1
Brigham Young University Department of Economics
Economics 110 – Principles of Economics
Professor Kerk Phillips – Winter Semester 2010
Final Exam key
This test is short answer and short essay. Write your answers in the space provided on this exam.
The
exam is closed book and closed notes.
There is a threehour time limit and you may use calculators.
.
Read
all questions carefully before answering.
Section I
Short Answer (5 points each)
1.
If the nominal interest rate on government bonds is 6.7% and the expected rate of inflation is
2.2%, then what is the expected real interest rate?
Use the Fisher equation, i = r+
π
.
6.7% = r + 2.2%, so r = 4.5%
2.
In the context of unemployment statistics, what is a “discouraged worker”?
A worker who has left the labor force because they are unwilling to keep looking for a job.
3.
Suppose the future value of a 1year bond is $100,000 and the interest rate it offers is 5.0%.
What
is the present value of this bond?
Recall FV=(1+i)
T
PV.
In this case, $100,000=(1.050)
1
PV, so that PV=$100,000/1.05=$95,238
4.
What is the consumer price index?
Define it; don’t worry about explaining how it is calculated.
A measurement of the general level of prices, derived by measuring the price of a fixed basket of
goods each period and comparing this to the price of the basket in some base year.
5.
Use a diagram to illustrate any deadweight losses associated with a subsidy.
Assume there are no
externalities.
6.
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 Winter '10
 KerkL.Phillips
 Economics, Inflation, Gdp, GDP deflator, hot dogs

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