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

EXAMINATION 3

### Version A

I. Multiple choice [1 pt each: 11 pts total]

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

II. Problems

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

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

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

1. 13.9 million = labor force - employed.
2. 9.1 percent = unemployed / labor force.
3. 58.2 percent = employed / working-age population, where working-age population = labor force + not in labor force.
4. 64.0 percent = labor force / working-age population.

(3) [Growth of capital stock: 2 pts] \$33.6 trillion = capital stock at end of prior year + gross investment - depreciation.

(4) [Interest rate: 4 pts]

1. \$212 = 200 × (1.02)3.
2. \$232 = 200 × (1.05)3.

(5) [Interest rate and GDP shares: 10 pts] First, find the expression for the nongovernmental share (NG/Y) = (C/Y) + (I/Y) + (X/Y). Set this expression equal to 100 - (G/Y) and solve for the interest rate r.

1. 3 percent.
2. 66 percent.
3. 13 percent.
4. - 1 percent.
5. 12 percent.

(6) [Interest rate and GDP shares: 6 pts]

1. unchanged.
2. left.
3. unchanged.
4. left.
5. unchanged.
6. decrease.
7. decrease.
8. Justification: As shown in the graph, investment's share of GDP (I/Y) decreases. 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 stock of capital, and technology. Since investment spending decreases, the capital stock grows slower and the long-run growth rate of real GDP will decrease.

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

1. \$4000.
2. not enough food.
3. population decreases.
4. more than enough food.
5. population increases.
6. 6 million.
7. \$4000.
8. \$4000.

(8) [Technical change: 4 pts]

1. 2.2 percent.
2. 2.3 percent.

(9) [Functions of money: 3 pts]

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

(10) [Measuring the money supply: 8 pts]

1. \$1.7 trillion, because M1 = currency + checking deposits.
2. \$8.4 trillion, because M2 = M1 + savings deposits.
3. 8.8, because velocity = GDP / money supply.
4. \$2.0 trillion, because MB = currency + bank reserves.

(11) [Money multiplier: 4 pts]

1. 5.6, because money multiplier = (1+k)/(k+RR).
2. \$280 billion.

(12) [Quantity equation: 2 pts] 3.9 percent.

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

1. 198 million.
2. \$6.
3. zero percent, because no one is unemployed in true equilibrium.
4. 6 million.
5. 194 million.
6. 3.0 percent.
7. 3 million.
8. 196 million.
9. 1.5 percent.
10. \$8.
11. 6 million.
12. 194 million.
13. 3.0 percent.
14. Long-run Phillips curve is a vertical line at 3 percent unemployment rate.

III. Critical thinking [4 pts]

(1) Disagree. 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) Disagree. While consumption spending helps people's well-being today, investment spending increases people's potential well-being in the future. Investment spending--that is, spending on new capital such as buildings, machines, vehicles, computers and software--increases the economy's ability to produce more goods in the future, including consumption goods.

### Version B

I. Multiple choice [1 pt each: 11 pts total]

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

II. Problems

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

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

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

1. 12.6 million = labor force - employed.
2. 8.2 percent = unemployed / labor force.
3. 58.3 percent = employed / working-age population, where working-age population = labor force + not in labor force.
4. 63.5 percent = labor force / working-age population.

(3) [Growth of capital stock: 2 pts] \$34.2 trillion = capital stock at end of prior year + gross investment - depreciation.

(4) [Interest rate: 4 pts]

1. \$219 = 200 × (1.03)3.
2. \$238 = 200 × (1.06)3.

(5) [Interest rate and GDP shares: 10 pts] First, find the expression for the nongovernmental share (NG/Y) = (C/Y) + (I/Y) + (X/Y). Set this expression equal to 100 - (G/Y) and solve for the interest rate r.

1. 4 percent.
2. 67 percent.
3. 16 percent.
4. - 3 percent.
5. 13 percent.

(6) [Interest rate and GDP shares: 6 pts]

1. unchanged.
2. unchanged.
3. unchanged.
4. unchanged.
5. shifts right.
6. decrease.
7. increase.
8. Justification: As shown in the graph, investment's share of GDP (I/Y) increases. 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 stock of capital, 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. \$2000.
2. not enough food.
3. population decreases.
4. more than enough food.
5. population increases.
6. 8 million.
7. \$2000.
8. \$2000.

(8) [Technical change: 4 pts]

1. 1.6 percent.
2. 1.8 percent.

(9) [Functions of money: 3 pts]

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

(10) [Measuring the money supply: 8 pts]

1. \$2.0 trillion, because M1 = currency + checking deposits.
2. \$9.2 trillion, because M2 = M1 + savings deposits.
3. 1.7, because velocity = GDP / money supply.
4. \$2.5 trillion, because MB = currency + bank reserves.

(11) [Money multiplier: 4 pts]

1. 4.8, because money multiplier = (1+k)/(k+RR).
2. \$240 billion.

(12) [Quantity equation: 2 pts] 2.4 percent.

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

1. 196 million.
2. \$7.
3. zero percent, because no one is unemployed in true equilibrium.
4. 8 million.
5. 192 million.
6. 4.0 percent.
7. 4 million.
8. 194 million.
9. 2.0 percent.
10. \$9.
11. 8 million.
12. 192 million.
13. 4.0 percent.
14. Long-run Phillips curve is a vertical line at 4 percent unemployment rate.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 11 pts total]

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

II. Problems

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

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

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

1. 12.3 million = labor force - employed.
2. 7.9 percent = unemployed / labor force.
3. 58.4 percent = employed / working-age population, where working-age population = labor force + not in labor force.
4. 63.4 percent = labor force / working-age population.

(3) [Growth of capital stock: 2 pts] \$34.8 trillion = capital stock at end of prior year + gross investment - depreciation.

(4) [Interest rate: 4 pts]

1. \$225 = 200 × (1.04)3.
2. \$245 = 200 × (1.07)3.

(5) [Interest rate and GDP shares: 10 pts] First, find the expression for the nongovernmental share (NG/Y) = (C/Y) + (I/Y) + (X/Y). Set this expression equal to 100 - (G/Y) and solve for the interest rate r.

1. 5 percent.
2. 68 percent.
3. 15 percent.
4. - 4 percent.
5. 11 percent.

(6) [Interest rate and GDP shares: 6 pts]

1. left.
2. unchanged.
3. unchanged.
4. left.
5. unchanged.
6. decrease.
7. increase.
8. Justification: As shown in the graph, investment's share of GDP (I/Y) increases. 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 stock of capital, 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. more than enough food.
3. population increases.
4. not enough food.
5. population decreases.
6. 10 million.
7. \$5000.
8. \$5000.

(8) [Technical change: 4 pts]

1. 1.1 percent.
2. 1.7 percent.

(9) [Functions of money: 3 pts]

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

(10) [Measuring the money supply: 8 pts]

1. \$2.4 trillion, because M1 = currency + checking deposits.
2. \$10.1 trillion, because M2 = M1 + savings deposits.
3. 6.75, because velocity = GDP / money supply.
4. \$2.6 trillion, because MB = currency + bank reserves.

(11) [Money multiplier: 4 pts]

1. 7, because money multiplier = (1+k)/(k+RR).
2. \$350 billion.

(12) [Quantity equation: 2 pts] 2.6 percent.

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

1. 196 million.
2. \$8.
3. zero percent, because no one is unemployed in true equilibrium.
4. 10 million.
5. 190 million.
6. 5.0 percent.
7. 5 million.
8. 193 million.
9. 2.5 percent.
10. \$10.
11. 10 million.
12. 190 million.
13. 5.0 percent.
14. Long-run Phillips curve is a vertical line at 5 percent unemployment rate.

III. Critical thinking

Same as Version A.