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Principles of Macroeconomics Signature: (Econ 001) Printed name: Drake University, Fall 2000 William M. Boal ID number:
MIDTERM EXAMINATION #2: Version A
National Income and Product Accounts
October 4, 2000
INSTRUCTIONS: This exam is closed-book, closed-notes, but calculators are permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100.
I. Multiple choice: Circle the one best answer to each question. [3 pts each]
(1) Steel is an example of a. an investment good. b. a final good. c. an intermediate good. d. all of the above.
(2) If the inflation rate gradually rises, then interest rates will likely a. fall. b. rise. c. stay constant. d. cannot be determined.
(3) Government purchases include all of the following except a. spending on education. b. spending on law enforcement. c. defense spending. d. welfare payments.
(4) Potential GDP depends on all of the following except a. labor. b. capital. c. available know-how or technology. d. unemployment.
II. Short answer: Insert your answer to each question in the box provided. Feel free to use the margins for
scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section.
(1) [Components of GDP: 9 pts] Suppose we have the following data on an imaginary country. [Hint: Some of the data are extraneous and not needed for solving this problem.]
Business fixed investment $ 60 billion Residential investment $ 40 billion Consumption $400 billion Business inventories at end of year
$ 50 billion
Depreciation $ 15 billion Business inventories at beginning of year
$ 40 billion
a. Compute inventory investment
billion b. Compute gross investment
billion c. Compute net investment
billion
(2) [Parts of business cycle: 10 pts] The graph below shows real U.S. GDP from the first quarter of 1988 to the fourth quarter of 1993.
Drake University, Fall 2000 Page 2 of 4
$6,
$6,
$6,
$6,
$6,
$6,
$6,
$6,
$7,
$7,
$7,
Year.Quarter
Match the periods or points in time labeled by letters on the graph to the following parts of the business cycle by inserting appropriate letters in the box below. Boom: Peak: Recession: Recovery: Trough:
(3) [Components of GDP: 16 pts] The imaginary country of Techland has just four industries. The Missile Defense Industry builds missile defense systems for the government. The Semiconductor Industry produces semiconductors (computer parts) which it sells to the other three industries. The Mainframe Industry produces business computers. The Electronic Game Industry produces games for consumers. There are no other goods and no foreign trade. In a recent year,
- The Missile Defense Industry produced a $15 billion missile defense system for the government.
- The Semiconductor Industry produced and sold $10 billion of semiconductors to the Electronic Game Industry, $10 billion to the Mainframe Industry, and $5 billion to the Missile Defense Industry, for a total of $25 billion in sales.
- The Mainframe Industry produced and sold $5 billion of business computers to each of the four industries (including itself), for a total of $20 billion in sales.
- The Electronic Game Industry produced and sold $50 billion of electronic games to consumers.
a. Compute the spending components of Techland’s GDP.
b. Compute value added by each industry.
Consumption (C) $ billion
Missile Defense Industry $ billion Investment (I) $ billion
Semiconductor Industry $ billion Government purchases (G) $ billion
Electronic Game Industry $ billion Total GDP (Y) $ billion
Mainframe Industry $ billion
(4) [Components of GDP: 9 pts] The table below shows data for the United States in 1999. [Hint: Some of the data are extraneous and not needed for solving this problem.] Government purchases $1.6 trillion Imports $1.2 trillion
A
B
C D E
F G H
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a. The purchasing power parity (PPP) exchange rate is
given by: £^ per U.S. dollar.
b. The United Kingdom’s GDP per capita is about £14,000.
Using the PPP exchange rate, this is equivalent to: $^ (U.S. dollars)
III. Short essay: Write a one-paragraph essay answering either question (1) or question (2) below, but not both.
[5 pts] (1) What kinds of goods are likely to sell at the same price everywhere in the world (calculated at market exchange rates)? Why? What kinds of goods are likely to sell at very different prices in different parts of the world (calculated at market exchange rates)? Why? (2) If pollution decreases, how would this affect GDP? Explain your answer.
Which question are you answering, (1) or (2)? _________. Please write your answer below:
[end of exam]
