mid102-2002-answers

mid102-2002-answers - Economics 102 Midterm Exam - Spring...

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Economics 102 Midterm Exam - Spring 2002 Professor Lee Ohanian Answer all Questions Keep in mind that coherent and clear answers will get more points. Question 1: True, False, or Uncertain, and explain. No credit without an explanation. 5 Points each. (1a) Gross Domestic Product is an overestimate of macroeconomic activity because it does not include non-market output. FALSE - SINCE GDP DOES NOT INCLUDE NON-MARKET OUTPUT, SUCH AS HOME PRODUCTION, ILLEGAL AND UNREPORTED ACTIV- ITY SUCH AS DRUG TRANSACTIONS AND TAX EVASION, AND OTHER TYPES OF OUTPUT SUCH AS CHANGES IN ENVIRONMENTAL QUAL- ITY, GDP IS AN UNDERESTIMATE OF MACRO ACTIVITY. consumers substitute away from goods whose price rises. TRUE - THE CPI MEASURES INFLATION BY CHOOSING A FIXED MARKET BASKET OF CONSUMER GOODS, AND THEN MEASURING THE CHANGES IN THE PRICES OF THAT FIXED MARKET BASKET. IT THUS DOES NOT TAKE INTO ACCOUNT WHEN CONSUMERS SUBSTI- TUTE AWAY FROM A GOOD WHOSE PRICE HAS INCREASED. FOR EX- AMPLE, WHEN THE PRICE OF COKE GOES UP, PEOPLE WILL DRINK MORE PEPSI. (1c) Economic models are useless because they leave out lots of details about the economy. FALSE - ALL MODELS - WHETHER ECONOMIC MODELS OR OTHER TYPES OF MODELS ABASTRACT FROM LOTS OF DETAILS. THE KEY TO MODEL BUILDING IS INCLUDING THE MOST IMPORTANT AS- PECTS OF THE PROBLEM WE ARE STUDYING. IF ONE TRIES TO IN- CLUDE ALL THE DETAILS, THE MODEL LOSES ALL ITS SIMPLICITY
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mid102-2002-answers - Economics 102 Midterm Exam - Spring...

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