Exam1_solSP2022

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University of Pennsylvania *

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Economics

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Feb 20, 2024

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Econ 002- INTRO MACRO Prof. Luca Bossi February 16, 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) We have the following information about a tie manufacturer: thefinal sales of ties generate $1500, the manufacturer purchases cotton for $950 to produce the ties, it employs 20 workers at $10/worker and pays $200 in interest payments. There are no rents. What is the contribution to GDP of this manufacturer? a. $550 b. $600 c. $750 d. Not enough information 2) Discouraged workers are currently not considered as being unemployed. If the definition of unemployed was changed to include discouraged workers, what would be the effect of this on the unemployment rate and the labor force participation rate? a. The unemployment rate would increase while the labor force participation rate would be unchanged b. The unemployment rate would decrease while the labor force participation rate would increase c. Both the unemployment rate and the labor force participation rate would increase d. Both the unemployment rate and the labor force participation rate would decrease 3) 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. 4) 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 $1 in Q1 and Q2, and can sell it for $2 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 = $150, Q2 = $50, Q3 = $150, Q4 = $50 c. Q1 = $150, Q2 = $50, Q3 = $300, Q4 = $100 d. Q1 = $100, Q2 = $100, Q3 = $100, Q4 = $100

Page 2 of 10 5) If Suzanne switches from going to a professional mechanic for an oil change to changing the oil in her car herself, then, all else equal, GDP a. necessarily rises. b. necessarily falls. c. will be unaffected because the same service is produced in either case. d. will be unaffected because car maintenance is not included in GDP. 6) Suppose that an economy produces 40,000 units of good A which sells at $4 a unit and 20,000 units of good B which sells at $5 per unit. Production of good A contributes a. 2 times as much to NGDP as the production of good B. b. 8/5 times as much to NGDP as the production of good B. c. 5/4 times as much to NGDP as the production of good B. d. 4/5 times as much to NGDP as production of good B. 7) Due to restrictions related to Covid-19, prices of all imported final goods in New Zealand increased while prices of all domestic final goods remained the same. Which of the following would be likely true about inflation as measured by GDP Deflator and PCED in New Zealand? a. Both measures would remain same. b. Both measures would increase. c. Inflation measured by PCED would increase, inflation measured by GDP Deflator would remain the same. d. Inflation measured by PCED would remain the same, inflation measured by GDP Deflator would increase. 8) In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover’s 1931 salary was equivalent to a 2007 salary of about a. $5507. b. $1,021,382. c. $1,140,000. d. $15,525,000. 9) Suppose the price for one gallon of orange juice rises from $3.50 to $4.00 and the price of one gallon of apple juice rises from $3.00 to $3.20. If the CPI rises from 120 to 132, then people will likely buy a. more orange juice and more apple juice. b. more orange juice and less apple juice. c. less orange juice and more apple juice. d. less orange juice and less apple juice. 10) 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 11) Americans love to eat peaches. One year, an unanticipated storm destroys half of the peach supply in the United States, leading to an increase in the price of peaches. Suppose that the price of all other goods stays constant. Which of the following is true?

Page 3 of 10 a. If Americans consume more plums because of the increase in the price of peaches, the CPI overestimates the impact of the storm on cost of living. b. The CPI declines because the supply of peaches has declined c. The CPI can no longer be used to compare across years because the supply of peaches is not fixed d. The CPI should be calculated using the previous year’s peach prices because the storm was unanticipated 12) 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 BLS 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. 13) In December 2020 both Miciaville and Burritaville land passed legislation to set their local minimum wage to $15 which is more than double the current federal level of $7.25. Back then the local unemployment rates in those cities were 2.5% and 4% respectively. Assume that, after the minimum wage change, Miciaville is experiencing an unemployment rate of 2.2% and Burritaville is at 3.9%. These unemployment rate figures are in stark contrast with the textbook prediction concerning the introduction of minimum wage we have seen in class. The most likely economic explanation for this is due to the fact that in both those cities a. labor supply has increased b. labor supply has stayed constant c. labor demand has decreased d. labor demand has increased 14) Which of the following people count as unemployed? a. Sarah looks after her child during the day while also actively looking for a job at night. b. Paul operates a successful cake decorating business out of his home c. Laura retired 3 months ago and now volunteers at the animal shelter d. Charlie is a full-time student who is looking for a scholarship to pursue graduate studies 15) Which of the following is an explanation for the existence of frictional unemployment? a. efficiency wages b. minimum-wage laws c. unions d. job search 16) Which of the following is NOT a reason that paying efficiency wages may increase a firm's profit?

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Page 4 of 10 a. Efficiency wages increase worker health and therefore increase worker productivity. b. Efficiency wages decrease worker turnover and therefore decrease hiring and training costs. c. Efficiency wages decrease worker shirking and therefore increase worker productivity. d. Efficiency wages decrease a country's natural rate of unemployment and therefore increase its standard of living. 17) The residents of country A earn $500 million of income from abroad. Residents of other countries earn $200 million in country A. The earnings that Country A residents earn abroad are accounted for in country A's a. GNP which is larger than GDP in country A. b. GNP which is smaller than GDP in country A. c. GDP which is larger than GNP in country A. d. GDP which is smaller than GNP in country A. 18) Which of the following is most likely to increase the Gini coefficient in the home country? a. An increase in the unemployment rate b. An increase in the wages of the bottom 10% income individuals c. An income tax system that taxes the rich more than the poor (i.e a progressive tax system). d. An increase in number of top 1% (income) individuals moving abroad from the home country. 19) Wegmans, a U.S. grocery chain, purchases olive oil from Greece and sells it to U.S. consumers. Where are these transactions included? a. U.S. consumption and U.S. imports b. U.S. consumption but not U.S. imports c. U.S. imports but not U.S. consumption d. neither U.S. consumption nor U.S. imports 20) 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 21) 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

Page 5 of 10 22) The government decides to stimulate the economy (despite claims that this is causing inflation). In order to do so, they provide another round of unemployment benefits transfer checks to unemployed households who qualify. The amount of these checks would be included under which component of GDP when using the expenditure approach? a. Consumption b. Investment c. Government spending d. None of the other answers 23) The graph below depicts the percent change in the U.S. GDP deflator from the previous quarter with 2012 as the base year. Which of the following can we surely conclude from the graph? a. Prices in all periods were higher than in 2012. b. The downward sloping parts of the graph correspond to price levels declining from one quarter to the next. c. Price levels declined from 2020 Q1 to 2020 Q2. d. We cannot conclude any of the other answers for sure. 24) The graph below shows the Lorenz curve of Economy A (red line) and the Lorenz curve of Economy B (blue curve) together with the line of perfect equality (black line), what can you conclude about the Gini coefficients of economies A and B?

Page 6 of 10 a. There is not enough information to determine which Gini coefficient will be higher. b. Economy A and B have the same Gini coefficient. c. The Gini coefficient of economy B will be higher than that of economy A. d. The Gini coefficient of economy A will be higher than that of economy B. Numerical Exercise A Use 2 decimals when needed for your computations. Consider the imaginary country of Mordor. Since this is a magical world, all Mordorians are born adults, capable of working immediately. No Mordorian ever dies. You know that 50% of the population is hired by Gandalf's company. Gandalf's company is the only employer on Mordor. Mordor is an island, and no movement is possible in or out of Mordor. Frodo runs a census study on Mordorians. He trips over a ring and loses some information. The missing information is denoted by the symbols ?? in the table below. Help him recover what he lost. Frodo knows that 60% of Mordorians are elves while the rest are trolls. Mordorians Elves Trolls # employed 100 80 ?? # unemployed 20 5 15 Not in labor force ?? ?? ?? Total population ?? ?? ?? 25) Refer to Numerical Exercise A info. What is the number of Mordorians not in the labor force and the number of the trolls employed in that order? a. 80; 20 b. 120; 20 c. 80; 50 d. Not enough information

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Page 7 of 10 26) Refer to Numerical Exercise A info. What is the unemployment rate for Trolls? a. 54.78% b. 42.86% c. 71.25 percent d. None of the others. 27) Refer to Numerical Exercise A info. What is the labor force participation rate for Elves? a. 70.83% b. 82.16% c. 68.51% d. None of the others. Labor force = # employed + # unemployed = 100 + 20 = 120 You know that 50% of the population is employed and this corresponds to 100 Mordorians. The Total Adult population is thus 200. So 80 are those not in the labor force. Trolls employed = 20 (because total Mordorians employed are 100 – 80 Elves employed = 20 Trolls employed) Elves not in the LF = 35 (Because the total population of Mordorians is 200 of which 60% =120 are the total number of Elves in the population. Of those 120, we are told 80 are employed and 5 are unemployed hence 35 = 120 - 80 – 5 are the one that are not in the labor force). Trolls not in the LF = 45 (from part b) of the question above you know that 80 is the total number of Mordorians not in the labor force, from letter A you know that 20 are the trolls employed hence 45 = 80-20- 15 are the trolls not in the labor force) Total Population = 200 this is simply adding 120 to 80 Elves total population = 120 (60% of 200 are Elves) Trolls total population = 80 (40% of 200 are Trolls) Total labor force for Elves is 85 (80 employed + 5 unemployed). Total labor force for Trolls is 35 (20 employed + 15 unemployed). LFPR for Elves =100*(# Elves unemployed + # Elves employed) /AP of Elves So 100*85/120 = 70.83% U-rate for Trolls =100*# Trolls unemployed /Labor force of Trolls So 100*15/35 = 42.86% Numerical Exercise B Use 2 decimals when needed for your computations. Please read the table’s headers very carefully. The table below presents information for all the prices (P) and quantities (Q) of the products that are produced and/or consumed in Arabba’s economy for the period 2018-2020. Let 2018 be the base year. Year Coffee - imported Jet Planes- produced domestically P Q P Q 2018 8 4 50 3 2019 9 5 55 3

Page 8 of 10 2020 8.5 4 56 4 Year Bread – produced domestically Butter- produced domestically P Q P Q 2018 3 12 5 6 2019 2 10 4 8 2020 4 13 5 10 28) Refer to Numerical Exercise B info. According to the GDP deflator, Arabba’s inflation in 2019 is: a. 7.14% b. -4.59%. c. -1.36%. d. 12.36%. 29) Refer to Numerical Exercise B info. There are two identical households that consume all the available amount of consumption goods that are in Arabba in 2020. The two households split each relevant consumption good exactly in equal amounts (do not round). This arrangement constitutes the typical market basket of a consumer that is used to compute the CPI. What is the 2020 inflation rate using the CPI? a. 19.44%. b. 23.87%. c. 33.33%. d. 26.92%. 30) Refer to Numerical Exercise B info. What is 2019 Arabba’s inflation rate using the Personal Consumption Expenditure Deflator? a. 20.14% b. -11.82% c. 12.68% d. -3.59% Answers: First, calculate the NGDP and RGDP. Notice that they coincide in 2018 because the base year is 2018. Besides, as coffee is imported, it is not included when calculating GDP. Year Nominal GDP Real GDP GDPD 2018 50x3+3x12+5x6=216 216 100 2019 55x3+2x10 +4x8 =217 50x3+3x10+5x8=220 100*217/220=98.64 2020 56x4+4x13+5x10=326 50x4+3x13+5x10=289 100*326/289=112. 80 Then calculate the GDP Deflator and the inflation rate. Recall the following formulas: GDPD t = 100*NGDP t /RGDP t Inflation in period t = 100* (GDPD t -GDPD t-1 )/GDPD t-1

Page 9 of 10 Year Inflation rate 2018 Not available 2019 100*(98.64-100)/100=-1.36% b) First notice that in the typical basket each consumer consumes 2 units of coffee, 6.5 units of bread, and 5 of butter. We cannot include Jet Planes because they are an investment good and not a consumption good. Coffee is imported but still obviously a obviously consumption good and bread and butter are consumption goods too. Then calculate the CPI and the inflation rate. Recall the following formulas: CPI t = 100*BK t /BK BP Inflation in period t = 100* (CPI t - CPI t-1 )/CPI t-1 = 100* (BK t - BK t-1 )/BK t-1 Year Basket cost Inflation Rate 2018 2x8+6.5x3+5x5 = 60.5 Not available 2019 2x9+6.5x2+5x4 = 51 100*(51-60.5)/60.5 = -15.70% 2020 2x8.5+6.5x4+5x5 = 68 100*(68-51)/51 = 33.33% c) When solving this you have to remember that in the RPCE and NPCE all the consumption goods are included when available (coffee, bread, and butter). Besides, remember we are using 2018 as the base year. Year NPCE RPCE 2018 8x4+3x12+5x6=98 98 2019 9x5+2x10+4x8 = 97 8x5+3x10+5x8=110 Then calculate the PCED and the inflation rate. Recall the following formulas: PCED t = 100*NPCE t /RPCE t Inflation in period t= 100*(PCED t -PECD t-1 )/PECD t-1 Year PCED Inflation rate 2018 100 Not available

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Page 10 of 10 2019 100*97/110 = 88.18 100*(88.18-100)/100 = -11.82%

Exam1_solSP2022

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