Version A

I. Multiple choice [1 pt each: 24 pts total]

(1)c. (2)a. (3)c. (4)b. (5)c. (6)c. (7)c. (8)a. (9)b. (10)a.
(11)b. (12)b. (13)d. (14)d. (15)b. (16)d. (17)d. (18)c. (19)e. (20)c.
(21)c. (22)c. (23)b. (24)b.

II. Problems

(1) [Percent changes: 4 pts]

1. increase.
2. 3 percent.

• Average product = total output/total input = 2, 3, 4 cars per worker.
• Marginal product = Δ output/Δ input = 2, 4, 6 cars per worker.
• NO, because MP does not decrease as the number of workers increases.

(3) [Economic capital: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

1. No.
2. Yes.
3. No.
4. Yes.
5. No.
6. Yes.

(4) [Market equilibrium, price controls: 12 pts]

1. 7 percent.
2. $80 billion.
3. $100 billion.
4. $60 billion.
5. excess demand.
6. $40 billion.

(5) [Spending approach: 12 pts]

1. $16.0 trillion = consumption of durable goods + consumption of nondurable goods + consumption of services.
2. $4.3 trillion = business fixed investment + residential investment + change in inventories.
3. $1.8 trillion = gross investment - depreciation.
4. $4.2 trillion = national defence purchases + federal nondefense purchases + state and local purchases.
5. trade deficit, because exports < imports.
6. $-0.8 trillion = exports - imports.

(6) [GDP and real GDP: 8 pts]

	Food		Clothing		Calculations
Year	Price	Quantity	Price	Quantity	2022 prices	2023 prices
2022	$5	20	$10	10	$200	$250
2023	$5	24	$15	10	$220	$270

1. 35 percent, using diagonal entries above because nominal GDP is computed using prices and quantities from the same period.
2. 10 percent, using entries in the first column (2022) above.
3. 8 percent, using entries in the second column (2023) above.
4. 9 percent, the average of the growth rate using constant 2022 prices and the growth rate using constant 2023 prices.

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

1. base year = 1995 (because nominal GDP = real GDP in that year).
2. GDP price index = nominal GDP / real GDP × 100 = 100.0, 118.4, 127.6.
3. Rate of inflation = (new price index - old price index) / (old price index) = 18.4 percent, 7.7 percent.

(8) [Using CPI: 2 pts] $28,783.

(9) [PPP exchange rate: 2 pts] 12.5 Chinese yuan per US dollar.

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

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

(11) [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.

(12) [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.

(13) [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).

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

(15) [Consumption function, Keynesian cross, Keynesian multipliers: 8 pts]

1. 0.9 = MPC.
2. 0.75 = MPC - MPI.
3. 4 = 1 / (1-MPC+MPI).
4. $1200 billion = $300 × govt purchases multiplier.
5. $75 billion = $300 / govt purchases multiplier.
6. 3 = govt purchases multiplier - 1.
7. $100 = $300 / tax cut multiplier.
8. $300, because the deficit-neutral multiplier always = 1.0.

(16) [How business cycles begin: 20 pts] Full credit requires correct graphs on page 11.

1. down, left, recession.
2. up, right, boom.
3. up, right, boom.
4. down, left, recession.

(17) [Inflation adjustment: 16 pts] Begin by drawing the "inflation adjustment line" at the current rate of inflation, 3 percent.

1. $28 trillion, where aggregate demand curve 1 intersects current inflation rate.
2. equal to natural rate of unemployment because GDP = potential GDP.
3. $29 trillion (an increase).
4. 3 percent, because inflation rate has momentum in short run.
5. less than the natural rate because GDP > potential GDP.
6. $28 trillion, because eventually the inflation rate will rise until GDP once more equals potential GDP.
7. 7 percent, where aggregate demand curve 2 intersects potential GDP.
8. equal to natural rate of unemployment because once again GDP = potential GDP.

1. Discretionary policy (because requires Act of Congress).
2. Automatic stabilizer (because changes without Congressional or Administration action), increases in a boom (because as income rises, people owe more in taxes.
3. Automatic stabilizer (because changes without Congressional or Administration action), decreases in a boom (because fewer people are unemployed).

1. boom, because actual GDP > potential GDP.
2. deficit.
3. $200 billion.
4. deficit.
5. $400 billion.

1. 2 percent.
2. above.
3. boom, because real GDP > potential GDP.
4. 3.5 percent, using the rule.

III. Critical thinking [4 pts]

Increased consumption has different effects on the economy in the short run and long run. In the short run, GDP can fluctuate around potential GDP. If the economy is initially in recession (that is, actual GDP is below potential GDP) then an autonomous increase in consumption can raise GDP and help the recovery.

However, in the long run, GDP always returns to potential GDP, which is determined by the total available amounts of capital, labor, and technology, according to the aggregate production function. The GDP spending shares model shows that a rightward shift in the (C/Y) curve (that is, a reduction in saving) will raise the real interest rate and discourage investment spending. Less investment spending implies that the capital stock and therefore potential GDP will grow more slowly.

Version B

I. Multiple choice [1 pt each: 24 pts total]

(1)e. (2)b. (3)a. (4)a. (5)d. (6)a. (7)b. (8)d. (9)c. (10)b.
(11)c. (12)d. (13)c. (14)b. (15)d. (16)b. (17)b. (18)a. (19)b. (20)a.
(21)d. (22)b. (23)d. (24)a.

II. Problems

(1) [Percent changes: 4 pts]

1. decrease.
2. 1 percent.

(2) [Production functions: 7 pts]

• Average product = total output/total input = 10, 7, 5 cars per worker.
• Marginal product = Δ output/Δ input = 10, 4, 1 cars per worker.
• YES, because MP decreases as the number of workers increases.

(3) [Economic capital: 6 pts] Economic capital includes factories, buildings, machinery, equipment, vehicles, computers, and software: goods that help produce more goods. Note that economic capital is NOT the same as financial capital.

1. Yes.
2. No.
3. Yes.
4. Yes.
5. Yes.
6. No.

(4) [Market equilibrium, price controls: 12 pts]

1. $12.
2. 60 million.
3. 40 million.
4. 70 million.
5. excess supply.
6. 30 million.

(5) [Spending approach: 12 pts]

1. $18.6 trillion = consumption of durable goods + consumption of nondurable goods + consumption of services.
2. $4.8 trillion = business fixed investment + residential investment + change in inventories.
3. $1.8 trillion = gross investment - depreciation.
4. $4.8 trillion = national defence purchases + federal nondefense purchases + state and local purchases.
5. trade deficit, because exports < imports.
6. $-0.8 trillion = exports - imports.

(6) [GDP and real GDP: 8 pts]

	Food		Clothing		Calculations
Year	Price	Quantity	Price	Quantity	2022 prices	2023 prices
2022	$2	25	$5	10	$100	$120
2023	$2	31	$7	10	$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 (2022) above.
3. 10 percent, using entries in the second column (2023) above.
4. 11 percent, the average of the growth rate using constant 2022 prices and the growth rate using constant 2023 prices.

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

1. base year = 2018 (because nominal GDP = real GDP in that year).
2. GDP price index = nominal GDP / real GDP × = 89.2, 95.1, 100.0.
3. Rate of inflation = (new price index - old price index) / (old price index) = 6.6 percent, 5.2 percent.

(8) [Using CPI: 2 pts] $6682.

(9) [PPP exchange rate: 2 pts] 1.54 Australian dollars per U.S. dollar.

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

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

(11) [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.

(12) [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.

(13) [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).

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

(15) [Consumption function, Keynesian cross, Keynesian multipliers: 8 pts]

1. 0.65 = MPC.
2. 0.6 = MPC - MPI.
3. 2.5 = 1 / (1-MPC+MPI).
4. $750 billion = $300 × govt purchases multiplier.
5. $120 billion = $300 / govt purchases multiplier.
6. 1.5 = govt purchases multiplier - 1.
7. $200 = $300 / tax cut multiplier.
8. $300, because the deficit-neutral multiplier always = 1.0.

(16) [How business cycles begin: 20 pts] Full credit requires correct graphs on page 11.

1. up, right, boom.
2. down, left, recession.
3. down, left, recession.
4. up, right, boom.

(17) [Inflation adjustment: 16 pts] Begin by drawing the "inflation adjustment line" at the current rate of inflation, 5 percent.

1. $29 trillion, where aggregate demand curve 1 intersects current inflation rate.
2. equal to natural rate of unemployment because GDP = potential GDP.
3. $27.5 trillion (a decrease).
4. 5 percent, because inflation rate has momentum in short run.
5. greater than the natural rate because GDP < potential GDP.
6. $29 trillion, because eventually the inflation rate will rise until GDP once more equals potential GDP.
7. 2 percent, where aggregate demand curve 2 intersects potential GDP.
8. equal to natural rate of unemployment, because once again GDP = potential GDP.

1. Automatic stabilizer (because changes without Congressional or Administration action), increases in a boom (because as income rises, people owe more in taxes.
2. Automatic stabilizer (because changes without Congressional or Administration action), decreases in a boom (because fewer people are unemployed).
3. Discretionary policy (because requires Act of Congress).

1. recession, because actual GDP < potential GDP.
2. deficit.
3. $600 billion.
4. balanced.
5. $0 billion.

1. 2 percent.
2. below.
3. recession, because real GDP < potential GDP.
4. 0.5 percent, using the rule.

III. Critical thinking [4 pts]

Same as Version A.

[end of answer key]