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Econ 1120 - INTRODUCTORY MACROECONOMICSMakeup PRELIM #1 – Wissink - S2016 - March 9

________________________________________ ____________________________________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.

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

DIS # TA Meeting Times Location

250, 251 Qilu Yu M 8:00am-9:55am Rockefeller 103

252, 253 Jose Lopes W 2:30pm-4:25pm Baker Lab 119

254, 255 Sujan Lamichhane F 9:05am-11:00am Goldwin Smith G64

256, 257 Nobu Kanazawa F 1:25pm-3:20pm Rockefeller 102

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. Assume that the U.S. economy’s production possibilities between cars and wheat can be depicted by the figure. Which of the points would represent an inefficient use of the U.S. economy’s resources?

A. I B. II C. III D. All of the above E. None of the above.

Max Planes Max HatsJim 13 10Pam 24 20Dwight 33 30Kelly 10 12

2. Jim, Pam, Dwight and Kelly are asked by their boss Michael 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, 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.

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.

D. 1/2 to 2 computers per unit of rice.E. 1/4 to 1/2 computer per unit of rice.

4. Drinking wine is a popular activity in Paris. Which one of the following will increase demand for wine in Paris, assuming that wine is a normal good?

A. A fall in the price of beer, a popular substitute for wine.B. A fall in the price of cheese, a popular complement with wine.C. A decrease in billboards showing a popular local artist drinking

wine.D. An abundant grape crop.E. A decrease in income of the average Parisian.

5. A careless research assistant has presented his professor with the following unlabeled equation representing the market for Jeep Cherokees (a type of car): Q = 300 + 8F - 2J. The professor then spends numerous hours trying to figure out what the equation represents. Which one of the following is a plausible best guess?

A. It is a supply function where F represents the price of Jeep Cherokees.

B. It is a demand function where F represents the price of Jeep Cherokees.

C. It is a supply function where F represents the cost of steel, a key input to jeep manufacturing.

D. It is a demand function where J represents consumer income and Jeep Cherokees are normal goods.

E. It is a demand function where J represents the price of a Chevrolet Traverse, a substitute for the Jeep Cherokee.

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?

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. Derek opens his own handcrafted baseball bat carving shop. He knows that his supply curve is QS = (1/2)P and that his demand curve is QD = 37.5 – (1/8)P.At what quantity does his market clear?

A. 30 unitsB. 33.33 unitsC. 35 unitsD. 40 unitsE. 60 units

8. The graph represents the Ithaca market for jelly beans this spring. Q is number of pounds. P is price per pound. Suppose the government imposes a price ceiling of $10 per pound. The consequence of this is that

A. there will be a surplus of 30 pounds of jelly beans.

B. there will be a shortage of 30 pounds of jelly beans.

C. The black market price will be higher than the original equilibrium price.

D. there will be a surplus of 40 pounds of jelly beans.

E. nothing happens, since the price ceiling is not binding.

9. Which one of the following would NOT be counted as “Private Investment” in the United States’ GDP accounts?

A. General Motors building a factory in Ithaca.B. Increases in General Motors’ inventories of cars produced in

Detroit but not sold.C. New residential housing structures in Boston.D. The purchase of a share of stock in General Motors by an

employee of General Motors.E. Walmart buying a fleet of trucks that were made in Detroit.

10. Which one of the following transactions’ value would NOT be represented, one way or another, either in the income loop or the expenditure loop in the calculation of U.S. GDP in 2016? GDP=Gross Domestic Product

A. Legal fees you paid your Ithaca-based attorney for work in 2016 to settle a law suit.

B. Wages paid to legal Mexican farm workers by a farmer located in Arizona in 2016.

C. Body armor made in West Virginia in 2016 and purchased by the defense department for the military to use in Afghanistan.

D. Lumber manufactured in South Carolina in 2016 that was used by Stickley Furniture in Syracuse to make tables in 2016.

E. Transfer payments made by the government in 2016 to families classified as working poor.

TABLE A

11. Refer to Table A. Assume that this economy uses the bundle produced and consumed in year 2 to construct its CPI. If year 2 is the base year, the value for this economy's CPI in year 3 is

A. 136.B. 1.36.C. 73.D. 100.E. 118.

12. The implicit GDP deflator index uses base year (or historical) __________________ to measure inflation whereas the CPI uses base year (or historical) ____________________ to measure inflation.

A. prices, quantitiesB. quantities, pricesC. prices, interest ratesD. interest rates, debt ratiosE. debt ratios, prices.

13. Which one of the following statements is false?

A. One problem with any fixed-bundle index like the CPI as a measure of the cost of living is that it does not account for substitutions that consumers might make in response to price changes.

B. The implicit GDP deflator index is a very broad measure of inflation.

C. The consumer price index would not reflect increases in the prices of items the U.S. military purchases.

D. The consumer price index somewhat understates increases in the cost of living during periods of inflation.

E. The consumer price index reflects, to some degree, increases in the price of higher education.

14. Which one of the following individuals is considered officially unemployed?

A. A former steel worker, now out of work for a year, who is so discouraged he has stopped looking for work 6 weeks ago.

B. A part-time day care worker who is looking for a second job to augment her income.

C. A previously working mother who quit her job to take care of her children because the costs of day care were so high.

D. An auto worker temporarily laid off, who is waiting to be called back to work.

E. A 14-year-old who just lost his paper route, but is looking for another paper route.

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1. Suppose in the summer along Cayuga Lake that the monthly supply curve and demand curve for jet-skis in Ithaca are described by the following equations: QD = 1,800 - 3P (demand) and QS = -100 + 2P (supply).

a) Graph the demand and supply curves. Make your graph BIG enough to play around with for the rest of the problem. For full credit you must label intercept values on the vertical and horizontal axes.

b) Determine the equilibrium price and quantity of jet-skis and label values on your graph.c) Suppose the Cayuga Sailing Club successfully lobbies the local government to put a binding quota of 300 jet-skis on

sellers in this market (since sailors hate people on jet-skis!). Calculate the new quantity traded and new price under this regulation. Show on your graph.

d) Considering demanders and suppliers in this market, who “wins” and who “loses” as a consequence of this policy? Briefly defend your position.

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 hiring a campaign assistant, Victor Gevotes. Suppose the following information summarizes their individual production functions for two outputs; writing campaign talking-points and making phone calls to potential contributors. Suppose Donald works 30 hours a week and Victor works 40 hours a week. Everything is infinitely divisible.

Time it takes to… Donald Trump Victor Gevoteswrite each talking-point 2 hours 4 hours

make each phone call 1 hour 8 hours

a) Who has the absolute advantage in talking-points?b) Who has the absolute advantage in calls?c) What is the marginal opportunity cost of each talking-point for Donald?d) What is the marginal opportunity cost of each talking-point for Victor?e) Assuming Donald and Victor allocate jobs efficiently, create a joint production possibilities frontier for them. Please put

calls on the vertical axis and talking-points 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 the steepness of any segments on your joint PPF.

f) Victor actually hates writing talking points and complains that he wants to be asked to make some calls for contributions. Given Donald’s desire to always be efficient, under what situation would Victor be asked to make at least some calls?

g) How would you graph a “pseudo PPF” (since it would no longer really be a PPF) if Donald was super inefficient and allocated his and Victor’s time very badly?

ANSWERS:

ANSWERS:

3. Consider a very simple economy with only three services & goods: tutoring, apples and pies. There is no government, and no international sector and no investment by firms. Note the following: Tutoring and pies are both final goods and final goods only. Apples are both consumed by households as a final good and used as an intermediate good by

firms in the production of pies. It takes 2 pounds of apples to make 1 pie. The pie industry buys all its apples from the domestic

apple industry.

The table below provides ALL the information you need to know on prices and total output/production in two consecutive years: 2015 and 2016.

Year = 2015 Year = 2016Item Price per unit Quantity Price per unit QuantityTutoring(hours) $100 50 $80 60Apples (pounds)

$4 1000 $5 1500

Pies $16 200 $30 300

a. Calculate nominal/current G.D.P. in both 2015 and 2016.b. What is real G.D.P. in 2016 assuming 2015 is the base year?c. How much did the economy grow or shrink between 2015 and 2016? Defend your answer with

careful calculations.d. What is the implicit G.D.P. deflator index in 2016, assuming 2015 is the base year and is standardized

to an index of 100?e. Calculate how much inflation there was between 2015 and 2016 according to the implicit G.D.P.

deflator index, using 2015 as the base year.

ANSWERS:

ANSWERS:

1Makeup ECON 1120 S2016 PRELIM 1 Answers

. AAny point inside the frontier of the PPF is an inefficient allocation of resources in 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. BIf the price of cheese decreases, then the demand for wine increases since now there is a larger quantity demanded of its complement. A, C and E are not correct because these all lead to a decrease in demand. D is not correct because a bumper crop would increase supply, not demand.5. AB implies an upward sloping demand curve. C would imply that an increase in costs would increase supply. D implies that Jeep Cherokees would be inferior goods while E implies that the Chevrolet Traverse is a complement.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. AEquating supply and demand we get P*=$60 Q*=30.

8. CWith the price ceiling, quantity demanded is 60 and quantity supply is 20. Thus there will be a shortage of 40. The quantity sold will be min{20, 60}=20 pound of jelly bean. The black market price would be $30, which is higher than the original equilibrium price of $20.

9 DD just represents financial capital and not something produced for real investment. All the other items are. Note that the cars produced and not sold go into GDP as inventory investment.

10 ESince nothing was produced for the transfer payments they don’t count in GDP.

11 ABase year bundle costs $132 in base year. Base year bundle costs $180 in year 3. (180/132)*100=136.

12 AA main difference between GDP deflator index and CPI is that the GDPDI looks at the quantities from the current year and prices in the current year and then considers the quantities from the current year and the prices from the base year. The CPI uses a base year bundle and looks at what it costs in base year prices and then with current year prices.

13 DD is not correct. CPI somewhat overstates, not understates the cost of living in the period of inflation, because in the period of inflation, consumers would consume less or try to consume cheaper substitutes, but since we use a base year

bundle for CPI, this is not taken into account. A is correct, because CPI uses base year bundle which is fixed, so it does not take into account the substitution effect (consumers demand its substitutes more if a product becomes more expensive. B and C are also correct, because CPI only considers products which are related to consumers (so it does not consider military purchases), whereas GDPDI considers every product the country produces. E is also correct, because education is in the CPI bundle, so we can track the increase of price of higher education over time to some degree.

14 DAll other answers are for people either counted as employed or are not in the labor force so do not count as unemployed.