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Econ 1120 - INTRODUCTORY MACROECONOMICSPRELIM #1 – Wissink – Fall 2017 – October 3

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_________________ Your Student Number:________________________________

Instructions and Exam Taking Policy:

There are two sections in this exam. Answer all questions.

Part I: 14 multiple choice/fill in the blank questions @ 3 points eachPart II: 3 problems @ 14, 22, and 22 points eachTotal Points = 100, Total Time = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.NO GRAPHING CALCULATORS.NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.

Circle the TA’s name for the section you regularly attend (that is, where you will pick up your prelim):

One more time, please…

_____________________________________ _________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_________________ Your Student Number:________________________________

GRADING

MC/FIB (out 42 points) =___________________

Q1 (out of 14 points) =__________________

Q2 (out of 22 points) =__________________

Q2 (out of 22 points) =__________________

TOTAL SCORE: =_____________________

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1. The figure with “wine” and “cars” shows the production possibility frontier for an economy that produces only those two goods. Which one of the following statements is true?

A. As we go from point A to point E, the marginal opportunity cost of wine increases.

B. This production possibility frontier exhibits constant marginal opportunity costs.

C. Output mix point A is more efficient than point E.

D. As we go from point A to point E, the marginal opportunity cost of cars increases.

E. An output mix between point A and point E would be best since it is a balance of wine and cars.

Max # Planesif 0 hats

Max # Hatsif 0 planes

Jim 13 10Pam 24 20Dwight 33 30

Kelly 10 122. Jim, Pam, Dwight and Kelly are asked to make paper airplanes and paper hats for the upcoming company party. The table shows the maximum number of airplanes or hats that each employee can make during one hour. Workers can produce any linear combination of their extreme values. The group decides to assign the tasks efficiently. Suppose Dwight is making both airplanes and hats. Given that information, which one of the following statements is true?

A. Jim is making only hats.B. Pam is making only planes.C. Jim, Pam and Kelly are also producing some of both.D. Kelly is not making hats.E. Everyone is making planes.

3. Suppose the marginal opportunity cost of rice in terms of computers in Japan is 2 computers per unit of rice. The marginal opportunity cost of rice in Korea is 1/2 computer per unit of rice. If the two countries trade without government restrictions,

Part I: Multiple Choice and Fill In The Blank Questions. Do them ALL.Circle the letter for your answer or fill in the answer in the blank provided.

transportation costs are negligible, and markets are competitive, then the likely terms of trade will fall in the range of

A. 4 to 5 computers per unit of rice.B. 3 to 4 computers per unit of rice.C. 2 to 3 computers per unit of rice.D. 1/2 to 2 computers per unit of rice.E. 1/4 to 1/2 computer per unit of rice.

4. Which one of the following will increase the supply of popcorn at football games this fall?

A. A decrease in the price of hot pretzels, a substitute in consumption for popcorn.

B. A decrease in the price of popcorn popping oil, an input.C. An increase in the price of un-popped corn kernels, an input.D. An increase in the price of popcorn.E. An increase in the income of football fans.

5. Suppose that the demand function for cups of coffee at a local cafe in London is as follows: QD = 600 + 7F – 0.5J + 1.9G.Which one of the following statements is most true?

A. Variable G is most likely the price the coffee shop owner paid for her coffee beans.

B. Variable J could not be the price of tea, which is a substitute for coffee.

C. The demand for coffee must be vertical.D. If coffee satisfies the “law of demand” then F is most likely the

price of coffee per cup.E. Variable F is most likely the price of donuts – since everyone

in London likes to eat a donut with their coffee.

6. Migration is a politically sensitive topic. Much of the discussion is centered around the effect of migrants on labor markets. Suppose the government decides to build a wall and decrease the number of migrants allowed into the country. Suppose that the only exogenous effect this policy has is to decrease the supply of labor in the economy. Which one of the following predictions is most correct based on the perfectly competitive model of demand and supply in the labor market?

A. The equilibrium market price of labor (wages) will definitely increase and the equilibrium quantity traded (employment) could go up or down.

B. Employment will definitely increase but wages could go up or down.

C. Both wages and employment will definitely increase.D. Both wages and employment will definitely decrease.

E. Wages will definitely increase and employment will definitely decrease.

7. Consider the market for Greek style yogurt. Recent TV advertisements for Greek yogurt during broadcasts of the Super Bowl have been very successful in making people like the stuff. At the same time new technology in the dairy industry dramatically lowers the cost of raw milk sold to people who make yogurt products. Which one of the following statements is correct concerning the Greek style yogurt market?

A. Both equilibrium price and equilibrium quantity will increase as a consequence of these events.

B. Both equilibrium price and equilibrium quantity will decrease as a consequence of these events.

C. Equilibrium price will increase and equilibrium quantity will decrease as a consequence of these events.

D. Equilibrium price might increase or might decrease and equilibrium quantity might also increase or decrease as a consequence of these events.

E. Equilibrium quantity will definitely increase but we don’t know what will happen to equilibrium price as a consequence of these events.

8. As actually measured by the U.S. government, GDP tends to understate the true social value of output produced by the economy to the extent that it

A. excludes environmental degradation caused by increased output production.

B. excludes value added from the underground economy, such as trade in illegal drugs and prostitution.

C. includes transactions that do not take place in organized markets, such as home-cooked meals.

D. excludes the value of the wages paid to government employees.E. includes transfer payments to low income people.

9. Which one of the following is an example of a final good or service in relationship to this year’s U.S. GDP? All production and transactions took place this year, unless otherwise noted. GDP=Gross Domestic Product.

A. Apples produced last year in Cortland and sold this year at Wegmans.

B. Flour made in New Hope, NY and purchased by Ithaca Bakery to make cakes and bread.

C. Children’s toys made in China that you bought at Walmart.D. The used economics textbook (published and printed 3 years

ago) which you bought on E-Bay this year.E. The Corning glassware made in Corning, NY this year that was

added to the inventory of a department store in Japan in anticipation of rising sales in Japan next year.

10. A country's GNP will definitely exceed its GDP if ________ foreign companies produce in the country and ________ of the country's companies produce abroad.

A. no; manyB. many; noneC. many; manyD. no; noneE. nothing but; none

TABLE A

11. Refer to Table A. Assume that this economy produces only two final goods Good X and Good Y. The value for this economy's nominal GDP in year 1 is

A. $110.B. $130.C. $140.D. $160.E. $100.

12. Refer to Table A. Assume that this economy produces only two final goods Good X and Good Y. If year 1 is the base year, the value for this economy's implicit GDP deflator index in year 2 is

A. 108.2.B. 92.4.C. 924.D. 100.E. 1.08.

13. Flossie lost her job months ago. At first she actively looked for work, but over the last 15 weeks she has stopped looking for anything. When she is polled by the Department of Labor Flossie truthfully reports this information. Flossie would now be officially considered

A. one of the frictionally unemployed.B. no longer in the labor force.C. no longer in the population.D. lazy.E. in the labor force but unemployed.

TABLE BTypical Urban Household’s Bundle for Purposes of CPI

Units in 2010

Units in 2016

Prices in 2010

Prices in 2016

Good A 10 8 $1.00 $2.00Good B 2 10 $2.00 $1.00Good C 15 12 $4.00 $6.00

14. Refer to Table B. Assume 2010 is the base year. The Consumer Price Index for 2016 based on the data in the table is (round off to nearest whole number):

Answer: ___________________

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1. "Cornell Homecoming" sunglasses are sold in a perfectly competitive market.The supply and demand curves are characterized by:

QD = 100 - 10P (demand)QS = -20 + 10P (supply)

a) Carefully graph the supply and demand curves for sunglasses. For full credit, be sure to label both axes and both curves and label the numerical values at the price-intercepts and quantity-intercepts.

b) What are the equilibrium price and quantity in this market? Illustrate and label the values in the graph by P* and Q*, respectively.

c) Now suppose that the new Cornell president decides to impose a price ceiling of $3/unit on this market. Why might she do that?

d) Fully analyze the likely impact of this policy using your graph and the stated demand and supply equations. In your opinion, is this policy a good or bad idea? Defend.

ANSWERS

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

ANSWERS

2. Suppose Donald Trump is considering how to allocate work between Bill and Ted, his two interns. Suppose the following information summarizes each intern’s individual production function for two outputs; writing tweets and making coffee. Suppose Bill works 30 hours a week and Ted works 40 hours a week. Everything is infinitely divisible.

Time it takes to… Bill Tedwrite each tweet 2 hours 4 hours

make each cup of coffee 1 hour 8 hours

a) Who has the absolute advantage in writing tweets?b) Who has the absolute advantage in making coffee?c) What is Bill’s marginal opportunity cost of each tweet?d) Assuming Donald allocates jobs efficiently, create a joint production possibilities frontier for Bill and

Ted. Please put tweets on the vertical axis and cups of coffee on the horizontal axis. For full credit make sure to label numerical values at endpoint on the joint PPF and at any kink spots on the joint PPF. Also label and identify the value for the steepness of any segments on your joint PPF.

e) Suppose Donald has Bill spend half his time on each task. Same goes for Ted. How many tweets and cups of coffee are produced? Where is this point on your graph of the PPF?

f) How would you graph a “pseudo PPF” (since it would no longer really be a PPF) if Donald was super inefficient and allocated Bill’s and Ted’s time as badly as possible?

ANSWERS

ANSWERS

3. Assume the following is a description of everything you need to know (and possibly more than you need to know) about the economy of Ivyland in 2017. Ivyland’s currency is the dollar. Note that all dollar amounts are in millions of current or nominal 2017 dollars.Any expenditure items NOT listed can be assumed to have a value of $0.

1) $2,000 = Personal consumption expenditures2) $650 = Government consumption and gross investment plus government transfer payments to

low income people3) $80 = Government transfer payments to low income people4) $300 = Gross private domestic investment excluding changes in business inventories5) $50 = Net private domestic investment excluding changes in business inventories6) $100 = Gross investment via changes in business inventories7) $250 = Depreciation or capital consumption allowance8) $200 = Exports9) $190 = Imports10) $500 = Profits11) $5,000 = Wages

a) Calculate the value of current or nominal 2017 GDP using the expenditure loop approach. Show some work.

b) If real 2017 GDP in 2008 dollars is reported to be $2,000 million, what is the implicit GDP deflator index (base year = 2008)?

c) Based on the implicit GDP deflator index, what is the average annual amount of inflation since the base year?

d) Suppose you and your sibling have always lived and worked in Ivyland. Your sibling’s salary upon graduation from Yale in 2008 was $40,000. You graduated from Cornell in 2017 and took a job with a starting salary of $65,000. Suppose the jobs are – for all intents and purposes – identical, except for starting salary. Who did better “money-wise”, you or your sibling? Defend your position.

The rest of the questions for this problem can be answered with no reference back to the numbers given.

e) Briefly but concisely identify two important ways in which the Consumer Price Index (CPI) differs from the implicit GDP deflator index.

f) Identify and briefly discuss two reasons why the way in which we calculate nominal GDP might misrepresent its true value as an indicator of social welfare.

g) Nominal (or current value) GDP in the United States in 2016 was roughly how many dollars?

Please start answers on next page.

ANSWERS

ANSWERS

1ECON 1120 Fall 2017 PRELIM 1 Answers

. DThe absolute value of the slope represents the opportunity cost of making cars in terms of wine. So at Point A, the opportunity cost of making cars is less than that at Point E. Therefore, the opportunity cost of making wines At Point A is greater than that at Point E. The opportunity cost changes along the curve since the slope changes. Any point to the right of PPF is not feasible. We don’t know where along the PPF is best because we don’t know the preference of the economy.

2. BDraw each person’s PPF and notice the following with respect to the marginal opportunity cost of hats in terms of planes: Kelly’s=5/6, Dwight’s=11/10, Pam’s = 12/10 = 6/5 and Jim’s=13/10. So if Dwight is doing some of both, by now you have Pam and Jim doing only planes, and Kelly doing only hats.

3. DA. No, the answer has to be between the Japanese and Korean rice prices of 2 computers/unit of rice and 1/2 computer/unit of rice, respectively. This outcome is not feasible.B. No, the answer has to be between the Japanese and Korean rice prices of 2 computers/unit of rice and 1/2 computer/unit of rice, respectively. This outcome is not feasible.C. No, the answer has to be between the Japanese and Korean rice prices of 2 computers/unit of rice and 1/2 computer/unit of rice, respectively. This outcome is not feasible.D. Correct. The international price must lie between the price of rice in terms of computers in Korea (1/2) and the price of rice in terms of computers in Japan (2).E. No, the answer has to be between the Japanese and Korean rice prices of 2 computers/unit of rice and 1/2 computer/unit of rice, respectively. This outcome is not feasible.

4. BPrice change of popcorn itself won’t change supply and it only changes quantity supplied. Popcorn popping oil and un-popped corn kernels are production inputs. Decrease (increase) in production cost will increase (decrease) supply of popcorn. Pretzels are substitute for popcorns. The price change of substitutes only changes demand, not supply. Same goes for a change in income.5. BLook at the algebraic signs in front of each variable and ask yourself if they make sense given the multiple-choice options. The answer is not A because this would affect supply, not demand. For C to be correct, we need to know that each of F,J and G are zero, and we do not know this. If law of demand is to be satisfied, then `F’ should enter with a negative sign. E is wrong since if donuts and coffee are complements, then the sign should be negative in front of F.

6. EThe decrease in supply shifts the supply curve to the left. This moves the equilibrium point up the demand curve so that wages rise and employment falls.

7 EBoth the demand curve and supply curve shift to the right. It is trivial from the graph that the equilibrium quantity will definitely increase, but the equilibrium price will depend on the relative size of the shifts between demand and supply.

8 BA. is wrong since this issue tends to make it so we overstateB. is correct since stuff was produced but not countedC. is wrong since the word includes is just flat out wrongD. is just wrong, since these wages are includedE. is wrong since GDP does not include these payments and shouldn’t if we are measuring output

9 EA was in last year’s GDP, B is an intermediate goods. C counts as GDP of China. D, the used textbook counts as GDP of the year it was made.

10 ASee definitions of GNP versus GDP.

11 A

Nominal GDP in year 1: 50*1.00 + 100*0.60 = $110.

12 ANominal GDP in year 2 is 50*1.20 + 120*0.60 = $132 and real GDP in year 2 is 50*1.0 + 120*0.60 = $122. Thus, GDPDI for year 2 would be 132/122*100=108.2.

13 BSince she has stopped looking for that many weeks, she is no longer counted as unemployed or in the labor force.

14

151          $74.00 $112.00 151.3514