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Econ 162B-A0, A1

Fall 2008

MIDTERM EXAMINATION NUMBER TWO (A)

PART I MULTIPLE CHOICE (30 points)

Choose the single best answer by circling the appropriate letter.

1.  Which of the following is not a macroeconomic goal of the United States government?

a.  stable rates of GDP growth

b.  high employment rates

c.  stable prices

d.  low interest rates

e.  low unemployment rates

2.  Which of the following is included in Gross Domestic Product for the United States?

a.  marijuana sales in New York State

b.  flour produced by a miller and sold to a baker

c.  the purchase of Lehman Brothers stock

d.  Coca-Cola produced in India

e.  economics classes at Binghamton University

3.  Suppose that an economy suffers from deflation.  Then in years after the base year,

a.  real GDP will be greater than nominal GDP.

b.  nominal GDP must be increasing.

c.  real GDP will be less than nominal GDP.

d.  real GDP will equal nominal GDP.

e.  none of the above.

4.  The current account

a.  records the flows of financial assets between countries.

b.  is always equal to 0.

c.  has been in surplus in the United States in recent years.

d.  records the flows of goods, services, income and unilateral transfers.

e.  all of the above.

5.  If there is a surplus in the current account, then

a.  the country has a trade deficit.

b.  imports must exceed exports.

c.  there must be a deficit in the capital and financial accounts.

d.  debits will be greater than credits.

e.  exports must be increasing over time.

6.  Purchasing Power Parity Theory

a.  states that currencies should have the same purchasing power in different

     countries.

b.  results from international arbitrage.

c.  is represented by the formula  P = P^f x E.

d.  provides a model for the long-term movements of exchange rates over time.

e.  all of the above.

7.  Who would be included in the labor force?

a.  Arthur is in prison for selling cocaine.

b.  Betty is actively seeking employment as a carpenter but is currently without a

     job.

c.  Charlie is a college student actively looking for work.

d.  David is retired.

e.  Ed is without a job and has given up actively seeking employment.

8.  Who is harmed by unanticipated inflation?

a.  lenders

b.  spenders

c.  tenants

d.  borrowers

e.  all of the above

9.  One difference between the classical and Keynesian models is that

a.  wages, prices and interest rates are assumed to be flexible in the Keynesian

     model.

b.  the aggregate supply curve is horizontal in the classical model.

c.  markets always clear in the classical model.

d.  involuntary unemployment may exist in the classical model.

e.  all of the above.

10.  The classical dichotomy is the idea that

a.  economic decision-makers are aware of price changes throughout the

     economy.

b.  labor and capital markets are always in equilibrium.

c.  household decisions can be separated from business decisions.

d.  private sector decisions are different than public sector decisions.

e.  real variables can be separated from nominal variables in the classical model.

PART II TRUE-FALSE AND EXPLAIN      (25 points)

State whether each of the following five statements is true or false (@ 2

points each) and then briefly explain why you gave the answer that you did (@ 3 points each).  Use graphs where appropriate, and you may use

the back of the page if necessary.

1.  Since Coca-Cola is an American company, then Coca-Cola produced in India would be included in Indian GDP but not Indian GNP.

2.  If one British pound trades for two euros, and if one euro trades for two dollars, then one British pound should trade for one dollar.  

3.  Frictional unemployment occurs when technological change makes some jobs obsolete.

4.  As long as inflation is anticipated, then there are no costs of inflation to the economy as a whole.

5.  Say’s Law states that demand creates its own supply.

PART III PROBLEMS                  (45 points)

Answer each of the following three questions to the best of your abilities. Please show all work, and be sure to answer each part of every question.  Be sure to label all axes and curves, and show numerical intercepts and intersection points where ever possible.

Partial credit will be given where appropriate.  Use the backs of the pages if necessary.

1.  The country of Phoney produces three goods, bologna, rigatoni, and macaroni.  The prices and quantities exchanged in 2007 and 2008 are given by the following table:

  2007  2008

 price          quantity   price          quantity

bologna    $3  10     $6  20

rigatoni    $2  20     $4  40

macaroni    $1  30     $2  60

Assume that 2007 is the base year.  From the information provided, find the following:

a.  nominal GDP for 2007     b.  real GDP for 2007      c.  nominal GDP for 2008

d.  real GDP for 2008     e.  nominal GDP growth rate      f.  real GDP growth rate

g.  GDP price deflator for  2007      h.  GDP price deflator for 2008  (1 point each)

i.  chain-type growth rate (g) (3 points)    j.  chain-type real GDP   (2 points)

k.  chain-type GDP price deflator  (2 points)

2.  Suppose that you have two choices to invest $1000 for one year:

a.  purchase a French bond that pays 5% interest per year.

b.  purchase a Japanese bond that pays 10% interest for the year.

Currently, the following exchange rates exist:

$1.00 = €0.5

$1.00 = ¥100

Next year, you expect the following exchange rates to exist:

$1.00 = €0.25

$1.00 = ¥120

a.  If you purchase the French bond, how many dollars will you have in one year?  What is your profit?     (5 points)

b.  If you purchase the Japanese bond, how many dollars will you have in one year?  What is your profit?     (5 points)

c.  Which bond should you purchase?  Comment and explain.     (5 points)

3.  Suppose that the Obama Administration is successful in increasing public expenditures on health care and education, and as a result workers become more productive due to these investments in human capital.  Using the first three graphs of the classical model, show the effects of an increase in labor productivity.  What happens to real wages, the quantity of labor, real GDP, and the price level?   Explain.