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A midterm exam for the principles of macroeconomics course at drake university, fall 2005. The exam focuses on the national income and product accounts, including multiple-choice questions and problems related to real gdp, inflation, components of gdp, and value added. Students are required to answer in the boxes provided and partial credit is not given.
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Principles of Macroeconomics (Econ 001) Signature: Drake University, Fall 2005 William M. Boal Printed name:
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT 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. [2 pts each, 20 pts total] (1) Over time, a graph of real GDP shows a. long-run growth. b. short-run fluctuations. c. both (a) and (b). d. neither (a) nor (b). (2) Which of the following shows a strong upward trend for the U.S. in the last few decades? a. The unemployment rate. b. Real GDP per capita. c. The inflation rate. d. The interest rate. (3) At the peak of a business cycle, actual GDP is a. above potential GDP. b. below potential GDP. c. equal to potential GDP. d. cannot be determined from information given. (4) In recent years, Japan experienced a negative inflation rate of around -1%. This is an example of a. disinflation. b. deflation. c. reflation. d. recession. (5) Suppose a bank pays an interest rate of 5 percent on deposits and the expected inflation rate is 2 percent. The real rate of interest is a. 2 percent. b. 3 percent. c. 5 percent. d. 7 percent. (6) Consumption spending in the national accounts includes a. purchases of new houses. b. purchases of used cars. c. spending on visits to doctors and dentists. d. purchases of government bonds for retirement accounts. (7) Investment spending in the national accounts does not include a. purchases of new factories. b. purchases of new homes. c. purchases of software by businesses. d. purchases of shares of stock in corporations. (8) Government purchases in the national accounts do not include a. pay for members of the armed services. b. social security payments. c. school construction. d. maintenance of national parks. (9) Suppose a bagel shop produces and sells $30, of bagels using flour and other ingredients it purchases for $5,000; workers it hires for $15,000; and ovens it leases for $3,000. The value added by the bagel shop is a. $7,000. b. $22,000. c. $25,000. d. $30,000. (10) The rate at which you can buy euros with your dollars is called a. the market exchange rate. b. the purchasing-power parity exchange rate. c. the real interest rate. d. net exports.
(3) [Spending components of GDP: 6 pts] The table below shows 2004 data for the United States available when this exam was written. [Hint: Some of the data are extraneous and not needed for solving this problem.] Business fixed investment $1.2 trillion Residential investment $0.7 trillion Compensation of employees $6.7 trillion Business inventories at end of year $1.7 trillion Business inventories at beginning of year $1.6 trillion Depreciation $1.4 trillion
(4) [Spending components of GDP: 6 pts] The table below shows 2002 data for the United States available when this exam was written. [Hint: Some of the data are extraneous and not needed for solving this problem.] Gross investment $1.6 trillion Government purchases $2.0 trillion Imports $1.4 trillion National defense $0.4 trillion Exports $1.0 trillion Corporate profits $0.9 trillion Consumption $7.4 trillion
Year Nominal GDP (billions of dollars) Growth rate of real GDP Real GDP (billions of 1999 dollars) GDP price index or price deflator (base year = 1999) to the nearest tenth Rate of inflation (to the nearest tenth of a percent)
(6) [Inflation and the CPI: 2 pts] The federal minimum wage was introduced at $0. per hour in October 1938, when the CPI was about 14.0. The CPI is now about 197. Compute the value of the 1938 minimum wage in today's dollars to the nearest cent.
(7) [Inflation: 2 pts] The CPI was 196.4 in August 2005 and 189.5 in August 2004. Compute the annual rate of inflation from August 2004 to August 2005 to the nearest
Year Food Appliances Price Quantity Price Quantity 2003 $4 100 $6 100 2004 $4 200 $16 100 Use the data above to complete the following table. Compute the growth rate of real GDP, the level of real GDP, and the GDP deflator using the same method used by the U.S. Bureau of Economic Analysis.
GDP (also called "nominal GDP" or "current-dollar GDP")
GDP deflator or price index (base year = 2003)