is2010 m_1 a - Dr V.R Bencivenga Economics 304L Spring 2010...

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Unformatted text preview: Dr. V.R. Bencivenga Economics 304L Spring 2010 MIDTERM #1: ANSWERS Multiple choice 1. C 16. B 2. A 17. B 3. A 18. B 4. D 19. B 5. B 20. B 6. A 21. A 7. B 22. D 8. D 23. B 9. C 24. D 10. B 25. C 11. B 12. B We gave credit for both C and D on MC#9, since the question did not specify whether to 13. B use the exact or approximate definition of the real interest rate. 14. B 15. C Problems 1.a. real GDP in 2010 = 20 (12) + 4 (1500) + 100 (5) = 6740 b. nominal GDP in 2010 = 30 (12) + 5 (1500) + 120 (5) = 8460 GDP deflator in 2010 = 8460/6740 = 1.255 c. The price of the investment good (huts) increased 20%. The prices of the consumption goods (bicycles and corn) increased 50% and 25%. This means inflation according to the CPI will be higher. The GDP deflator will “average in” the relatively smaller percentage change in the price of huts, which will pull the GDP deflator down compared to the CPI. 2.a. You have to compute twelve present values (but I rigged them up to be efficient, since there are lots of “zeroes” and there is lots of repetition). For example, for project #2, when the interest rate is 5% the present value of revenues is ( ) ( ) 08 . 177 = 05 . + 1 100 + 05 . + 1 100 = PV 3 2 . Since this exceeds the up-front cost of 160, this project is profitable at this interest rate. The results of the calculations are as follows, with the profitable projects in bold, and the unprofitable projects (those where PV < up-front cost) in italics: PV of revenues r = 5% r = 10% r = 15% Project #1 181.61 166.04 152.71 Project #2 177.08 157.78 141.36 Project #3 172.77 150.26 131.50 Project #4 190.46 181.82 173.92 2...
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This note was uploaded on 06/15/2011 for the course ECO 304L taught by Professor Bencivenga during the Spring '10 term at University of Texas.

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is2010 m_1 a - Dr V.R Bencivenga Economics 304L Spring 2010...

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