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exams2008 - Economics 132.03 Principles of Macroeconomics...

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Economics 132.03 Principles of Macroeconomics Spring 2008 Professor Peter Ireland http://www2.bc.edu/~irelandp/ec132.html First Midterm Exam This exam has 9 questions on 3 pages; before you begin, please check to make sure your copy has all 9 questions and all 3 pages. Each of the 9 questions will receive equal weight in determining your overall exam score. You can work on the questions in any order, but please be sure to keep your answers to all of the parts of a specific question together in your exam book. 1. What happens to US gross domestic product (GDP) and its four main components when a. Hallmark (a US firm) buys $1 million worth of paper from International Paper (another US firm) to make greeting cards? b. You (a US resident) buy a used car? c. The State of Massachusetts hires a new employee? d. General Motors (a US firm) buys new computer equipment made in Japan? e. You (a US resident) spend $25 on a haircut? 2. Consider a simple economy in which only two goods are produced and sold: pizza and beer. The prices and quantities produced of these two goods over a three Ͳ year period are shown in the table below. Year Price of Pizza Quantity of Pizza Price of Beer Quantity of Beer 2005 $2 1 $2 1 2006 $2 3 $2 2 2007 $4 3 $8 2 a. Calculate nominal GDP in 2005, 2006, and 2007. b. Next, using 2005 as your base year, calculate real GDP in 2005, 2006, and 2007. c. Does the GDP deflator rise between 2005 and 2006? Why or why not? d. Does the GDP deflator rise between 2006 and 2007? Why or why not?
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2 3. In recent years, many new parents (fathers and mothers alike) have chosen to quit their jobs to stay home and care for their children. a. What happens to GDP when both parents work before having children, but one decides to stay at home afterwards to take care of the kids full time? b. How does this change in GDP compare to the change in the parents well Ͳ being? 4. Go back to the same example from question 2, above. Consumers in the economy like two goods: pizza and beer. Prices and quantities consumed are the same as before: Year Price of Pizza Quantity of Pizza Price of Beer Quantity of Beer 2005 $2 1 $2 1 2006 $2 3 $2 2 2007 $4 3 $8 2 a. As a first step in computing the consumer price index (CPI), the Bureau of Labor Statistics surveys consumers to determine the basket of goods purchased by a typical consumer. Using 2005 as your base year, what is the basket of goods in this economy? b. What is the cost of the basket in each year: 2005, 2006, and 2007? c. Still using 2005 as the base year, what is the CPI in each year: 2005, 2006, 2007? d. Is percentage change in the CPI between 2005 and 2007 in this question larger than, smaller than, or the same as the percentage change in the GDP deflator between 2005 and 2007 in question 2? What explains the difference, if any? 5. Explain what happens to the GDP deflator and the CPI in the United States when a. The price of fighter planes, newly Ͳ produced by Lockheed Martin (a US firm) and sold to the US Air Force, rises.
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