ECON 001 - Principles of Macroeconomics Drake University, Fall 2014 William M. Boal

EXAMINATION 2

### Version A

I. Multiple choice [1 pt each: 12 pts total]

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

II. Problems

(1) [Inflation: 2 pts] 3.1 percent.

(2) [Real interest rate: 2 pts] 2 percent.

(3) [Spending approach to GDP: 16 pts]

1. YES. Net exports (X).
2. NO. A share of stock is an asset, but not a final good. It is not produced.
3. YES. Government purchases (G).
4. NO. The car was not produced in 2014.

(4) [Components of GDP: 16 pts]

1. Consumption = \$500 billion, investment = \$200 billion, government purchases = \$100 billion, total GDP = \$800 billion.
2. Value added by Raw Concrete Industry = \$300 billion, by Building Industry = \$150 billion, by Road Construction Industry = \$50 billion, by Birdbath Industry = \$300 billion.

(5) [Spending approach: 12 pts]

1. \$10.7 trillion.
2. \$2.7 trillion.
3. \$1.1 trillion.
4. \$3.2 trillion.
5. trade deficit, because exports < imports.
6. \$-0.6 trillion.

(6) [GDP, saving, GDP per capita: 6 pts]

1. \$14.7 billion.
2. \$1.7 trillion.
3. \$48,197.

(7) [Stocks v. flows: 8 pts]

1. STOCK.
2. FLOW.
3. STOCK.
4. FLOW.

(8) [Value added: 2 pts] \$250,000.

(9) [GDP and real GDP: 8 pts] I recommend first computing the following table.
GDPPrices
20122013
Quantities 2012\$500\$800
2013\$500\$800

1. 68 percent, because nominal GDP is computed using prices and quantities from the same period.
2. 8 percent.
3. 5 percent.
4. 6.5 percent, the average of the growth rate using constant 2012 prices and the growth rate using constant 2013 prices.

(10) [Nominal GDP, real GDP, and inflation: 7 pts]

1. base year = 1998 (because nominal GDP = real GDP in that year).
2. GDP price index = nominal GDP / real GDP × 100 = 100.0, 154.3, 230.2.
3. Rate of inflation = (new price index - old price index) / (old price index) = 54.3 percent, 49.2 percent.

(11) [Using CPI: 2 pts] \$2.40.

(12) [Using market exchange rate: 2 pts] \$721.

(13) [PPP exchange rate: 2 pts] 2.35 Malaysian ringgits per U.S. dollar.

III. Critical thinking [4 pts]

(1) The spending component of GDP that is most important for future economic growth is investment (I). Investment spending is spending on new economic capital, such as machinery and equipment, buildings, trucks, bulldozers, communication towers, computers and software. New capital enables workers to do more, thus increasing the productive capacity of the economy.

(2) Japan must have experienced deflation during this period. Nominal GDP is the current value of goods and services produced in an economy. Real GDP is nominal GDP corrected for inflation. In most countries, nominal GDP grows faster than real GDP because the price level rises (that is, the country experiences inflation). But if the price level instead falls (deflation), as in Japan, nominal GDP grows more slowly than real GDP.
This is shown more clearly using the approximation formula for the percent change of ratios. The GDP price index = nominal GDP / real GDP × 100. So for small growth rates, the inflation rate = (growth rate of nominal GDP) - (growth rate of real GDP). Therefore, if the growth rate of nominal GDP is less than the growth rate of real GDP, then the inflation rate is negative--that is, the country is experiencing deflation.

### Version B

I. Multiple choice [1 pt each: 12 pts total]

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

II. Problems

(1) [Inflation: 2 pts] 2.1 percent.

(2) [Real interest rate: 2 pts] 1 percent.

(3) [Spending approach to GDP: 16 pts]

1. NO. The car was not produced in 2014.
2. YES. Net exports (X).
3. NO. A share of stock is an asset, but not a final good. It is not produced.
4. YES. Government purchases (G).

(4) [Components of GDP: 16 pts]

1. Consumption = \$800 billion, investment = \$200 billion, government purchases = \$300 billion, total GDP = \$1300 billion.
2. Value added by Raw Concrete Industry = \$450 billion, by Building Industry = \$150 billion, by Road Construction Industry = \$200 billion, by Birdbath Industry = \$500 billion.

(5) [Spending approach: 12 pts]

1. \$11.0 trillion.
2. \$2.5 trillion.
3. \$0.9 trillion.
4. \$3.2 trillion.
5. trade deficit, because exports < imports.
6. \$-0.6 trillion.

(6) [GDP, saving, GDP per capita: 6 pts]

1. \$14.4 billion.
2. \$1.5 trillion.
3. \$46,906.

(7) [Stocks v. flows: 8 pts]

1. STOCK.
2. FLOW.
3. FLOW.
4. STOCK.

(8) [Value added: 2 pts] \$300,000.

(9) [GDP and real GDP: 8 pts] I recommend first computing the following table.
GDPPrices
20122013
Quantities 2012\$250\$500
2013\$280\$530

1. 112 percent, because nominal GDP is computed using prices and quantities from the same period.
2. 12 percent.
3. 6 percent.
4. 9 percent, the average of the growth rate using constant 2012 prices and the growth rate using constant 2013 prices.

(10) [Nominal GDP, real GDP, and inflation: 7 pts]

1. base year = 2010 (because nominal GDP = real GDP in that year).
2. GDP price index = nominal GDP / real GDP × 100 = 94.4, 98.7, 100.0.
3. Rate of inflation = (new price index - old price index) / (old price index) = 4.6 percent, 1.3 percent.

(11) [Using CPI: 2 pts] \$2.04.

(12) [Using market exchange rate: 2 pts] \$630.

(13) [PPP exchange rate: 2 pts] 4.35 Mexican pesos per U.S. dollar.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 12 pts total]

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

II. Problems

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

(2) [Real interest rate: 2 pts] 3 percent.

(3) [Spending approach to GDP: 16 pts]

1. YES. Government purchases (G).
2. NO. The car was not produced in 2014.
3. YES. Net exports (X).
4. NO. A share of stock is an asset, but not a final good. It is not produced.

(4) [Components of GDP: 16 pts]

1. Consumption = \$900 billion, investment = \$400 billion, government purchases = \$500 billion, total GDP = \$1800 billion.
2. Value added by Raw Concrete Industry = \$450 billion, by Building Industry = \$350 billion, by Road Construction Industry = \$400 billion, by Birdbath Industry = \$600 billion.

(5) [Spending approach: 12 pts]

1. \$10.9 trillion.
2. \$2.6 trillion.
3. \$0.9 trillion.
4. \$3.2 trillion.
5. trade deficit, because exports < imports.
6. \$-0.6 trillion.

(6) [GDP, saving, GDP per capita: 6 pts]

1. \$15.0 billion.
2. \$1.6 trillion.
3. \$48,387.

(7) [Stocks v. flows: 8 pts]

1. STOCK.
2. FLOW.
3. STOCK.
4. FLOW.

(8) [Value added: 2 pts] \$350,000.

(9) [GDP and real GDP: 8 pts] I recommend first computing the following table.
GDPPrices
20122013
Quantities 2012\$500\$750
2013\$520\$750

1. 50 percent, because nominal GDP is computed using prices and quantities from the same period.
2. 4 percent.
3. 0 percent.
4. 2 percent, the average of the growth rate using constant 2012 prices and the growth rate using constant 2013 prices.

(10) [Nominal GDP, real GDP, and inflation: 7 pts]

1. base year = 2002 (because nominal GDP = real GDP in that year).
2. GDP price index = nominal GDP / real GDP × 100 = 97.8, 100.0, 106.9.
3. Rate of inflation = (new price index - old price index) / (old price index) = 2.2 percent, 6.9 percent.

(11) [Using CPI: 2 pts] \$3.36.

(12) [Using market exchange rate: 2 pts] \$521.

(13) [PPP exchange rate: 2 pts] 1.43 Swiss francs per U.S. dollar.

III. Critical thinking

Same as Version A.