ECON 010 - Principles of Macroeconomics
Drake University, Fall 2024
William M. Boal

EXAMINATION 3
Answer Key

Version A

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

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

II. Problems

(1) [Malthusian model: 18 pts]

  1. $2000, slope of subsistence line.
  2. more than enough food.
  3. population increases.
  4. not enough food.
  5. population decreases.
  6. 5 million.
  7. $2000.
  8. 8 million.
  9. $2000.

(2) [Growth of capital stock: 2 pts] $47.0 trillion = capital stock at end of prior year + gross investment - depreciation.

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

  1. $106 = 100 × (1.02)3.
  2. $126 = 100 × (1.08)3.

(4) [Interest rate and GDP shares: 10 pts] First, find the expression for the nongovernmental share (NG/Y) = (C/Y) + (I/Y) + (X/Y). Here,
(NG/Y) = 118 - 6 r .
Set this expression equal to 100 - 13 = 87 and solve for the equilibrium interest rate r.
Then substitute that value of r back into the equations for (C/Y), (I/Y), and (X/Y).

  1. 6 percent.
  2. 69 percent.
  3. 17 percent.
  4. - 4 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. vertical line.
  2. shifts left.
  3. NG/Y unchanged.
  4. interest rate increases.
  5. C/Y decreases.
  6. I/Y decreases.
  7. X/Y decreases.
  8. I/Y directly affects potential GDP in the long run because new capital raises the aggregate production function.
  9. growth decreases.

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

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

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

  1. 6.3 million = labor force - employed.
  2. 3.8 percent = unemployed / labor force.
  3. 60.4 percent = employed / working-age population, where working-age population = labor force + not in labor force.
  4. 62.8 percent = labor force / working-age population.

(8) [Technical change: 4 pts]

  1. 1.4 percent (capital's contribution computed as 4.2 percent × 1/3).
  2. 0.9 percent (technology's contribution computed as 2.3 percent minus capital's contribution).

(9) [Functions of money: 4 pts]

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

(10) [Quantity equation: 2 pts] 4.6 percent (computed as as growth rate of money supply minus growth rate of real GDP).

(11) [GDP growth around the world: 6 pts] Countries that are above and to the left of the U.S. in this graph are converging toward the U.S.

  1. Australia - YES.
  2. Cambodia - YES.
  3. Fiji - YES.
  4. Malaysia - YES.
  5. Vanuatu - NO.
  6. Vietnam - YES

III. Critical thinking [4 pts]

(1) Disagree. Long-run economic growth depends on investment spending--that is, spending on new capital--increase, not consumption. If consumption spending increased, 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 long-run economic growth.

(2) 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).

Version B

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

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

II. Problems

(1) [Malthusian model: 18 pts]

  1. $4000, slope of subsistence line.
  2. not enough food.
  3. population decreases.
  4. more than enough food.
  5. population increases.
  6. 8 million.
  7. $4000.
  8. 5 million.
  9. $4000.

(2) [Growth of capital stock: 2 pts] $48.6 trillion = capital stock at end of prior year + gross investment - depreciation.

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

  1. $116 = 100 × (1.05)3.
  2. $133 = 100 × (1.10)3.

(4) [Interest rate and GDP shares: 10 pts] First, find the expression for the nongovernmental share (NG/Y) = (C/Y) + (I/Y) + (X/Y). Here,
(NG/Y) = 118 - 6 r .
Set this expression equal to 100 - 24 = 76 and solve for the equilibrium interest rate r.
Then substitute that value of r back into the equations for (C/Y), (I/Y), and (X/Y).

  1. 7 percent.
  2. 68 percent.
  3. 14 percent.
  4. - 6 percent.
  5. 8 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 curve.
  2. shifts right.
  3. NG/Y shifts right.
  4. interest rate increases.
  5. C/Y decreases.
  6. I/Y increases.
  7. X/Y decreases.
  8. I/Y directly affects potential GDP in the long run because new capital raises the aggregate production function.
  9. growth increases.

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

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

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

  1. 6.8 million = labor force - employed.
  2. 4.0 percent = unemployed / labor force.
  3. 60.2 percent = employed / working-age population, where working-age population = labor force + not in labor force.
  4. 62.7 percent = labor force / working-age population.

(8) [Technical change: 4 pts]

  1. 2.7 percent (capital's contribution computed as 8.1 percent × 1/3).
  2. 1.9 percent (technology's contribution computed as 4.6 percent minus capital's contribution).

(9) [Functions of money: 4 pts]

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

(10) [Quantity equation: 2 pts] 3.5 percent (computed as as growth rate of money supply minus growth rate of real GDP).

(11) [GDP growth around the world: 6 pts] Countries that are above and to the left of the U.S. in this graph are converging toward the U.S.

  1. Algeria - NO.
  2. Jordan - NO.
  3. Libya - NO.*
  4. Mauritania - NO.
  5. Morocco - YES.
  6. Tunisia - YES

* Technically, Libya appears to have converged on the U.S. from above because its real GDP per capita in 1990 was slightly higher than the U.S. and its subsequent growth rate was negative. In fact, its collapse was so rapid (-4 percent per year) that its GDP per capita in 2019 was only about $14 thousand, far below that of the U.S. So in fact, Libya was not converging on the U.S. during most of this period.

III. Critical thinking

Same as Version A.

[end of answer key]