ECON 1 - Principles of Macroeconomics Drake University, Fall 2012 William M. Boal

EXAMINATION 3

### Version A

I. Multiple choice [1 pt each: 15 pts total]

(1)c. (2)c. (3)a. (4)b. (5)b. (6)a. (7)c. (8)a. (9)c. (10)c.
(11)c. (12)d. (13)b. (14)c. (15)b.

II. Problems

(1) [Aggregate production function: 5 pts]

1. false.
2. true.
3. true.
4. false.
5. true.

(2) [Measuring the labor force: 3 pts]

1. out of the labor force.
2. employed.
3. out of the labor force.

(3) [Measuring the labor force: 8 pts]

1. 234.6 million.
2. 61.7 percent.
3. 66.0 percent.
4. 6.5 percent.

(4) [Growth of capital stock: 2 pts] \$29,462 billion.

(5) [Interest rate and GDP shares: 16 pts]

1. 3 percent.
2. 68 percent.
3. 15 percent.
4. 1 percent.
5. 16 percent.

(6) [Interest rate and GDP shares pts] Note: Under this scenario, the (C/Y) curve in the first graph shifts left, so the downward-sloping (NG/Y) curve in last graph also shifts left by the same amount. Since the vertical line labeled "100%-(NG/Y)" in the last graph does not change, the equilibrium interest rate decreases.

1. decreases.
2. decreases.
3. increases.
4. increases.
5. increases.
6. Investment is spending on new economic capital, such as buildings, machines, vehicles, computers, and software. In the long-run, the level of real GDP depends on the size of the labor force, the level of the capital stock, and technology. Since investment spending increases, the capital stock grows faster and the long-run growth rate of real GDP will increase.

(7) [Malthusian limits to growth: 8 pts]

1. \$3000.
2. just enough.
3. constant.
4. more than enough.
5. increase.
6. 8 million.
7. \$3000.
8. \$3000.

(8) [Teechnical change: 4 pts]

1. 1.5 percent.
2. 0.8 percent.

(9) [Functions of money: 4 pts]

1. store of value.
2. medium of exchange.
3. unit of account.

(10) [Measuring the money supply: 10 pts]

1. \$1371 billion.
2. \$7306 billion.
3. \$801 billion.
4. 9.1.
5. 1.9.

(11) [Quantity equation: 2 pts] 6.0 percent.

(12) [Phelps-Friedman critique of Phillips curve: 14 pts]

1. 196 million.
2. \$7.
3. 0 percent.
4. 12 million.
5. 188 million.
6. 6.0 percent.
7. 6 million.
8. 192 million.
9. 3.0 mpercent.
10. \$11.
11. 12 million.
12. 188 million.
13. 6 percent.

III. Critical thinking [4 pts]

(1) One should disagree with this statement. People who are not working are not necessarily unemployed. To be counted as "unemployed," a person must not have a job, but must have looked for work in the last four weeks. Persons who have not looked for work in the last four weeks are counted as "out of the labor force." This last category includes people who have given up looking for work because they do not believe jobs are available ("discouraged workers") and people who do not want a job (such as retired persons or full-time homemakers).

(2) One should disagree with this statement. To promote long-run growth, the government should not encourage consumers to spend more. If consumption were encouraged, the (C/Y) curve in the spending shares model would shift right. This would cause the (NG/Y) curve to shift right and would drive up the real interest rate. Now investment's share of GDP (I/Y) is negatively related to the interest rate in the GDP shares model. So investment--that is, spending on new capital such as buildings, machines, vehicles, computers, and software--would decrease. Since potential GDP depends in part on the level of the capital stock, any reduction in investment spending would decrease long-run growth.

### Version B

I. Multiple choice [1 pt each: 15 pts total]

(1)d. (2)b. (3)c. (4)a. (5)a. (6)c. (7)d. (8)b. (9)d. (10)b.
(11)d. (12)c. (13)c. (14)a. (15)c.

II. Problems

(1) [Aggregate production function: 5 pts]

1. false.
2. true.
3. false.
4. true.
5. true.

(2) [Measuring the labor force: 3 pts]

1. unemployed.
2. employed.
3. unemployed.

(3) [Measuring the labor force: 8 pts]

1. 238.5 million.
2. 58.3 percent.
3. 64.4 percent.
4. 9.5 percent.

(4) [Growth of capital stock: 2 pts] \$30,884 billion.

(5) [Interest rate and GDP shares: 16 pts]

1. 4 percent.
2. 67 percent.
3. 12 percent.
4. 0 percent.
5. 12 percent.

(6) [Interest rate and GDP shares pts] Note: Under this scenario, the vertical line labeled "100%-(G/Y)" in the last graph graph shifts left. Since the downward-sloping (NG/Y) curve in last graph is unchanged, the equilibrium interest rate increases. The first three graphs show that the spending shares (C/Y), (I/Y), and (X/Y) are all negatively related to the interest rate.

1. increases.
2. increases.
3. decreases.
4. decreases.
5. decreases.
6. Investment is spending on new economic capital, such as buildings, machines, vehicles, computers, and software. In the long-run, the level of real GDP depends on the size of the labor force, the level of the capital stock, and technology. Since investment spending decreases, the capital stock grows more slowly and the long-run growth rate of real GDP will decrease.

(7) [Malthusian limits to growth: 8 pts]

1. \$4000.
2. more than enough.
3. increase.
4. not enough.
5. decrease.
6. 5 million.
7. \$4000.
8. \$4000.

(8) [Teechnical change: 4 pts]

1. 1.2 percent.
2. 1.3 percent.

(9) [Functions of money: 4 pts]

1. store of value.
2. unit of account.
3. medium of exchange.

(10) [Measuring the money supply: 10 pts]

1. \$1662 billion.
2. \$8455 billion.
3. \$801 billion.
4. 5.1.
5. 1.7.

(11) [Quantity equation: 2 pts] 0.9 percent.

(12) [Phelps-Friedman critique of Phillips curve: 14 pts]

1. 195 million.
2. \$8.
3. 0 percent.
4. 10 million.
5. 190 million.
6. 5.0 percent.
7. 6 million.
8. 192 million.
9. 3.0 mpercent.
10. \$13.
11. 10 million.
12. 190 million.
13. 5 percent.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 15 pts total]

(1)b. (2)a. (3)a. (4)b. (5)b. (6)b. (7)a. (8)c. (9)a. (10)a.
(11)a. (12)d. (13)d. (14)b. (15)e.

II. Problems

(1) [Aggregate production function: 5 pts]

1. true.
2. true.
3. false.
4. true.
5. false.

(2) [Measuring the labor force: 3 pts]

1. out of the labor force.
2. out of the labor force.
3. unemployed.

(3) [Measuring the labor force: 8 pts]

1. 244.0 million.
2. 58.8 percent.
3. 63.8 percent.
4. 7.9 percent.

(4) [Growth of capital stock: 2 pts] \$31,646 billion.

(5) [Interest rate and GDP shares: 16 pts]

1. 5 percent.
2. 66 percent.
3. 9 percent.
4. negative 1 percent (trade deficit).
5. 8 percent.

(6) [Interest rate and GDP shares pts] Note: Under this scenario, the (I/Y) curve in second graph shifts right, so the downward-sloping (NG/Y) curve in last graph also shifts right by the same amount. Since the vertical line labeled "100%-(G/Y)" in the last graph does not change, the equilibrium interest rate increases. Now the graphs show that at higher interest rates, (C/Y) and (I/Y) will both decrease. Since government purchases' share is unchanged, and (C/Y) and (I/Y) both decrease, (I/Y) must increase.

1. increases.
2. decreases.
3. increases.
4. decreases.
5. increases.
6. Investment is spending on new economic capital, such as buildings, machines, vehicles, computers, and software. In the long-run, the level of real GDP depends on the size of the labor force, the level of the capital stock, and technology. Since investment spending increases, the capital stock grows faster and the long-run growth rate of real GDP will increase.

(7) [Malthusian limits to growth: 8 pts]

1. \$5000.
2. not enough.
3. decrease.
4. more than enough.
5. increase.
6. 4 million.
7. \$5000.
8. \$5000.

(8) [Teechnical change: 4 pts]

1. 0.9 percent.
2. 4.3 percent.

(9) [Functions of money: 4 pts]

1. unit of account.
2. store of value.
3. medium of exchange.

(10) [Measuring the money supply: 10 pts]

1. \$2006 billion.
2. \$9314 billion.
3. \$1763 billion.
4. 5.3.
5. 1.6.

(11) [Quantity equation: 2 pts] 3.0 percent.

(12) [Phelps-Friedman critique of Phillips curve: 14 pts]

1. 196 million.
2. \$9.
3. 0 percent.
4. 8 million.
5. 192 million.
6. 4.0 percent.
7. 4 million.
8. 194 million.
9. 2.0 mpercent.
10. \$11.
11. 8 million.
12. 192 million.
13. 4 percent.

III. Critical thinking

Same as Version A.