Practice MT1 Spring 2011

Practice MT1 Spring 2011 - Practice Questions for Midterm...

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Practice Questions for Midterm 1, Spring 2011 Part 1: Short Answer Problems 1. (_____ of 6 points) Real GDP in the US, measured in year 2000 (chained) dollars, was $8.03 trillion in 1995. In ten years, by 2005, real GDP rose to $11.05 trillion. a. (_____ of 2 points) Calculate the average annual growth rate of real GDP in the U.S. during the decade 1995-2005. b. (_____ of 2 points) What will real GDP be in 2015, if the growth trend of the 1995-2005 decade continues through 2005-2015? c. (_____ of 2 points) Using 2005 as the base year with value of 100, calculate an index of real GDP for 1995. 2. Disneyland is a closed economy that produces rollercoasters and rides. The following table summarizes production and price data for the years 2007 and 2008. a. (4 points) Using 2007 as the base year, calculate nominal and real GDP in 2008. b. (4 points) Calculate the GDP deflator for 2008. What is the rate of inflation between 2007 and 2008 as measured by the GDP deflator? c. (4 points) Calculate the CPI for 2008, again using 2007 as the base year. What is the rate of inflation between 2007 and 2008 as measured by the CPI? 3. HINTS: Recall the definitions of private disposable income as GNP – T + TR + INT and net government income as T – TR – INT. Remember also that saving of both the private sector and the government sector is generally defined as current income minus current consumption. The home country has a GDP of $190. Some of the country’s citizens receive wages from abroad in the total amount of $10. The country employs no foreign factors of production. Its trade deficit is $20 and its government runs a budget deficit of $40. Tax collection by the government exactly covers transfer payments and the interest on the national debt. Private saving is 30% of private disposable income. a. (_____ of 3 points) Calculate GNP and the current account balance. b. (_____ of 2 points) How much is private disposable income and private saving? Page 1 rollercoasters 450.0 5 600.0 3 rides 1.0 4000 2.6 4000 2007 2008 price quantity price quantity
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c. (_____ of 2 points) How much investment in physical assets can the country finance? d. (_____ of 3 points) Some politicians argue that the government deficit should be reduced so that investment can rise. With the uses of saving identity, explain how, other things equal, a reduction in the government deficit allows for more investment. e. (_____ of 2 points) Some other politicians say that reducing the trade deficit could have a similar effect on investment. Is their reasoning correct? Why or why not? 4. An economy has two goods: good A and good B. Both of these goods are produced using labor only, and in each year the quantity produced is equal to the quantity consumed. (There are no net exports, investment or government expenditures.) Production and price data for three time periods are summarized the the following table: a. (_____ of 7 points) Using t = 0 as the base year, calculate nominal and real GDP for the year t = 4. Calculate the GDP deflator at t = 4. Calculate the average annual inflation rate between the base year and year t = 4. Show your work in detail.
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Practice MT1 Spring 2011 - Practice Questions for Midterm...

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