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Unformatted text preview: ECON 2202(004) L. He Midterm Exam Fall 2009 Solution Problem 1 Fill in the blanks. (9 points, 1 point for each blank) 1. In business cycle stylized facts, we say one variable is procyclical if this variable moves in the (1) (same/opposite) cycle as GDP. 2. In business cycle stylized facts, we say one variable is leading if this variable moves (2) (before/after) cycle as GDP. 3. In business cycle stylized facts, we say one variable is more volatile than GDP if this variable has a standard deviation that is (3) (smaller/larger) than that of GDP. 4. Fill in the table. Variable Corr. Coeff. Pro-cyclical/ Standard Deviation More/Less (with GDP) Counter-cyclical (% of S.D. of GDP) Volatile Consumption 0.76 (4) 75 (5) Investment 0.83 (6) 472.6 (7) Price Level-0.28 (8) 57.1 (9) Solution : 1. same 2. before 3. larger 4. The table is Variable Corr. Coeff. Pro-cyclical/ Standard Deviation More/Less (with GDP) Counter-cyclical (% of S.D. of GDP) Volatile Consumption 0.76 Procyclical 75 Less Investment 0.83 Procyclical 472.6 More Price Level-0.28 Countercyclical 57.1 Less Problem 2 (11 points) 1. Write down the equations for GDP under expenditure approach and income approach. (6 points) 2. Breifly explain why the two methods should provide the same measure. (2 points) 3. Breifly explain the difference between real GDP and nominal GDP. (3 points) Solution : 1 ECON 2202(004) L. He Midterm Exam Fall 2009 Solution 1. Expenditure approach Y = C + I + G + NX , income approach Y = w + + r + t , where w is wage, is after-tax profit, r is interest income, t is tax. 2. Because in an economy, imcome must equal to expenditure. 3. Nominal GDP uses contemporary prices while real GDP uses constant price. As a result, nominal GDP growth contains both effects from output growth and price changes, while real GDP growth only measures output growth and leaves out the price chages. Problem 3 (20 points) Consider the standard consumers choice model in Chapter 4. The consumers constraint is c = ( h- l ) w + - T ....
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- Spring '08