of Department Economics
Iowa State University
Principles of Macroeconomics
Define/explain the meaning of five of the following terms. If you
define all six, your best five answers will be used.
A. Normal Good
A good for which a rise in income increases the demand for
that good-the normal case.
B. Effective Price Floor
The minimum price buyers are required to pay for a good or
service; a form of price control.
C. Gross Domestic Product
The total value of all final goods and services produced in the
economy during a given period, usually a year.
D. Transfer Payment
E. Personal Consumption Expenditures
F. Real GDP
The total value of all final goods and services produced in the
economy during a given year, calculated using the prices of a
selected base year.
II. True/False (45 points)
Using an appropriate diagram, explain whether three of the
following statements are true or false and why. If you answer more
than 3, your best answers will be used. Credit will be divided
between the explanation and the diagram.
1.
False?
Regardless of the kind of price control, if it is effective it
will lead to a decrease in the quantity exchanged.
2.
The recent increase in the price of gasoline has led to a
decrease in the demand for sport utility vehicles (SUVs).
The resulting decrease in the price of SUVs will lead to a
decrease in their supply, somewhat alleviating the decrease
in demand.
True.?
3.
A subsidy and an effective price ceiling have exactly the
same effect on a market, except the subsidy involves
government payments.
False.?
4.
The circular flow diagram shows that the amount of
expenditures in an economy have to equal the amount of
income, therefore, GDP equals National Income.
False. GDP + net factor payments from the rest of the world= output) GNP
(measures consumption of fixed capitol
(depreciation)= Net National Product/ National Income
III
Problem
1.
(20 points)
Assume that the state government is concerned about the
looming deficit and is considering decreasing the state
subsidy for college students. The current subsidy is $2500,
and it will be reduced to $1250 per student. The 45,000
state students currently pay tuition of $3250 per year.
a.
Use a diagram to indicate the situation in this market before
the subsidy is decreased. Label the price consumers pay PC0,
the price producers receive PP0, the quantity supplied QP0,
the quantity demanded QC0, and the quantity exchanged QE0.
b.
In your diagram above, indicate the situation in this market
after the subsidy is decreased. Clearly indicate the amount
of the subsidy. Label the price consumers pay PC1, the price
producers receive PP1, the quantity supplied QP1, the quantity
demanded QC1, and the quantity exchanged QE1.
c.
Clearly indicate in your diagram the amount of
expenditures the government is making in this market.
IV.
SHORT ESSAYS (10 points each)
1.
Explain how output is measured at an aggregate level (in
other words, how do we measure the output of an
economy). When comparing output levels from year-toyear, why might inflation cause a problem?
They take the Gross Domestic Pro
2.
Define Gross Domestic and Gross National Product.
Explain the difference between these two measures of
production.
The total value of all final goods and services produced in an
area and in the economy during a given period, usually a
year is GDP. Where it is done.
GNP is all goods and services produced by domestically
owned factors of production. Measures production based on
who does the production, not where it is done.