Eco exam

Midterm 1 (Practice)

ECON 3 − Principles of Macroeconomics University of California San Diego

Christopher Gibson

Monday, April 27th

Multiple choice

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For the following questions, choose the best answer. Choose only one. Multiple choice questions are worth 3 points each.

1. If real GDP increases, we know for certain that

(a) the price of some goods in the economy decreased.

(b) the production of some goods in the economy increased.

(c) the price of some goods in the economy increased.

(d) the production of some goods in the economy decreased.

2. If CPI decreases, we know for certain that

(a) the price of some goods in the economy decreased.

(b) the production of some goods in the economy increased.

(c) the price of some goods in the economy increased.

(d) the production of some goods in the economy decreased.

3. Unemployment may suffer from underestimation as a result of

(a) retired workers.

(b) unreliable workers.

(c) voluntary part-time workers.

(d) disabled workers

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(e) discouraged workers.

(f) temporary workers.

4. The labor force participation rate is

(a) the fraction of the population that is of working-age.

(b) the fraction of the working-age population that is actively seeking employment.

(c) the fraction of the population that is employed.

(d) the fraction of the population that is employed or actively seeking employment.

(e) the fraction of the working-age population that is not a student, retired, or disabled.

(f) the fraction of the working-age population that is employed or actively seeking em- ployment.

5. The Fisher effect predicts that

(a) nominal interest rates and real interest rates move together.

(b) real interest rates and GDP move together.

(c) real interest rates and inflation move together.

(d) GDP and inflation move together.

(e) nominal interest rates and inflation move together.

(f) nominal interest rates and GDP move together.

6. Which of the following contributes to GDP?

(a) You buy a bond from the Federal Reserve.

(b) You buy stock in Facebook from a broker who charges commission.

(c) Your sister-in-law sells you a house that she has lived in for 3 years before it is on the market to the public.

(d) You pay your hairdresser to watch your dog, knowing full well that she will not report the income on her taxes.

7. If nominal interest is 8% and inflation is 2%, the exact real interest rate (not the approx- imate rate) would be

(a) 8%

(b) 6%

(c) Between 6% and 8%

(d) Less than 6%

8. One reason the CPI might not measure the true price level is

(a) the income effect.

(b) the substitution effect.

(c) the output effect.

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(d) the conglomeration effect.

9. If CPI rises more than GDP deflator, there is

(a) unemployment in the economy.

(b) inflation in the economy.

(c) deflation in the economy.

(d) a looming recession.

10. Workers who would like a job but have not looked recently enough to be counted as unemployed are referred to as

(a) abandoned workers.

(b) berated workers.

(c) condemned workers.

(d) discouraged workers.

(e) excluded workers.

(f) frustrated workers.

Short answer

1. (25 points total)

(a) (5 points) Name three “costs of inflation” and provide an example for each.

(b) (15 points total) Suppose an economy produces the following three goods

Year Groceries Clothing Industrial equipment

Quantity Price Quantity Price Quantity Price

2029 15 $1.00 20 $3.00 3 $10.50 2030 16 $1.50 25 $2.00 3 $9.50 2031 17 $2.00 19 $2.50 2 $9.00

i. (5 points) Which of the three does not belong in consumer price index and why?

ii. (10 points) Calculate CPI with the two most appropriate consumer goods, using 2029 as the base year.

(c) (5 points) From 2030 to 2031 is the real interest rate higher or lower than the nominal interest rate?

2. (25 points total)

(a) (5 points) Name three sources of growth and provide an example for each.

You’ve invested your savings in the republic of up and coming (RUC) and passed on investing in the republic of established savings (RES). RUC has had a hard go of it the past few years and has only grown at an annual rate of 1% per year. Meanwhile RES has enjoyed a steady annual growth of 5% per year.

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(b) (10 points) After three years, your savings would clearly have been better had you invested in RES. By what percentage?

(c) (10 points) Over the next three years RUC grew by 10% per year. Would you have preferred to have invested in RES after all?

3. (20 points total) Suppose that in 2023, you have entered the labor force and, as a successful UCSD student, you secure a job with a starting salary of $100,000 per year. With your new salary, you rent an amazing apartment for $2,000 per month.

(a) (10 points total) In one year you are given a 5% raise. You are confused, however, because after paying your new rent of $2,200, you find that you are able to afford fewer goods and services than you were the year before.

i. (4 points) Given this information alone, what explains your reduced purchasing power?

ii. (6 points) If all prices in the economy move identically, what is the percentage change in your real wage?

(b) (10 points) Suppose instead that inflation is 6% per year. What must be your wage in 2024 in order to assure a 5% increase in real wage?

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