Preparing for Exam 1

Answers to this study guide can be found in docx form here and pdf form here

Content

This exam will cover the content from classes 1-11. This includes all material from in-class lecture, readings, and homeworks.

In other words, it is expected that you have attended all classes, read all assigned readings, completed all homeworks, and are prepared to answer questions on this material.

Practice Problems

Warning

This is not an exhaustive list of questions or even topics. You still need to review all material and it would be a good idea to create your own questions to try to answer.

  1. What role does the rate of interest play in automatically restoring full employment equilibrium output in the classical model?

  2. What is the Keynesian critique of the self-equilibrating role of the interest rate in the classical model?

  3. Define unemployment and describe the formula for the unemployment rate

  4. Define inflation and explain why economists care about it.

  5. First, define nominal GDP and real GDP. Second, is it possible for nominal GDP in a year to be less than real GDP in the same year? Explain.

  6. Explain Okun’s law.

  7. Suppose a country using the United States’ system of calculating official unemployment statistics has 100 million people, of whom 50 million are working age. Of these 50 million, 20 million have jobs. Of the remainder: 10 million are actively searching for jobs; 10 million would like jobs but are not searching; and 10 million do not want jobs at all. Calculate:

    1. the unemployment rate

    2. the labor force participation rate

  8. Describe, in as much detail as possible, the “investment” component of GDP expenditures (i.e. what kinds of spending are included?)

  9. Suppose the United States economy is represented by the following equations: \[Z = C + I+ G \] \[C = 800 + .8Y_D\] \[Y_D = Y - T\] \[T = 1000\] \[I = 500\] \[G = 2000\]

    1. Given the above variables, calculate the equilibrium level of output.

    2. Illustrate the equilibrium level of output for this economy.

    3. Now, assume that the federal government has decided to balance its budget via spending reductions. Calculate the effects of this on the equilibrium level of output.

    4. Graphically illustrate the effects of this change, including showing the adjustment to new equilibrium.

    5. Graphically illustrate the effects of this change. Clearly indicate in your graph the initial and final equilibrium levels of output.

    6. Would it be better (in terms of output) for the government to balance their budget via tax increases or spending reductions?

  10. Using the following simple model of an economy, illustrate and explain the paradox of thrift:

\[Z = C+ I\]

\[ C = c_0 + c_1Y\]

\[ I = I_0\]

  1. Explain and give an example of the fallacy of composition

  2. What are the phases of the business cycle?

  3. What does it mean to say GDP is not a primary fact?

  4. Given the following economy, calculate GDP using each of the 3 approaches:

    Intermediate Product Income Expenditures
    Farmer, Wheat $0 $1 $1
    Miller, Flour $1 $2 $3
    Baker, Bread $3 $4 $7
    Total $4 $7 $11

  5. An economy produces three goods: cars, oil, and solar panels. Quantities and prices per unit for years 2012 and 2013 are as follows:

    2019 Price 2019 Quantity 2020 Price 2020 Quantity
    Cars 15000 100 20000 75
    Oil 200 50 150 50
    Solar Panels 2000 10 2200 20

    1. What is nominal GDP in 2019 and in 2020? By what percentage does nominal GDP change from 2019 to 2020?

    2. Using 2020 as the base year, what is real GDP in 2019 and in 2020? By what percentage does real GDP change from 2019 to 2020?

    3. Using 2020 as the base year, compute the GDP deflator for 2019 and for 2020, and compute the rate of inflation from 2019 to 2020.

  6. Explain the concept of credit rationing. What does it imply about forward looking consumption theories?

  7. You go to the gas station and see that the price of gasoline is unchanged. Can you use this observation to determine that the economy is not experiencing inflation? Explain your reasoning.

  8. Suppose the typical college student spends money primarily on the products in the following table.

    Product Quantity 2019
    price    		 2020
    price
    Soda 365 $2.25 $2.30
    Pizzas 200 $10.00 $11.00
    Chicken wings 165 $7.00 $7.50
    Room and board 1 $10,000 $10,800
    Textbooks 4 $150 $165

    1. What is the cost of the basket in 2019?

    2. What is the cost of the basket in 2020?

    3. What is the 2020 inflation rate for a college student?

    4. Has the cost of living for college students risen or fallen?

  9. In what sense is the labor market recovery “historic” according to Joey Politano?

  10. Define the prime-age employment rate. What advantages might it have over the unemployment rate as an indicator of the health of the labor market?

  11. What is the Beveridge curve? How did it change in the Covid era? What might be some reasons why?

  12. In the classical model, how are falling wages and prices supposed to restore economic activity?

  13. What are some key features of durable goods consumption?

  14. Explain the concept of the multiplier to a person who has not taken an economics course.

  15. What are the implications of the forward-looking consumption theories for the value of the multiplier?