / New labor force) * 100 = [(1,000 + 2,500) / (1,000 + 35,000)] * 100 = 9.7% Numerical Exercise B Consider the following information for the economy of Titan that in 2013 started importing cookies from Saturn. 2012 is the base year. Use 2 decimals when needed for your computations. Year Pencils Books Cookies Price Quantity Price Quantity Price Quantity 2012 5 50 10 25 - - 2013 5.5 60 12 30 8 10

Page 9 of 11 2014 6.5 90 18 40 10 20 27) Refer to Numerical Exercise B info. Titan’s Nominal GDP in 2012 is: a. $800 b. $700. c. $600. d. $500. 28) Refer to Numerical Exercise B info. Titan’s Real GDP in 2013 is: a. $500 b. $600. c. $700. d. $800. 29) Refer to Numerical Exercise B info. Titan inflation according to the GDP deflator in 2014 is: a. 23.50% b. 33.50% c. 43.50% d. 53.50% 30) Refer to Numerical Exercise B info. Titan inflation according to the PCE deflator in 2014 is: a. 23.17% b. 33.17% c. 43.17% d. 53.17% Solution: Note since cookies are imported, they do not enter the computation for NGDP, nor RGDP. Hence for question 27), 28) and 29) you do not need to use any info about cookies. You need to consider only books and pencils. (5)(50)+(10)(25)=$500=NGDP 2012 RGDP 2013 only includes books and pencils for which you have prices in the base year. RGDP 2013 (base year 2012): (5)(60)+(10)(30)=$600 NGDP 2013: (5.5)(60)+(12)(30)=$690 NGDP 2014: (6.5)(90)+(18)(40) =$1,305 RGDP 2014 (base year 2012): (5)(90)+(10)(40)=$850 GDPD t = 100* NGDP t / RGDP t GDPD 2013 =100 *690/600 = 115 GDPD 2014 =100 *1,305/850= 153.53 Inflation 2014 = 100*(GDPD 2014 - GDPD 2013 )/ GDPD 2013 = 100*(153.53 – 115)/115 = 33.50%

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Page 10 of 11 For question 30), cookies are obviously part of consumption. There is a reason why they are imported: because households want to consume them. There are two possible ways to tackle the problem. a) Economic Intuition: from the table you see that the price of cookies has increase by 25% between 2013 and 2014=>100*(10-8)/8 = 25%. Since PCED is adding a good to the basket with respect to the basket for GDPD and since inflation according to GDPD for that period was 33.5% from question 29), then you know that PCED inflation will be a number smaller than 33.%% and in particular a number between 25% and 33.5%. So you can easily choose b) as an answer to MC30. b) If you did not have that intuition or you got somehow MC29 wrong: you need to compute real consumption and nominal consumption in order to obtain the PCE Deflator. Notice that for the base year you do not have info on the price for cookies. Hence you need to adopt the chained weighted method exactly like we did for RGDP. After all C is just a subset of Y. So there is no conceptual issue in using the chain weight method for C rather than for Y. Step 1: Calculate real consumption growth for an adjacent pair of years choosing one of the yeas as a base year. RCONS 2012 (base year 2012): (5)(50)+(10)(25)=$500 = NCONS 2012 RCONS 2013 (base year 2012): (5)(60)+(10)(30)=$600 RCONS growth between 2012-2013: 100*(600-500)/500=20% Notice than when using 2012 as the base year, we do not have information on prices of cookies because cookies were not imported back then. Therefore cookies are not considered in the real CONS of 2013. Step 2: Calculate RCONS growth between the same pair of years using the other year as a base year. RCONS 2012 (base year 2013): (5.5)(50)+(12)(25)+(8)(0)=575 RCONS 2013 (base year 2013): (5.5)(60)+(12)(30)+(8)(10)=770 RCONS growth between 2012 and 2013: 100*(770-575)/575=33.91% Step 3: Average the two numbers and obtain the growth rate between the two years. This procedure avoids any arbitrariness in the choice of base year, since both have been used. The resulting growth rate is: ((20%)+(33.91%))/2=26.96% Repeat steps 1 to 3, for the other adjacent pair of years. RCONS 2013 (base year 2013): (5.5)(60)+(12)(30)+(8)(10)=$770 = NCONS 2013 RCONS 2014 (base year 2013): (5.5)(90)+(12)(40)+(8)(20)=$1,135 RCONS growth between 2013 and 2014: 100*(1,135-770)/770=47.40% RCONS 2013 (base year 2014): (6.5)(60)+(18)(30)+(10)(10)=$1,030 RCONS 2014 (base year 2014): (6.5)(90)+(18)(40)+(10)(20)=$1,505 = NCONS 2014 RCONS growth between 2013 and 2014: 100*(1,505-1,030)/1,030=46.12% Average growth rate=((47.40%)+(46.12%))/2=46.76% Step 4: Calculate the chain-weighted series of RCONS based on 2012, using the growth rates appropriately. RCONS 2012= (5)(50)+(10)(25)=$500 (recall that in the base year RCONS=NCONS) RCONS 2013= 500*(1+0.2696)=$634.8 RCONS 2014=634.8*(1+0.4676)=$931.63 PCED t = 100* NCONS t / RCONS t PCED 2013 =100 *770/634.8 = 121.30 PCED 2014 =100 *1,505/931.63= 161.54

Page 11 of 11 Inflation 2014 = 100*( PCED 2014 - PCED 2013 )/ PCED 2013 = 100*(161.54 – 121.3)/121.3 = 33.17%

Exam1_solFA2022

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