Principles of Macroeconomics

Midterm 1 mock

Rules
“I will exercise complete academic honesty"

Name:

Signature:

1. You are allowed to use a calculator. No cellphones, tablets or other electronic

devices with internet access can be used during the final exam.

2. The written and chosen answers must be marked clearly and must not allow
different interpretations. If the answers allow different interpretations, none
of the answers will be accepted as correct.

3. Any academic dishonesty will be reported and the student might get a zero
score on the midterm.

4. Solve the short questions and questions 1-3.

Short questions (25 points)
Multiple Choice Questions
1. The use of taxes and government spending to change the overall level of
spending in an economy is called:

(a)monetary policy. (b)fiscal policy. X

(c) either monetary or fiscal policy, de- (d)both monetary and fiscal policy.
pending on what is happening to
the interest rate.

2.The cons of government interventions into the economy during a recession

are

(a)Increases in government spending (b)Increases in government spending

would lead to increases in taxes to- can lead to big changes in an econ-
day or in the future omy’s indebtedness and may affect
capital inflows.

(c) Increases in government spending (d)All of the above X

would crowd out private investment

3. Are the following included in U.S. GDP? (1) The price paid by a German
tourist when staying at a New York hotel. (2) The price paid by an American
tourist when staying at a Berlin hotel.

(a)Both are included in U.S. GDP. (b)Neither is included in U.S. GDP.

(c) Only the price paid by a German (d)Only the price paid by an American
tourist when staying at a New York tourist when staying at a Berlin ho-
hotel is included in U.S. GDP. X tel is included U.S. GDP.

4. Suppose country A sells 100 million worth of goods and services to country
B. Country B sells 50 million worth of goods and services to country A. These are
the only two countries in the world. Net exports in country:

(a)B equal 50 million. X (b)A equal 150 million.

(c) A equal 150 million. (d)B equal 50 million.
 5. Income spent on imported goods:

(a)represents income that has leaked (b)must be subtracted from spending

across national borders. data to calculate an accurate value
for domestic production.

(c) is income that is not spent on do- (d)Answers (a), (b), and (c) are all cor-
mestically produced goods and services. rect. X

6. In your country, there are 24 million people in the labor force. A total of 21.5
million people are employed. What is the unemployment rate in your country?

(a)10.4% X (b)2.5%
(c) 89.6% (d)21.5%

7. Manolis has recently moved to Greece because he finished his studies. Fresh
out of college and due to the pandemic, he has been looking for a job that matches
his expectations the past month. This is an example of:

(a)frictional unemployment. X (b)cyclical unemployment.

(c) structural unemployment. (d)underemployment.

8. Many firms transformed their offices during the pandemic and they can
hire now workers located in places far from the office. As a result, places that had
consistently had large unemployment rates , see large reductions in unemployment.
This is because employees can offer their skills in business in different geographies
where they are needed. This is an example of a reduction in:

(a)frictional unemployment. (b)cyclical unemployment.

(c) structural unemployment. X (d)underemployment.

9. India’s GDP per capita is $3,000, and let’s assume real output per person
grows at 5% per year. Using the rule of 70, how many years will it take for India
to reach Italy’s current level of GDP per capita, about $24,000 per year?

(a)42 years X (b)14 years

(c) 28 years (d)12 years
 10. Financial markets main functions include:

(a)Increasing risk for investors, by pro- (b)Liquidity transformation, helping banks

viding a set of risky financial instruments.fund liquid loans with illiquid deposits.

(c) Reducing the costs related to fund- (d)Answers (a), (b), and (c) are all
ing a new investment opportunity. correct.
X

True/ False Questions

11. This year the value of a country’s imports is equal to 1.2 billion, and the
value of its exports is equal to 1.3 billion. This country is running a trade surplus.

X
TRUE FALSE

12. The inflation rate has been 0% for the past 10 years. As a result, banks
are offering nominal interest rates of 1 %. If the actual inflation rate increases to
3% and the nominal interest rate of 1% remains in loan contracts, then: banks are
glad they gave loans because the real interest rate has increased to 4%.

TRUE X
FALSE

13. Vilma, a stay-at-home mom, does not have a job currently and has not
applied for a job the past 13 months. She is long-term unemployed.

TRUE X
FALSE

14. For an investor living in the UK, investing 200000 in a house is a more
liquid investment compared to investing the same amount in the New York Stock
Exchange.

TRUE X
FALSE

Fill in the blank

14. The adult population 90 million, the labor force is 80 million, the employed
persons is 67.75 million and part time workers are 15 million.
 According to the table, the unemployment rate is 15,31 % , and the labor force
participation rate is 88,89 % .
15. You have just been awarded a cost-of-living increase tied to the CPI. The
CPI has gone from 105 to 114. If your salary is 50,000 per year before the increase.
Your salary, after the CPI increase is factored in, will be 54286 per year, and in
real terms the change is equal to 0.
16. The expected inflation rises from 3% to 6%.
The real interest rate will stay constant by 0 %. The nominal interest rate will
increase by 3 %. The quantity of deposits in equilibrium will stay constant.
17. Assume aggregate consumer spending equals $5,000 when aggregate dis-
posable income is zero, and when disposable income increases from $300 to $400,
consumer spending increases by $70. What is the equation for the aggregate con-
sumption function? C = 5000+ 0.7 YD
 Long Questions
Question 1 (25 points): Use the data in the following table. Assume that
this economy has only two goods produced, oranges and computers, and 2010 is
the base year. The consumption basket of a typical consumer is 3 oranges and 1
computer.
2010 2011
Quantity of oranges(billions) 4, 000 4, 500
Price of oranges $2.50 $3.00
Quantity of computers (billions) 1, 200 1, 600
Price of computers $3.50 $2.80

Calculate the following:

1. Nominal GDP in 2010 and 2011

In 2010: 4000 × 2.5 + 1200 × 3.5 = 14200
In 2011: 4500 × 3 + 1600 × 2.8 = 17980

2. Real GDP in 2010 and 2011

In 2010: 4000 × 2.5 + 1200 × 3.5 = 14200
In 2011: 4500 × 2.5 + 1600 × 3.5 = 16850

3. The growth rate of real GDP in 2011

16850−14200
14200
= 18, 67 %

4. The CPI in 2010 and 2011

Cost in 2010:3 × 2.5 + 3.5 = 11
Cost in 2011:3 × 3 + 2.8 = 11.8
CPI in 2010 is 100
11.8
CPI in 2011 is 11
× 100 = 107, 27

5. The inflation rate in 2011

7,27 %
 Question 2 (25 points): In the Rohan Economy : Consumption is $750 bil-
lion, Government spending $250 billion , Imports $70 billion, Investment spending
is $160 billion, Exports $50 billion. Calculate:

1. GDP GDP = C + I + G + X – IM, GDP = 750 +160 + 250 + 50 – 70 =

1140 billion

2. National savings National savings = GDP – C – G National savings = 1140

– 750 – 250 = 140 billion

3. Net capital inflow

Net capital inflow = IM – X Net capital inflow = 70 – 50 = 20 billion

4. Investment spending
Investment spending = National savings + Net capital inflow I = 140 + 20
= 160 billion It was a given also.

5. If the value of exports doubles, when all other values stay constant, calculate
the growth rate in: Net capital inflow and Investment spending.
Net capital inflow = IM – X Net capital inflow = 70 – 100 = -30 billion
Growth (-30-20)/(20) = -250%
Investment spending stays constant, so 0 percent.
 Question 3 (25 points) :Economists observed the only five residents of a
very small economy and estimated each one’s consumer spending at various lev-
els of current disposable income. The accompanying table shows each resident’s
consumer spending at two income levels.
Individual income
$20, 000 $40, 000
CA $14, 000 $28, 000
CB 15, 000 27, 500
CC 22, 500 35, 000
CD 17, 000 30, 000
CE 16, 000 33, 000

1. What is resident’s A and B consumption function? What is MPC for A and

B? Who is going to save more in percentage terms, if the income increases
by 1000?
If the consumption function for A is:

cA = aA + M P CA ydA

I can substitute the two data points and I have:

14000 = aA + M P CA 20000

and
28000 = aA + M P CA 40000
28000−14000
Then M P CA = 40000−20000
= 0.7 and aA = 0.
If the consumption function for B is:

cB = aB + M P CB ydB

27500−15000
Similarly M P CB = 40000−20000
= 0.625 and aB = 15000 − 0.625 × 20000 =
2500.

2. What is the economy’s aggregate consumption function?

Aggregate income
$100, 000 $200, 000
CAgg $84, 500 $153, 500
153,500−84,500
Similarly M P C = 200000−100000
= 0.69 and A = 84, 500 − 0.69 × 100000 =
15, 500.
3. What can shift the aggregate consumption function to the right? Answer:

Positive changes in wealth and future income. You should give one detailed
example for each, e.g. change in the price of houses + an increase in NCI
and as a result, investment spending would lead to more hiring and higher
wages.

4. If the small economy consists only of those 5 individuals, what is the value
of the multiplier?

1 1
The Multiplier is 1−M P C
= 1−M P C
= 3.23

5. How would total production increase in this economy if the government de-
cides to buy 2000 dollars’ worth of buses? Describe the assumptions you
made to determine a quantitative answer to this question.

By 3.23*2000 = 6460.
We make a number of assumptions. 1. There is no foreign sector or X = 0
and M = 0. 2. There is no other government interventions or T and G = 0
3. Prices are constant, the production of buses is flexible.