Eco 202 – Principles of Macroeconomics Professor Wesley Pech

First Midterm Spring 2017

Please show all of your work.

PART 1 – CONCEPTUAL QUESTIONS

(8 points) 1. Explain why imports are subtracted in the calculation of GDP.

(8 points) 2. Does the CPI overstate or understate the true inflation rate? Explain.

PART 2 – PROBLEMS

Answer all the problems.

(16 points) 1. Suppose a country observes an increase in the unemployment rate, an increase in the labor force participation rate, and an increase in the employment-population ratio. Give a numerical example to illustrate how this is possible.

(16 points) 2. It is known that real wages have remained constant between 1990 and 2010. The CPI in 1990 (using 2010 as the base year) was 20. Nominal wages were equal to $5/hour in 2010. What were nominal wages in 1990?

(16 points) 3. Suppose that people consume only three goods as shown in the table:

Year Price of Quantity Price of Quantity Price of Quantity CPI tennis of tennis tennis of tennis Gatorade of balls balls rackets rackets Gatorade 2003 $1 100 $40 30 200 79.17 2004 $2 100 $60 30 $2 200 100 2005 100 $50 30 $3 200 104.17

a) Calculate the price of Gatorade in 2003 and the price of tennis balls in 2005. b) What year is the base year? Explain. c) What was the inflation rate in 2004?

(16 points) 4. Consider the following data on US GDP: Year Nominal GDP GDP Deflator (base year 1990) 1999 $10000 120 2000 $18000 200

a) What was the inflation rate in 2000? b) What was the growth rate in Real GDP between 1999 and 2000 measured in 1990 prices? c) What was the growth rate in Nominal GDP between 1999 and 2000? d) What was the GDP Deflator in year 1990?

(20 points) 5. Use the market of loanable funds model to explain the effects of the following events on investment and the interest rate:

a) A government budget surplus; b) The US declaring war on Russia; c) An improvement in education that causes entrepreneurs to have better ideas. d) A shift from materialistic values to leisure.