Department of Economics

ECON 303/2BB: Intermediate Macroeconomic Theory I

Fall 2013

Midterm exam #1, October 15, 2013

Instructor: Yves Tehou

STUDENT NAME___________________________________________________

STUDENT ID ____________________________

Instructions: There are a total of 25 points. The exam has two sections: multiple-choices and short problems. The multiple-choice section is worth 15 points, and the short problems section is worth 10 points. For the multiple-choice questions, circle ONE answer for each question. For short problems, all answers must be clearly derived.

I- Multiple choices (15 points)

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1- Primarily, macroeconomists use microeconomic principles to study

A) business cycles and trends in the stock market.

B) long-run economic growth and antitrust policies.

C) trends in the stock market and long-term economic growth.

D) long-run economic growth and business cycles.

2- The relationship between the level of growth of an economic variable, gt, and its level, yt, is best approximated as

A) gt =

yt

. yt −1

B) gt = log yt - log yt-1.

C) yt = log gt - log gt-1.

D) log gt = yt - yt-1.

3- Anny Brown produces and sells $1100 worth of flowers. She uses no intermediate inputs. She pays his workers $700 in wages, pays $100 in taxes and pays $200 in interest on a loan. Anny's contribution to GDP is

A) $900.

B) $1000.

C) $1100.

D) $1800.

4- A furniture maker used to buy its wood, but has now bought the lumber company.

How does this impact GDP?

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A) It reduces it.

B) It does not change.

C) It increases it.

D) We cannot tell.

5- Suppose that the government collects $3 million in taxes, pays $2 million in social security benefits, pays $0.5 million in interest on the national debt, and pays workers $1 million to sit at their desks and work as little as possible. The government's contribution to GDP is

A) $0.

B) $1 million.

C) $3 million.

D) $3.5 million.

6- The expenditure components of GDP include all of the following except

A) consumption.

B) investment.

C) net exports.

D) net factor payments.

7- The income-expenditure identity is best paraphrased as

A) all spending generates income.

B) all profits are used for investment spending.

C) on average, consumers cannot save.

D) on average, government can spend no more than what it collects in income taxes. 8- Suppose that the BMW plant in London, ON, produces $10 million worth of vehicles in a given year. Of this total amount, $1 million in profits are returned to the owners of the company in Germany. The $1 million in profits

A) contributes to both Canadian GDP and Canadian GNP.

B) contributes to Canadian GNP, but not Canadian GDP.

C) contributes to Canadian GDP, but not Canadian GNP.

D) contributes to neither Canadian GDP, nor Canadian GNP.

9- The frequency of the business cycle refers to

A) how variable it is.

B) how large the deviations from trend are.

C) how long a cycle lasts.

D) how much it leads or lags.

10- The property that macroeconomic variables fluctuate together in patterns that exhibit strong regularities is called

A) coincidence.

B) co-movement.

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C) correlation.

D) coexistence.

11- When a macroeconomic aggregate is procyclical

A) it grows faster than GDP.

B) its deviations from trend generally change before the deviations from trend in

GDP do.

C) its deviations from trend generally change more that the deviations from trend in GDP.

D) its deviations from trend are more often of the same sign as the deviations from trend in GDP.

12- A lagging variable can be recognized by the fact that

A) its persistence is smaller than that of GDP.

B) its turning points happen before the turning points of GDP.

C) the turning points of GDP happen before its turning points.

D) its persistence is larger than that of GDP.

13- A utility function

A) needs to measure the absolute level of happiness.

B) needs to measure relative amounts of happiness for a single individual. C) helps compare the relative happiness of two separate consumers.

D) is most useful if it can be influenced by others.

14- The marginal rate of substitution measures

A) the willingness of a consumer to exchange a good with another consumer.

B) the willingness of a consumer to pay the form for a good.

C) the value in dollars of the last unit of good obtained by the consumer.

D) the rate at which a consumer is willing to exchange one good for another. 15- In a one-period economy, all of the following are equivalent expressions of the budget constraint except

A) C = w(NS + l) + π - T.

B) C = wNS + π - T.

C) C = w(h - l) + π - T.

D) C = wl = wh + π - T.

II- Short Problems (10 points)

1- (4 points) Suppose an economy produces only bread and computers. Assume that all production is consumed in each year, and that price and quantity data are given in the table below.

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A)- If Year 1 is the base year, what is the GDP price deflator for Year 2?

Here, students may need use the result of part c. That is correct. In that case:

GDPDeflator =

Nomin alGDP(year2) x100 Re alGDP(year2)

40x15 + 30x60

2400

x100 = x100 1900

1900

= 126.3

=

B)- If Year 1 is the base year, what is the CPI for Year 2

Q(year1)xP(year2) x100 Q(year1)xP(year1)

30x15 + 10x60

=

x100

30x10 + 10x50

1050

= x100 = 131.25

800

CPI 2 =

C)- If Year 1 is the base year, what is the real GDP of Year 2?

Real GDP year 2=

bread bread Computer computer Qyear 2 xPyear1 + Qyear 2 xPyear1

= 40x10+30x50= 1900

2- (2 points) Assume that in an economy with 200M inhabitants, 90M work, 4M are looking for a job, 3M receive unemployment insurance compensation, and 6M receive unemployment insurance compensation and are looking for a job.

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A)- What is the unemployment rate?

Labour force= 90(workers)+4(looking for a job)+6(unempl. insurance and looking for a job)=100M

Nber of unemployed=4+6=10

Unemployment

Rate =

number unemployed

10

x100 = x100 = 10% labor force

100

B)- What is the participation rate?

Case 1: Total working age= 200M. We assume all the population, because we do not have any other information about the proportion not working age population.

Case 2We accept, however, any other consideration of working age population, such as

90+4++3+6=103M

In either caseParticipation rate=

labor force x100 total working age population

Case 1, PR= (100/200)x100=50%

Case 2, PR=(100/103)x100= 97% too high!!!

3- (4points) Sampleland is a small economy with only companies : Ricefarm, and Resto.

Ricefarm produces 5000 tonnes of rice, sells 2000 tonnes of rice to Resto at $30 per tonne, exports 2500 tonnes at $30 per tonne, and stores 500 tonnes as inventory. Ricefarm pays

$50 000 in wages to consumers. Resto produces 10 000 rice dishes, and sells to

Sampleland consumers at $10 per dish. Resto pays consumers

$20 000 in wages. In addition to the 10 000 rice dishes consumers buy from Resto, they import and consume 3 000 of rice dishes, and they pay $5 per dish for this imported rice dishes. Calculate the GDP of Sampleland using one of the following approaches: the product approach, the expenditure approach, or the income approach.

. Product approach: the value of Ricefarm’s production is equal to $150,000. the value of Resto’s production is equal to $100,000.. Resto pays $60,000 to

Ricefarm, which is an intermediate input. Resto’s value added is therefore

$40,000. GDP is therefore equal to $190,000.

. Expenditure approach: Consumers buy 10,000 rice dishes of domestically

produced at $10/dish and 3,000 dishes of imported cooked rice at $5/dish.

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Consumption spending is therefore equal to $100,000 + $15,000 = $115,000.

Ricefar, adds 500 tonnes of rice to inventory. Rice is worth $30/tonne, so investment is equal to $15,000. Ricefarm exports 2,500 tonnes of rice for

$30/tonne. Exports are $75,000. Consumers import 3,000 rice dishes at

$5/dish. Imports are $15,000. Net exports are equal to $75,000 − $15,000 =

$60,000. There is no government spending. GDP is equal to consumption

($115,000) plus investment ($15,000) plus net exports ($60,000). GDP is therefore equal to $190,000.

. Income approach: Ricefarm pays $50,000 in wages. Resto pays $20,000 in wages.

Total wages are therefore $70,000. Ricefarm’s production is $150,000 and pays $50,000 in wages. Ricefarm’s profits are $100,000. Resto’s production is

$100,000. Resto pays $20,000 in wages and pays $60,000 to Ricefarm for rice.

Resto’s profits are $100,000 − $20,000 − $60,000 = $20,000. Total profit income in the economy equals $100,000 + $20, 000 = $120,000. Total wage income

($70,000) plus profit income ($120,000) equals $190,000. GDP is therefore

$190,000.

Bonus problem (2 point)

Show that: Sp - I = CA + D

Where Sp is Private Sector Saving, I is Investment, CA is Current Account Surplus, and D is the government deficit.

By definition:

S p = Y d − C = Y + NFP + TR + INT − T − C

Next, recall that Y = C + I + G + NX . Substitute into the equation above and subtract I to obtain:

S p − I = C + I + G + NX + NFP + INT − T − C − I

= ( NX + NFP ) + (G + INT + TR − T )

= CA + D

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