ECON 1010 Principles of Macroeconomics Practice Test 2 Solutions

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1 ECON 1010 Principles of Macroeconomics Practice Test 2 Solutions Section A: Multiple Choice Questions. (40 points; 2 pts each) 1. The unemployment rate is the ratio of all of the people: A) out of work to the total population. B) out of work to those over age 16. C) unemployed to those looking for work. D) unemployed to those in the labor force. 2. If the rate of unemployment is 10 percent and the labor force is 130 million, the number of unemployed workers is: A) 10 percent. B) 13 million. C) 10 million. D) 8 million. 3. Unemployment that occurs because it takes workers and employees time to find each other is called: A) cyclical unemployment. B) structural unemployment. C) frictional unemployment. D) discouraged unemployment. 4. Structural unemployment means there are: A) more people seeking work than there are jobs in a particular labor market. B) more jobs than workers in a particular industry. C) wages that are too low in a particular industry. D) people just entering the labor force. 1

2 5. (Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. What is the quantity of labor supplied at a binding minimum wage of P 3? A) Q 1. B) Q 2. C) Q 3. D) Q Increases in the average level of prices are called: A) depreciation. B) deflation. C) inflation. D) expectations. 7. Menu costs of inflation are the: A) costs associated with money being a less reliable unit of measurement. B) costs of transactions associated with avoiding the inflation tax. C) costs associated with businesses changing prices. D) revenue the government gets from printing money. 2

3 8. Suppose the real interest rate is 2.1 percent and the nominal interest rate is 5.4 percent. The inflation rate is: A) 7.5 percent. B) 3.3 percent. C) 3.3 percent. D) 2.1 percent. Aadland Spring A price index: A) always includes a base year. B) measures the cost of purchasing a market basket of output across different years. C) is normalized to 100 for the base year. D) always includes a base year, measures the cost of purchasing a market basket of output across different years, and is normalized to 100 for the base year. 10. If the cost of the market basket in the base year is $2000, and the cost of the market basket in 2014 is $2100, the price index for 2014 is: A) 2100 B) 105 C) 100 D) (Table: GDP II) Using the information in the Table: GDP II, calculate the GDP deflator for A) 111 B) 104 C) 90 D) 96 3

4 12. Which statistics are used to measure changes in the prices that firms pay for goods and services? A) producer price index B) CPI C) GDP deflator D) cost of living index Aadland Spring If a country has a population of 1000, an area of 100 square miles, and a GDP of $5 million, then its GDP per capita is: A) $500. B) $5000. C) $50,000. D) $5 million. 14. Suppose a panel of economists predicts that a nation's real GDP per capita will double in approximately 20 years. Based upon the rule of 70, what must be the predicted annual growth rate of real GDP per capita? A) 140 percent B) 3.5 percent C) 2.85 percent D) 14 percent 15. According to the text, productivity is driven by all EXCEPT: A) physical capital. B) human capital. C) technological progress. D) natural resources. 16. Diminishing returns to physical capital implies that when the human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to: A) a smaller increase in productivity. B) a larger increase in productivity. C) a decrease in productivity. D) negative productivity. 4

5 17. As a limit to economic growth, environmental problems are more difficult to solve than resource problems because: Aadland Spring 2015 A) environmental problems don't automatically provide incentives for changed behavior. B) resource problems don't automatically provide incentives for changed behavior. C) the opportunity cost of solving environmental problems in terms of GDP sacrificed is larger. D) most scientists haven't determined the relationship between greenhouse gas emissions and climate change. 18. The unemployment rate in the U.S. recently fell to: A) 1.5%. B) 15%. C) 2.5%. D) 5.5%. 19. A country's growth rate depends very highly on how it has invested in its physical capital. Generally, countries that have: A) used foreign direct investment as a source of their capital have exhibited the highest growth rate. B) used domestic saving as a source of their investment on physical capital have exhibited the highest growth rate. C) used foreign portfolio investment as a source of their capital have exhibited the highest growth rate. D) used contracted globalization as a source of their capital have exhibited the highest growth rate. 20. The convergence hypothesis helps explain why: A) highly educated people converge in high-income countries. B) high-income individuals marry other high-income individuals. C) high-income countries continue their high growth rates. D) the income of high-income and lower-income countries get closer. 5

6 Section B: Short Answer Questions. (60 points) 1. (20 pts) Consider the following labor market data for a stylized economy. Year Population Unemployed Employed a) (10 pts) Calculate the labor force participation rate and unemployment rate in each year. Comment on the results. 2012: Labor force participation rate = (80 / 100) 100 = 80% Unemployment rate = (10/80) 100 = 12.5% 2013: Labor force participation rate = (95 / 120) 100 = 79.2% Unemployment rate = (15/95) 100 = 15.8% 2014: Labor force participation rate = (110 / 140) 100 = 78.6% Unemployment rate = (20/110) 100 = 18.2% As the labor force participation rate decreased, unemployment rate has increased from b) (10 pts) Now assume the economy goes into recession in 2015, but the population and number employed do not change. However, five unemployed workers from 2014 become discouraged and stop actively looking for a job. Calculate the labor force participation rate and unemployment rate in Comment on the results. If five unemployed workers from 2014 become discouraged and stop actively looking for a job, then they will not be counted as unemployed based on the definition of unemployment. Year Population Unemployed Employed : Labor force participation rate = (105 / 140) 100 = 75% Unemployment rate = (15/105) 100 = 14.3% The labor force participation and the unemployment rate both decreased in

7 2. (40 pts) The table below shows production and prices for a stylized economy. Assume the base year is Year Production of X Price per unit of X ($) Production of Y Price per unit of Y ($) units units units units units units 5 a) (10 pts) Calculate the GDP deflator for 2012, 2013, and What is the inflation rate in 2013 and 2014? 2012 (base year): Nominal GDP = = $1300 Real GDP = = $1300 GDP Deflator = (1300/1300) 100 = : Nominal GDP = = $3300 Real GDP = = $2100 GDP Deflator = (3300/2100) 100 = : Nominal GDP = = $8300 Real GDP = = $3200 GDP Deflator = (8300/3200) 100 = GDP Deflator inflation rate in 2013 = (( )/100) 100 = 57.14% GDP Deflator inflation rate in 2014 = (( )/157.14) 100 = 65.06% b) (10 pts) Assume that the market basket for the typical consumer is given by the quantities in Calculate the CPI for 2012, 2013, and What is the CPI inflation rate in 2013 and 2014? Consumer Price index in 2012 = 100 Consumer Price index in 2013 = ($2150/$1300) 100 = CPI Inflation rate in 2013 = (( )/100) 100 = 65.38% Consumer Price index in 2014 = ($4075/$1300) 100 = CPI Inflation rate in 2014 = (( )/165.38) 100 = 89.54% 7

8 c) (10 pts) How fast is the economy growing in 2013 and 2014? Using the 2014 growth rate, approximately how long will it take real GDP to double? Defend your answer. Growth rate in real GDP in 2013 = (( )/1300) 100 = 61.5% Growth rate in real GDP in 2014 = (( )/2100) 100 = 52.4% Using Rule of 70, Number of years for the real GDP to double = 70/52.4% = 1.34 years. d) (10 pts) Use the population numbers in question #1 to calculate the growth rate in real GDP per capita in 2013 and Are the numbers in part (c) or part (d) a better indicator of economic growth and standards of living in the economy? Explain. Growth rate in real GDP per capita in 2013 = (( )/13) 100 = 34.6% Growth rate in real GDP per capita in 2014 = (( )/17.5) 100 = 29.1% Part d) is a better indicator of economic growth and standards of living because it takes into account the changes in the population of an economy. For example, with other factors equal, an increase in population lowers the standard of living for the average person, as there are now more people to share a given amount of real GDP. Thus, an increase in real GDP that accounts for the increase in population leaves the standard of living unchanged. 8

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