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

EXAMINATION 3

### Version A

I. Multiple choice [1 pt each: 16 pts total]

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

II. Problems

(1) [Malthusian model: 18 pts]

1. \$5000.
2. not enough food.
3. population decreases.
4. more than enough food.
5. population increases.
6. 4 million.
7. \$5000.
8. 7 million.
9. \$5000.

(2) [Growth of capital stock: 2 pts] \$38.0 trillion = capital stock at end of prior year + gross investment - depreciation.

(3) [Interest rate as opportunity cost: 4 pts]

1. \$1159 = 1000 × (1.03)5.
2. \$1338 = 1000 × (1.06)5.

(4) [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 - 23 percent and solve for the interest rate r.

1. 5 percent.
2. 67 percent.
3. 15 percent.
4. - 5 percent.
5. 10 percent. (S = GDP-C-G, so S/Y = 100 percent - C/Y - G/Y.)

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

1. C/Y.
2. shifts left.
3. NG/Y also shifts left.
4. interest rate decreases.
5. C/Y decreases.
6. I/Y increases.
7. X/Y increases.
8. I/Y directly affects potential GDP in the long run because new capital reaises the aggregate production function.
9. growth increases.

(6) [Measuring the labor force: 4 pts]

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

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

1. 9.7 million = labor force - employed.
2. 6.0 percent = unemployed / labor force.
3. 57.8 percent = employed / working-age population, where working-age population = labor force + not in labor force.
4. 61.5 percent = labor force / working-age population.

(8) [Technical change: 4 pts]

1. 0.9 percent (computed as 2.7 percent × 1/3).
2. 0.2 percent (computed as 1.1 percent minus 0.9 percent).

(9) [Functions of money: 4 pts]

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

(10) [Quantity equation: 2 pts] 4.0 percent (computed as as growth rate of money supply minus growth rate of real GDP).

(11) [GDP growth around the world: 6 pts]

1. Bolivia - YES.
2. Brazil - NO.
3. Chile - YES.
4. Colombia - YES.
5. Costa Rica - YES.
6. Mexico - NO.

III. Critical thinking [4 pts]

(1) Disagree. Long-run economic growth requires that investment spending--that is, spending on new capital--increase, not consumption. If consumption spending increased and stayed high, the C/Y curve would shift right in the spending allocation model, and the NG/Y curve would shift right by the same amount. This would increase the interest rate, which would decrease investment spending according to that model, and therefore reduce economic growth.

(2) Disagree. According to the quantity equation, inflation occurs when the money supply increases faster than real GDP, and deflation occurs when the money supply increases more slowly than real GDP. So we would avoid inflation or deflation only if the amount of gold increased at exactly the same rate as real GDP--which seems unlikely. More likely, the amount of gold would increase more slowly than real GDP, which would cause deflation.

### Version B

I. Multiple choice [1 pt each: 16 pts total]

(1)a. (2)d. (3)d. (4)b. (5)a. (6)b. (7)b. (8)a. (9)a. (10)b. (11)a. (12)d. (13)c. (14)a. (15)e. (16)c.

II. Problems

(1) [Malthusian model: 18 pts]

1. \$3000.
2. more than enough food.
3. population increases.
4. not enough food.
5. population decreases.
6. 2 million.
7. \$3000.
8. 4 million.
9. \$3000.

(2) [Growth of capital stock: 2 pts] \$40.5 trillion = capital stock at end of prior year + gross investment - depreciation.

(3) [Interest rate as opportunity cost: 4 pts]

1. \$541 = 500 × (1.02)4.
2. \$608 = 500 × (1.05)4.

(4) [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 - 21 percent and solve for the interest rate r.

1. 4 percent.
2. 66 percent.
3. 16 percent.
4. - 3 percent.
5. 13 percent. (S = GDP-C-G, so S/Y = 100 percent - C/Y - G/Y.)

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

1. I/Y.
2. shifts left.
3. NG/Y also shifts left.
4. interest rate decreases.
5. C/Y increases.
6. I/Y decreases.
7. X/Y increases.
8. I/Y directly affects potential GDP in the long run because new capital reaises the aggregate production function.
9. growth decreases.

(6) [Measuring the labor force: 4 pts]

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

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

1. 6.3 million = labor force - employed.
2. 3.8 percent = unemployed / labor force.
3. 59.9 percent = employed / working-age population, where working-age population = labor force + not in labor force.
4. 62.3 percent = labor force / working-age population.

(8) [Technical change: 4 pts]

1. 1.1 percent (computed as 3.3 percent × 1/3).
2. 0.7 percent (computed as 1.8 percent minus 1.1 percent).

(9) [Functions of money: 4 pts]

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

(10) [Quantity equation: 2 pts] 3.8 percent (computed as as growth rate of money supply minus growth rate of real GDP).

(11) [GDP growth around the world: 6 pts]