Midterm 1 Macro Review Materials A Solutions

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Midterm 1 Macro Review Materials A Ed Cho 1. Which of the following may NOT raise a country’s standard of living? a. Increases in human capital investment b. Increases in labor productivity c. Increases in total factor productivity d. Increases in population growth e. Increases in capital per worker 2. An unexpected budget surplus will _____________ private savings and ______________ national savings. a. Increase; increase b. Increase; decrease c. Decrease; increase d. Decrease; decrease e. Decrease; not change 3. Consider two equally risky bonds, both of which have a face value of $100 and a coupon rate of 8%. Interest rates are expected to remain at 10% for at least the next two years. One bond matures in one year and the other bond matures in two years. Which of the following is true? a. The price of both bonds must be equal. b. The price of the one-year bond must be greater than the price of the two-year bond. c. The price of the two-year bond must be greater than the price of the one-year bond. d. The one-year bond will sell for more than its face value. e. All of the other choices are true 4. The present value of a payment to be made in the future falls as a. the interest rate rises and the time until the payment is made increases b. the interest rate rises and the time until the payment is made decreases c. the interest rate falls and the time until the payment is made increases d. the interest rate falls and the time until the payment is made decreases 5. Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is a. 2 percent b. 4 percent c. 6 percent d. 8 percent e. All of the above are correct

6. Penelope pays her real estate broker $5000 to help her find a new home she purchases for $100,000. As a result of these two activities, a. GDP does not change b. GDP increases by $5000 c. GDP increases by $100,000 d. GDP increases by $95,000 e. GDP increases by $105,000 7. Moldavia’s GDP doubles every 14 years. What is the average annual growth rate of GDP? a. 3% b. 9% c. 7% d. 5% e. 14% 8. If a government increases its budget deficit, then a. the real interest rate rises and investment rises b. the real interest rate falls and investment falls c. the real interest rate rises and investment falls d. the real interest rate falls and investment does not change e. the real interest rate falls and investment rises 9. Investment as measured in the national income accounts is: a. stocks, bonds, and other financial assets b. real estate and financial assets c. new cars and trucks purchased by households d. financial assets, new capital equipment, inventories, structures and new housing e. new capital equipment, inventories, structures and new housing 10. Increased deficit spending by the government will cause the most crowding out of private investment when the demand for loanable funds is _______________. a. downward sloping with a slope of -1 b. vertical c. unit elastic d. elastic e. inelastic 11. Which of the following is not included in GDP? a. a can of bug spray b. the services of an exterminator c. the honey produced and sold by a beekeeper d. eating a dinner at a restaurant e. All of the above are included in GDP

12. Quality Motors is a Japanese-owned company that produces automobiles; all of its automobiles are produced in American plants. In 2010 Quality Motors produced $30 million worth of automobiles, with $17 million in sales to Americans, $9 million in sales to Canadians, and $4 million worth of automobiles added to Quality Motors’ inventory. The transactions just described contribute how much to U.S. GDP for 2010? a. $13 million b. $17 million c. $21 million d. $26 million e. $30 million 13. The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown below. The base year is 2008. Prices and Quantities Year Price of Cereal Quantity of Cereal Price of Milk Quantity of Milk 2008 $4.00 90 $1.50 150 2009 $4.00 100 $2.00 180 2010 $5.00 120 $2.50 200 2011 $6.00 150 $3.50 200 This country’s output grew a. 29.9% from 2008 to 2009. b. 33.3% from 2009 to 2010. c. 24.3% from 2009 to 2010. d. 15.4% from 2010 to 2011. e. 12.2% from 2010 to 2011. 14. All else equal, which of the following would tend to cause real GDP per person to rise? a. a change from outward-oriented policies to inward-oriented policies b. an increase in investment in human capital c. a weakening of property rights d. a decrease in natural rescources e. All of the above are correct 15. When a tariff is imposed on a good that is imported by a given country, which of the following quantities decrease compared to a situation when country traded without tariff? a. only domestic producer surplus b. only domestic consumer surplus c. both domestic consumer surplus and total surplus d. only total surplus e. government revenue

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16. A bond has a maturity of 3 years, a face value of $100, and a coupon rate of 15%. Assuming that the interest rate is 5%, the present value of the bond is closest to a. $95 b. $100 c. $125 d. $150 e. 170 17. Satchel loses his job and immediately begins looking for another. Other things the same , the unemployment rate a. increases and the labor-force participation rate decreases. b. and the labor-force participation rate both increase. c. increases and the labor-force participation rate is unaffected. d. decreases and the labor-force participation rate is unaffected. e. is unaffected and the labor-force participation rate decreases. 18. In the labor market, assume a downward sloping demand curve and an upward sloping supply curve. When a union raises the wage above the equilibrium level, a. the quantity of labor supplied and unemployment both rise. b. the quantity of labor supplied is unaffected and unemployment falls. c. the quantity of labor supplied and unemployment both fall. d. the quantity of labor supplied rises and unemployment falls. e. the quantity of labor supplied falls and unemployment rises.

Long Question Section 1. In the small nation of Catmandu, real GDP is produced using the following production function where Y is real GDP, A represents total factor productivity, K is the capital stock and L is the number of hours worked in Catmandu. Assume that α = 0.30. a. Briefly described what A attempts to measure. A is total factor productivity, and captures the level of technological progress, human capital, managerial and entrepreneurship level, and other such intangible factors. b. Assume that the growth rate of the capital stock is 0%, the number of hours worked by Catmanduians increases 1% per year and total factor productivity grows 2% per year. Calculate the growth rate of output. %ΔY = %ΔA + α%ΔK + (1- α) %ΔL. We know that %ΔA = 2%, %ΔK = 0%, and %ΔL = 1%. To calculate %ΔY precisely, we need to know α. But since α = 0.3 %ΔY =%ΔA + α %ΔK +(1- α) %ΔL = 2.7% c. The government of Catmandu wishes to increase per capita consumption. The Federation of Reactionary Businessmen (FRB) suggests that the government encourage workers to work longer hours, retire later, and spend less time in graduate school. Why might the FRB think its proposal would increase per capita consumption? (∗ 3) ࠵? ࠵?࠵?࠵? = (1 − ࠵?) - ࠵? ࠵? 0 - ࠵? ࠵?࠵?࠵? 0 All of these suggestions would increase labor force participation (L/pop), which would increase per capita consumption. d. The government hires you to suggest an alternative proposal. Which variables should the government focus on to permanently increase the annual growth of consumption per capita? Explain. To generate permanently higher growth in per capita consumption, the government should focus on ways to increase labor productivity. To generate permanent increases in labor productivity, the government should foster growth in total factor productivity or in capital per worker. Higher labor force participation may increase GDP for a little while, but it cannot increase indefinitely. a a - = 1 L AK Y

2. Over the past decade, Arborland businesses have been making many investments in structures and new equipment due to strong growth in the local economy. In 2015, businesses wary that they have overinvested in too much physical capital, reduce the amount of investment they make in 2015. For this event, draw a well-labeled diagram for the loanable funds market in 2015. Label the initial equilibrium as point A, and the post equilibrium as point B. Qualitatively (increase/decrease/no change) determine the effect this event has on the new equilibrium interest rate, investment, national savings, private savings and public savings. Explain. As businesses reduce the amount of investment, the demand curve will shift in. Using the diagram, interest rates decrease, investment decreases, national savings decrease, private savings decreases, and public savings stays the same. Private savings decreases because the interest rate is now lower, or the return on savings is now lower. Public savings stays the same, because there was no change in the government budget or surplus. Since public savings remains constant and private savings decreases, national savings must decrease.

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Midterm 1 Macro Review Materials A Solutions

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