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

FINAL EXAMINATION

### Version A

I. Multiple choice [1 pt each: 21 pts total]

(1)a. (2)a. (3)c. (4)d. (5)a. (6)d. (7)c. (8)d. (9)b. (10)a.
(11)a. (12)c. (13)c. (14)d. (15)c. (16)a. (17)c. (18)b. (19)a. (20)a.
(21)b.

II. Problems

1. 3 bicycles.
2. 1/2 bicycle.
3. 1/3 mobile phone.
4. 2 mobile phones.
5. Country B.
6. Country A.
7. ... if Country A produces and exports one million bicycles to Country B, which produces and exports 1 million mobile phones in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(2) [Economic capital: 6 pts]

1. Yes.
2. Yes.
3. No.
4. Yes.
5. No.
6. Yes.

(3) [Market equilibrium: 12 pts]

1. excess demand.
2. \$7.
3. 5 units.
4. \$35.
5. \$46.

(4) [Inflation: 2 pts] 2.8 percent.

(5) [Components of GDP: 16 pts]

1. \$300 billion, \$200 billion, \$80 billion, \$580 billion.
2. \$40 billion, \$190 billion, \$70 billion, \$280 billion.

(6) [Spending components of GDP: 8 pts]

1. deficit.
2. \$-0.4 trillion.
3. \$10.6 trillion.
4. \$1.2 trillion.

(7) [Aggregate production function: 5 pts]

1. False.
2. True.
3. True.
4. False.
5. True.

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

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

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

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

1. "C/Y" curve in first graph shifts left and "NG/Y" curve in last graph shifts left by the same amount. New horizontal dotted line showing equilibrium interest rate is lower.
2. decrease.
3. decrease.
4. increase.
5. increase.
6. increase.
7. Investment is spending on new economic capital, such as buildings, machines, trucks, 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 (due to the lower interest rate), the capital stock grows faster and the long-run growth rate of real GDP will increase.

(11) [Technical change: 4 pts]

1. 0.9 percent.
2. 4.3 percent.

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

1. \$1662 billion.
2. \$8455 billion.
3. \$1650 billion.
4. 5.1 .
5. 1.7 .

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

(14) [Consumption function, Keynesian cross, Keynesian multipliers: 8 pts]

1. 0.80 .
2. 0.75 .
3. 4.
4. \$480 billion.
5. \$30 billion.
6. 3.
7. \$40 billion.
8. \$120 billion.

(15) [How business cycles begin: 20 pts] Full credit requires accurate graphs.

1. up, right, boom.
2. down, left, recession.
3. up, right, boom.
4. down, left, recession.

1. \$15 trillion.
2. equal.
3. \$16.5 trillion.
4. 2 percent.
5. less.
6. \$15 trillion.
7. 8 percent.
8. equal.

(17) [Fiscal policy, tax rates: 4 pts]

1. 18.5 percent (= total tax / income).
2. 28.0 percent (= Δ tax / Δ income).

(18) [Fiscal policy: 5 pts]

1. recession.
2. deficit.
3. \$200 billion.
4. surplus.
5. \$100 billion.

(19) [Monetary policy: 8 pts]

1. decrease.
2. 1.5 percentage points.
3. increase.
4. \$0.2 trillion.

(20) [International accounts: 6 pts]

1. \$ -500 billion.
2. \$ 165 billion.
3. \$ -471 billion.

III. Critical thinking [4 pts]

(1) If there is a recession in Europe, then GDP in the United States will decrease. A country's imports depend positively on its own GDP. So if GDP in Europe decreases, then Europe will import less from other countries, including the U.S. This will cause U.S. exports to Europe to decrease. Thus U.S. net exports (X) must decrease since net exports equal exports minus imports. U.S. GDP is the sum of U.S. consumption, investment, government purchases and net exports, so U.S. GDP will decrease. (Note that U.S. imports are unaffected by the recession in Europe. A country's imports depend on its own income.)

(2) If the U.S. succeeds in reducing its government budget deficit, then the trade deficit will likely decrease. The government budget deficit represents negative government saving. National saving (S) is the sum of private saving and government saving, so assuming there is no change in private saving, reducing the budget deficit will increase national saving. Now net exports are equal to saving minus investment: X = S-I. So if saving increases and investment (I) does not change, then net exports (X) will increase--that is, become less negative. The trade deficit will thus likely decrease.

### Version B

I. Multiple choice [1 pt each: 21 pts total]

(1)b. (2)c. (3)d. (4)c. (5)a. (6)d. (7)d. (8)b. (9)a. (10)c.
(11)c. (12)d. (13)a. (14)d. (15)d. (16)b. (17)a. (18)d. (19)b. (20)c.
(21)d.

II. Problems

1. 1/3 bicycles.
2. 1/2 bicycle.
3. 3 mobile phone.
4. 2 mobile phones.
5. Country A.
6. Country B.
7. ... if Country B produces and exports one million bicycles to Country A, which produces and exports 5 million mobile phones in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(2) [Economic capital: 6 pts]

1. No.
2. Yes.
3. No.
4. Yes.
5. Yes.
6. Yes.

(3) [Market equilibrium: 12 pts]

1. excess supply.
2. \$4.
3. 6 units.
4. \$24.
5. \$59.

(4) [Inflation: 2 pts] 1.4 percent.

(5) [Components of GDP: 16 pts]

1. \$500 billion, \$200 billion, \$100 billion, \$800 billion.
2. \$250 billion, \$50 billion, \$50 billion, \$450 billion.

(6) [Spending components of GDP: 8 pts]

1. deficit.
2. \$-0.5 trillion.
3. \$11.0 trillion.
4. \$1.1 trillion.

(7) [Aggregate production function: 5 pts]

1. False.
2. True.
3. False.
4. True.
5. True.

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

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

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

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

1. Vertical line labeled "10%-(G/Y) in last graph shifts left. New horizontal dotted line showing equilibrium interest rate is higher.
2. increase.
3. decrease.
4. decrease.
5. decrease.
6. decrease.
7. Investment is spending on new economic capital, such as buildings, machines, trucks, 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 (due to the higher interest rate), the capital stock grows slower and the long-run growth rate of real GDP will decrease.

(11) [Technical change: 4 pts]

1. 1.5 percent.
2. 0.8 percent.

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

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

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

(14) [Consumption function, Keynesian cross, Keynesian multipliers: 8 pts]

1. 0.40 .
2. 0.375 .
3. 1.6.
4. \$192 billion.
5. \$75 billion.
6. 0.6 .
7. \$200 billion.
8. \$120 billion.

(15) [How business cycles begin: 20 pts] Full credit requires accurate graphs.

1. up, right, boom.
2. up, right, boom.
3. down, left, recession.
4. down, left, recession.

1. \$16 trillion.
2. equal.
3. \$15 trillion.
4. 5 percent.
5. greater.
6. \$16 trillion.
7. 1 percent.
8. equal.

(17) [Fiscal policy, tax rates: 4 pts]

1. 3.7 percent (= total tax / income).
2. 10.0 percent (= Δ tax / Δ income).

(18) [Fiscal policy: 5 pts]

1. recession.
2. deficit.
3. \$400 billion.
4. deficit.
5. \$100 billion.

(19) [Monetary policy: 8 pts]

1. increase.
2. 1 percentage point.
3. increase.
4. \$0.1 trillion.

(20) [International accounts: 6 pts]

1. \$ -698 billion.
2. \$ 147 billion.
3. \$ -677 billion.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 21 pts total]

(1)a. (2)d. (3)b. (4)b. (5)b. (6)d. (7)d. (8)c. (9)c. (10)b.
(11)d. (12)b. (13)d. (14)c. (15)d. (16)c. (17)b. (18)c. (19)c. (20)b.
(21)a.

II. Problems

1. 1 bicycle.
2. 2 bicycles.
3. 1 mobile phone.
4. 1/2 mobile phone.
5. Country A.
6. Country B.
7. ... if Country B produces and exports three million bicycles to Country A, which produces and exports 2 million mobile phones in return.
8. Trade must be plotted on graph. Must show production before trade (on PP curve) and consumption after trade (outside PP curve) for each country.

(2) [Economic capital: 6 pts]

1. Yes.
2. Yes.
3. Yes.
4. No.
5. Yes.
6. No.

(3) [Market equilibrium: 12 pts]

1. excess supply.
2. \$10.
3. 4 units.
4. \$40.
5. \$37.
6. sellers.

(4) [Inflation: 2 pts] 3.0 percent.

(5) [Components of GDP: 16 pts]

1. \$900 billion, \$400 billion, \$300 billion, \$1600 billion.
2. \$200 billion, \$350 billion, \$250 billion, \$800 billion.

(6) [Spending components of GDP: 8 pts]

1. deficit.
2. \$-0.4 trillion.
3. \$10.2 trillion.
4. \$1.3 trillion.

(7) [Aggregate production function: 5 pts]

1. True.
2. True.
3. False.
4. True.
5. False.

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

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

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

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

1. "I/Y" curve in second graph shifts right and "NG/Y" curve in last graph shifts right by the same amount. New horizontal dotted line showing equilibrium interest rate is higher.
2. increase.
3. decrease.
4. increase. (This one is tricky. The "I/Y" curve itself shifts right, tending to increase I/Y, at the same time the interest rate is rising, tending to decrease I/Y. Which dominates? Since C/Y and X/Y both decrease, and G/Y is unchanged, I/Y must increase because the four spending shares must still sum to 100 percent.)
5. decrease.
6. increase.
7. Investment is spending on new economic capital, such as buildings, machines, trucks, 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.

(11) [Technical change: 4 pts]

1. 1.2 percent.
2. 1.3 percent.

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

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

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

(14) [Consumption function, Keynesian cross, Keynesian multipliers: 8 pts]

1. 0.65 .
2. 0.6 .
3. 2.5 .
4. \$300 billion.
5. \$48 billion.
6. 1.5 .
7. \$80 billion.
8. \$120 billion.

(15) [How business cycles begin: 20 pts] Full credit requires accurate graphs.

1. down, left, recession.
2. up, right, boom.
3. up, right, boom.
4. down, left, recession.

1. \$16.5 trillion.
2. equal.
3. \$15.5 trillion.
4. 6 percent.
5. greater.
6. \$16.5 trillion.
7. 2 percent.
8. equal.

(17) [Fiscal policy, tax rates: 4 pts]

1. 5.8 percent (= total tax / income).
2. 15.0 percent (= Δ tax / Δ income).

(18) [Fiscal policy: 5 pts]

1. boom.
2. surplus.
3. \$200 billion.
4. balanced budget.
5. \$0 billion.

(19) [Monetary policy: 8 pts]

1. decrease.
2. 0.5 percentage points.
3. decrease.
4. \$0.3 trillion.

(20) [International accounts: 6 pts]

1. \$ -381 billion.
2. \$ 128 billion.
3. \$ -376 billion.

III. Critical thinking

Same as Version A.