AK_1M2004 - ECON 102(Winter Quarter 2007 Sketch of Answers...

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ECON 102 (Winter Quarter 2007) Sketch of Answers ° for First Midterm 2004 January 29, 2007 Part A 1. True; before the marriage counted in GDP as consumption of services, after the marriage no longer so. 2. False; can tell the change in welfare with certainty only when (i) Laspeyeres index is less than one, or (ii) Paasche index is greater than one (see lecture note Part I). 3. False; reduces the long-run level of output per capita. 4. False; it°s the growth rate of A that matters here, not the level 5. False; capital should grow at the same rate as output, which is 5% Part B 1. nGDP year 1 = (4)(5) + (5)(4) = 40 nGDP year 2 = (5)(4) + (4)(5) = 40 ° This is a rough sketch of how you should approach each question, rather than a complete solution key. In actual exam, more explanations will be required for full credit. 1
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2. Note: superscripts denote the base year. CPI year 1 year 1 = 1 CPI year 1 year 2 = (4)(4) + (5)(5) (4)(5) + (5)(4) = 1 : 025 Hence the rate of in±ation is ( 1 : 025 1 ± 1) ² 100 = 2 : 5(%) 3. Paasche price index in year 2 is (5)(4) + (4)(5) (5)(5) + (4)(4) = 0 : 976 so the rate of in±ation is ( 0 : 976 1
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