ECON 010 - Principles of Macroeconomics
Drake University, Spring 2022
William M. Boal

EXAMINATION 2
Answer Key

Version A

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

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

II. Problems

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

  1. YES. Net exports (X).
  2. NO. Land is an asset, but not a final good. It is not produced.
  3. YES. Investment (I).
  4. YES. Consumption (C).

(2) [Components of GDP: 16 pts]

  1. Consumption = $300 billion, investment = $200 billion, government purchases = $100 billion, total GDP = $600 billion.
  2. Value added equals sales minus purchases of intermediate goods. Value added by Raw Concrete Industry = $200 billion, by Building Industry = $150 billion, by Road Construction Industry = $50 billion, by Birdbath Industry = $200 billion.

(3) [Spending approach: 12 pts]

  1. $14.0 trillion = consumption of durable goods + consumption of nondurable goods + consumption of services.
  2. $6.0 trillion = business fixed investment + residential investment + change in inventories.
  3. $3.9 trillion = gross investment - depreciation.
  4. $3.5 trillion = national defence purchases + federal nondefense purchases + state and local purchases.
  5. trade deficit, because exports < imports.
  6. $-0.6 trillion = exports - imports.

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

  1. $18.2 trillion = consumption + investment + government purchases + net exports.
  2. $2.7 trillion = GDP - consumption - government purchases.
  3. $56,522 = GDP in trillions × 1,000,000 / population in millions.

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

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

(8) [Value added: 2 pts] $150,000.

(9) [GDP and real GDP: 8 pts] I recommend first computing the following table.
GDP
Prices
2019 prices2020 prices
Quantities 2019 quantities$250$500
2020 quantities$280$530

  1. 112 percent, using diagonal entries above because nominal GDP is computed using prices and quantities from the same period.
  2. 12 percent, using entries in the first column above.
  3. 6 percent, using entries in the second column above.
  4. 9 percent, the average of the growth rate using constant 2019 prices and the growth rate using constant 2020 prices.

(10) [Nominal GDP, real GDP, and inflation: 7 pts] Data for South Africa

  1. base year = 2015 (because nominal GDP = real GDP in that year).
  2. GDP price index = nominal GDP / real GDP × 100 = 94.3, 100.0, 107.0.
  3. Rate of inflation = (new price index - old price index) / (old price index) = 6.0 percent, 7.0 percent.

(11) [Using CPI: 2 pts] $29,281.

(12) [Using market exchange rate: 2 pts] $157.

(13) [PPP exchange rate: 2 pts] 11.36 Mexican pesos per U.S. dollar.

III. Critical thinking [4 pts]

(1) Nominal GDP usually growest fastest in the long run. Usually, real GDP, the price level (the GDP price index), and the population all grow--that is, they all have positive growth rates. Now, nominal GDP = real GDP × price index / 100, so the growth rate of nominal GDP equals the growth rate of real GDP plus the growth rate of the price index (that is, the inflation rate). Meanwhile, real GDP per capita equals real GDP / population, so the growth rate of real GDP per capita equals the growth rate of real GDP minus the growth rate of population. So nominal GDP grows faster than real GDP and real GDP per capita grows slower than real GDP.

(2) Fluctuations in real GDP are negatively correlated with the unemployment rate. When real GDP rises, more people are working to produce that output and fewer people are looking for work, so the unemployment rate falls. When real GDP falls, as in a recession, fewer people are working to produce that output and more people are looking for work, so the unemployment rate rises.

Version B

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

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

II. Problems

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

  1. YES. Net exports (X).
  2. NO. Shares of stock are assets, but not final goods. They are not produced.
  3. YES. Investment (I).
  4. NO. Not produced in 2022.

(2) [Components of GDP: 16 pts]

  1. Consumption = $100 billion, investment = $20 billion, government purchases = $20 billion, total GDP = $140 billion.
  2. Value added equals sales minus purchases of intermediate goods. Value added by Raw Concrete Industry = $30 billion, by Building Industry = $15 billion, by Road Construction Industry = $15 billion, by Birdbath Industry = $80 billion.

(3) [Spending approach: 12 pts]

  1. $14.0 trillion = consumption of durable goods + consumption of nondurable goods + consumption of services.
  2. $4.5 trillion = business fixed investment + residential investment + change in inventories.
  3. $2.2 trillion = gross investment - depreciation.
  4. $3.9 trillion = national defence purchases + federal nondefense purchases + state and local purchases.
  5. trade deficit, because exports < imports.
  6. $-0.7 trillion = exports - imports.

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

  1. $18.7 trillion = consumption + investment + government purchases + net exports.
  2. $2.7 trillion = GDP - consumption - government purchases.
  3. $57,538 = GDP in trillions × 1,000,000 / population in millions.

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

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

(8) [Value added: 2 pts] $200,000.

(9) [GDP and real GDP: 8 pts] I recommend first computing the following table.
GDP
Prices
2019 prices2020 prices
Quantities 2019 quantities$100$120
2020 quantities$112$132

  1. 32 percent, using diagonal entries above because nominal GDP is computed using prices and quantities from the same period.
  2. 12 percent, using entries in the first column above.
  3. 10 percent, using entries in the second column above.
  4. 11 percent, the average of the growth rate using constant 2019 prices and the growth rate using constant 2020 prices.

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

  1. base year = 2013 (because nominal GDP = real GDP in that year).
  2. GDP price index = nominal GDP / real GDP × 100 = 94.8, 98.1, 100.0.
  3. Rate of inflation = (new price index - old price index) / (old price index) = 3.5 percent, 1.9 percent.

(11) [Using CPI: 2 pts] $21,770.

(12) [Using market exchange rate: 2 pts] $54.

(13) [PPP exchange rate: 2 pts] 9.09 Swedish kroner per U.S. dollar.

III. Critical thinking

Same as Version A.

[end of answer key]