Econ 1102: Principles of Macroeconomics

Name:______Class Time:______Midterm # 1 “Principles of Macroeconomics” NSCC - Summer 2007 Professor: Moonsu Han

Total of 25 pts. (Due Date: Tue June 12, 2007) Question 1 Bring definitions for following terms. (5 pts.)

1. CPI (1 pt.):

2. Similarity and Difference btwn CPI and GDP Deflator (2 pts.):

3. Similarity and Difference btwn Human Capital and Organization capital(2 pt.):

Question 2 Suppose that people consume only three goods, as shown in following table.

1 (10 pts.)

Tennis Balls Tennis Racquets Gatorade 2003 Price $3 $50 $1 2003 Quantity 100 10 200 2004 Price $3 $75 $2 2004 Quantity 200 20 300 Note: Use fixed basket of goods: 100 balls, 10 rackets, 200 Gatorades

1. What is the percentage change in the price of each of the three goods? (3 pts.) What is the percentage change in the overall price level? (5 pts.)

2. Do tennis racquets become more or less expensive relative to Gatorade? Does the well-being of some people change relative to the well-being of others? Explain. (2 pts.)

Question 3 (10 Pts., 2.5 pts. each)

2 Using supply-and-demand diagrams, show the effect of the following events on the market for loanable fund market and show changes of interest rate (i*) and equilibrium * quantity of loanable fund (Qf ).

1. A change in the tax law to encourage Americans to save. (Note: Gov’t lowers tax on capital gains like interest income.)

2. Gov’t lowers tax on new investment.

3. Government had budget deficit but it has budget surplus now.

4. Gov’t spent more than it receives in tax revenue so there is a gov’t budget deficit.

Bonus Question (1 Pt.)

Andover Bank and Lowell Bank each sell one-year certificates of deposit (CDs). The

3 interest rates on these CDs are given in the following table for a three-year period:

Bank 2005 2006 2007 Andover Bank 2% 9% 10% Lowell Bank 7% 7% 7%

Suppose you deposit $1,000 in a CD in each bank at the beginning of 2005. At the end of 2005, you take your $1,000 and any interest earned and invest it in a CD for the following year. You do this again at the end of 2006. At the end of 2007, will you have earned more on your Andover Bank CDs or on your Lowell Bank CDs? Briefly explain.