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Midterm Exam


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THE GEORGE WASHINGTON UNIVERSITY Department of Economics ECON 012: PRINCIPLES OF MACROECONOMICS SECTION 13 - MW 11:10am MIDTERM – ANSWER KEY (100 points) YOUR NAME: ________________________________________________________________ DISCUSSION SECTION DAY AND TIME: _______________________________________ TA NAME: ___________________________________________________________________ PLEASE DO NOT OPEN UNTIL ASKED TO DO SO.
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Spring 2010 2 WRITE YOUR ANSWER TO EACH QUESTION IN THE BOX PROVIDED ON THE RIGHT (50 POINTS) Questions Answers 1. (2) If total spending rises from one year to the next, then the economy must be producing a larger output of goods and services. True or False? FALSE – increase in total spending could be due to inflation. 2. (2) Based on the articles you read, what was the root cause of the deflation that Japan has been experiencing? Housing and stock bubbles burst and government did not lower interest rates quickly or by enough 3. (2) If an American liquor-store owner purchases bottles of wine from an Italian distributor, will U.S. GDP rise, fall or remain unchanged? Investment increases (increase in inventories) and Imports increase, so US GDP will remain unchanged 4. (2) If the GDP deflator in 2004 was 150 and the GDP deflator in 2005 was 120, what was the inflation rate in 2005? [(GDP 05 – GDP 04) /GDP 04 ] x 100 = Inflation rate 05 [(120-150)/150] x 100 = - 20% 5. (2) The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index. True or False? FALSE 6. (2) Henry Ford paid his workers $5 a day in 1914, when the CPI was 10. With the CPI at 207 in 2007, how much is the Ford paycheck worth in 2007 dollars? Salary 1914 x (CPI 2007 /CPI 1914 ) = Salary 2007 $5 x (207/10) = $103.50 7. (2) If you currently earn $25,000 a year and the CPI rises from 110 today to 150 in five years, then how much should you be earning in five years to have kept pace with consumer price inflation? Salary Today x (CPI In5years /CPI Today ) = Salary In5years $25,000 x (150/110) = $34,090.91 8. (2) Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited, then has Bob’s purchasing power increased, decreased or remained unchanged? Nominal interest rate – inflation rate = Real interest rate 5 – (-5) = 10% Bob’s purchasing power increased by 10% 9. (2) If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent. True or False? Nominal interest rate – inflation rate = Real interest rate 5 – 2 = 3% FALSE 10. (2) In general, the increase in output per worker given an addition to capital is smaller for developed countries and larger for underdeveloped countries. True or False? TRUE
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