exams2009 - Economics 132.03 Principles of Macroeconomics...

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Economics 132.03 Principles of Macroeconomics Spring 2009 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. A US household buys a new refrigerator, manufactured by a US firm? b. Ford Motor Company (a US firm) produces a new car, which sits in a US auto dealer s lot instead of being sold to a US consumer? c. The State of Massachusetts repaves part of the Massachusetts Turnpike? d. Honda (a Japanese firm) expands one of its factories that is located in the US? e. The value of assets like stocks, bonds, and mutual funds falls in the US? 2. The American Bakeries Corporation purchases $1 million worth of flour, eggs, and other ingredients to make cakes. At the same time, however, it pays its workers $500,000 in wages. American Bakeries then sells the cakes to a chain of grocery stores for $3 million. The grocery stores sell the cakes to individual consumers for $4 million, but then have to pay their employees $250,000 in wages. By how much does GDP go up as a result of all these transactions?
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2 3. 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 2006 $2 1 $2 1 2007 $2 3 $2 2 2008 $4 3 $8 2 a. Calculate nominal GDP in 2006, 2007, and 2008. b. Next, using 2006 as your base year, calculate real GDP in 2006, 2007, and 2008. c. Does the GDP deflator rise between 2006 and 2007? Why or why not? d. Does the GDP deflator rise between 2007 and 2008? Why or why not? 4. Go back to the same example from question 3, just 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 2006 $2 1 $2 1 2007 $2 3 $2 2 2008 $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 2006 as your base year, what is the basket of goods in this economy? b. What is the cost of the basket in each year: 2006, 2007, and 2008? c. Still using 2006 as the base year, what is the CPI in each year: 2006, 2007, 2008? d. Is percentage change in the CPI between 2006 and 2008 in this question larger than, smaller than, or the same as the percentage change in the GDP deflator between 2006 and 2008 in question 3? What explains the difference, if any?
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