Prof. Ashenmiller: Economics 101: Exam 3 Sample Questions

Prof. Ashenmiller:
Economics 101: Exam 3 Sample Questions
Be clear and concise. Write in complete sentences, both in English and in math. Show all of your
work when possible, fully label your graphs, and be sure to answer all of the questions.
1. a) What is the difference between nominal GDP and real GDP? If we are using GDP to
measure the economic well-being of a country over time, which of these should we look at?
Nominal GDP measures the final value of current goods and services at current prices.
Real GDP measures the final value of goods and services at constant prices. Over time
we should look at real GDP.
b) Over time people have come to rely more on market-produced goods and less on goods
that they produce for themselves. Give an example of this and explain how this phenomenon
would affect GDP.
The final value of market-produced goods is higher than the final value of goods that
have a lot of labor adding value in the home. This would result in a higher GDP, but
might not reflect a higher quality of life.
c) In the graphs below start with the market for loanable funds in equilibrium. Clearly label
all of your graphs.
d) Suppose the government goes from a surplus to a deficit. Show the effect in the graph and
clearly mark the effect on the new equilibrium interest rate and level of investment.
This would be the supply curve moving to the left from the dotted S’ to the S. The
interest rate would increase and the quantity of loanable funds would decrease.
Supply
Interest Rate
Demand
.
.
.
Supply
Supply'
.
Demand
Supply'
.
.
Loanable Funds
2.
a) Why don’t banks hold 100% reserves? How is the amount of reserves banks hold
related to the amount of money the banking system creates?
If banks hold 100% reserves then they cannot lend money and increase the money
supply. The less banks hold in reserve the higher the money multiplier.
b) Why can’t the Fed control the money supply perfectly? What are two things that the
Fed can not control?
The Fed can not make people put their money in the bank.
The Fed can not control who the bank lends money to.
c) What are the three policy tools that the Federal Reserve can use to increase the money
supply?
Open market operations – buy bonds
Reserve Ratio – decrease
Discount Rate - decrease
d) List the three major problems in using the CPI as a measure of the cost of living.
Substitution Bias
Increased quality of goods not reflected in a price change
Introduction of new goods
3. Use the table below to answer the following two questions.
year
2000
2001
peaches
$11 per bushel
$9 per bushel
pecans
$6 per bushel
$10 per bushel
Suppose that the typical consumer basket consists of 10 bushels of peaches and 15 bushels
of pecans and that the base year is 2000.
a) Compute the cost of the basket of goods in each year.
(11*10)+(6*15) = $200
(9*10)+(10*15) = $240
b) What is the consumer price index for 2001?
(240/200)*100 = 120
c) What was the inflation rate in 2001?
(120-100)/100 = 20%
4. Residents of the town of Los Locos (population 900) like to drive noisy off-road vehicles, but
they hate the disturbance and dust caused by each others' vehicles. Each vehicle that is purchased
causes $15 worth of damage to each of the 900 residents. There are 300 residents who are willing
to pay up to $19,000 for an off-road vehicle. There are 200 residents who are willing to pay up to
$11,000 for an off-road vehicle and there are 400 residents who are willing to pay up to $3,000
for an off-road vehicle. The price of off-road vehicles is $5,000.
a) In the absence of any governmental interference, how many residents of Los Locos would buy
off-road vehicles and which buyer values do they include?
BV’s $19,000 and $11,000
Q=500
b) How many people in Los Locos would be better off if off-road vehicles were outlawed and
which buyer values do they include?
$11,000 and $3,000 or 600 people as they would both have negative buyer’s profit
c) Suppose that the town of Los Locos want to impose a Pigouvian tax on off-road vehicles.
This is a tax equal to the total environmental damage caused by each off-road vehicle to the
town. How much would the tax per off-road vehicle be?
($15)*(900)= $13,500
d) With the Pigouvian tax in place the town distributes the revenues collected from the tax
equally among all residents of Los Locos. In the presence of the tax, what is the total
environmental damage to each resident and how big is the subsidy distributed by the
government to each resident?
Pollution damages = (300)*($15) = $4,500
Tax Rebate = [(300)*(13,500)]/(900) = $4,500
5. The country of Tigertown produces two goods: footballs and basketballs. Below is a table
showing prices and quantities of output for three years:
Year
2002
2003
2004
Price of
Footballs
$10
12
14
Quantity of
Footballs
120
200
180
Price of
Basketballs
$12
15
18
Quantity of
Basketballs
200
300
275
(a) Compute nominal GDP for each year. (6)
Nominal GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600
Nominal GDP in Year 2 = ($12 × 200) + ($15 × 300) = $6,900
Nominal GDP in Year 3 = ($14 × 180) + ($18 × 275) = $7,470
(b) Compute Real GDP for each year using 2002 as the base year. (6)
Using Year 1 as the Base Year:
Real GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600
Real GDP in Year 2 = ($10 × 200) + ($12 × 300) = $5,600
Real GDP in Year 3 = ($10 × 180) + ($12 × 275) = $5,100
(c) Compute the GDP deflator for each year.
GDP deflator for Year 1 = ($3,600/$3,600) × 100 = 1 × 100 = 100
GDP deflator for Year 2 = ($6,900/$5,600) × 100 = 1.2321 × 100 = 123.21
GDP deflator for Year 3 = ($7,470/$5,100) × 100 = 1.4647 × 100 = 146.47
(d) What is the change in the price level between 2002 and 2003?
((146-123)/123)*100= 18.7%
6. Give one or two sentence answers to each of the following parts of this question.
(a) Give an example of a common resource. What are the characteristics of the good that make it
a common resource? Be sure to explain yourself clearly.
A common resource is both rival and non-excludable, like fish in the ocean. They are rival
because if you catch one someone else can not catch that fish and non-excludable because it
is hard to keep anyone from catching fish in the ocean.
(b) Suppose that technology has increased the quality of a good available at a given price over
time. How accurate will the CPI be as an estimate of the change in the cost of living in this
situation? If there is a bias explain the direction of the bias.
If the quality of the good has increased but the price has stayed constant then the CPI
will overestimate the change in the cost of living.
(c) Over time people have come to rely more on market-produced goods and less on goods that
they produce for themselves. For example people eat at restaurants relatively more and prepare
their own meals at home relatively less. How does this change affect GDP?
The final value of market-produced goods is higher than the final value of goods that
have a lot of labor adding value in the home. This would result in a higher GDP, but
might not reflect a higher quality of life.
(d) If the price of the “candy basket” in the base period of the CPI experiment cost $0.50 and the
price of the candy basket in period 1 was $0.75. Calculate the CPI in the base period? Calculate
the CPI in period 1? Calculate the inflation rate between the base period and period 1? (5)
CPI=[.75/.5]*100 = 150
Inflation=[(150-100)/100]*100= 50%
(e) GDP is equal to public savings plus private savings. Write the equation that defines GDP in
this way and be sure to define each of the variables (for example: Y = GDP). (5)
Y = C+I+G+NX
NX=0
Y=C+I+G
I=Y-C-G
I=S
S=(Y-C-T)+(T-G)
S=private savings + public savings