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UW-Madison ECON 302 - Answers to First Midterm

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Economics 302 Name _______________________________Fall 2009Answers to First Midterm Student ID Number ____________________October 7, 2009 Section Number _______________________This 75 point midterm consists of three parts: a binary choice section with 10 binary choice questions worth2 points each for a total of 20 points; a short answer/graphing questions section with 5 questions each worth5 points for a total of 25 points; and an essay/problem section with two parts worth a total of 30 points.You will want to write legibly since illegible answers will be graded as wrong answers.You will want to present your work in an orderly fashion since a lack of organization will be interpreted as a lack of mental clarity and competent expression.You will want to make sure your answers are clear and easy to find on the test.All work should be done on the exam booklet and all answers should provide work and any formulas you used in answering the question. A lack of work for any answer will be penalized by a lower gradeon that section.Calculators are fine to use. SCORE:Binary Choice 20 points __________________Short Answer/Graphing 25 points1.__________________2.__________________3.__________________4.__________________ 5.__________________Essays/Problems 30 points1. 15 points __________________2. 15 points __________________TOTAL 75 points __________________1I. Binary Choice (worth 2 points each or 20 points total)Please circle legibly the letter that corresponds to your answer.1. Suppose you are a macroeconomist interested in building a short-run model of the aggregate economy. Most likely your model will assume that prices area. Sticky in the short-run.b. Flexible in the short-run.2. Which of the following variables is a flow variable?a. Wealthb. Consumer expenditure3. When calculating real GDP per year using the method outlined in lecture, a. Prices are allowed to vary while quantities are equal to the base year quantities.b. Prices are equal to the base year prices while quantities are allowed to vary. 4. The CPI provides a measure of the general price level of a. All goods and services produced in an economy during a specific time period. b. Goods and services that consumers typically purchase. 5. Currently the unemployment rate as calculated by the Bureau of LaborStatistics does not include discouraged workers in the unemployed group. What would happen to the unemployment rate if these discouraged workers were reclassified as part of the unemployed instead of being treated as not in the labor force?The unemployment rate woulda. Decrease.b. Increase.26. Suppose you are given the aggregate production function for an economy. Furthermore, suppose the amount of available capital increases for this economy. Holding labor constant, this increase in capital will cause the MPK to a. Decreaseb. Increase7. Suppose you are given the aggregate production function for an economy. Furthermore, suppose the amount of available technology increases for this economy. Holding labor and capital constant, this increase in technology causes labor productivity to a. Increaseb. Decrease8. Holding everything else constant, when the government increases its spending while maintaining the same level of taxation this results ina. A leftward shift in the supply of loanable funds curve.b. A rightward shift in the supply of loanable funds curve. 9. In the loanable funds framework with a closed economy, when the interest rate is greater than the equilibrium interest rate this implies that the supply of goods and services is a. Greater than the demand for goods and services. b. Less than the demand for goods and services. 10. The Fisher Effect refers to the a. Relationship between the demand for money and the supply of money and how this relationship determines the price level in an economy.b. Relationship between the inflation rate and the nominal interest rate. 3II. Short Answer/Graphing Questions (worth 5 points each or 25 point total)Please provide your answer in the provided space. Remember to write legibly and take the time to organize your answer before you begin to write. For short essay responses please remember to use complete sentences: sentences should have a subject, a verb, proper capitalization and proper punctuation. We reserve the right to lower your graph for responses that are not written in standard English with these components. 1. (5 points total) Provide a formula for the National Income Accounts Identity using the expenditure approach in the space below. NY C I G NX= + + +Suppose that American exports decrease from $1,662 billion to $1,500 billion and at the same time American imports decrease from $2,370 billion to $2,100 billion. All other expenditure components in the American economy during this period of time are unchanged. What is the change in American GDP due to these changes? Show your work in the space below. [ ]( )0 0 0 (1500 1662 ) (2100 2370 )162 270108NY C I G NXC I G EXPORT IMPORTbillion billion billion billionbillion billionbillionD =D +D +D +D=D +D +D + D - D= + + + - - -=- +=2. (5 points) Fill in the blank for the following two statements: An approximation for the percentage change in (A B�) is ______________________An approximation for the percentage change in (A/B) is _______________________Percentage change in (A B�) ≈ Percentage change in A+ Percentage change in BPercentage change in (A B) ≈ Percentage change in A-Percentage change in BProvide an equation giving the relationship between the real wage and the nominal wage. Identify clearly any variable abbreviations you use in this equation. Real wage = Nominal wage/price index4Use your equation and the relevant approximation technique to provide an approximation of the inflation rate when during the relevant time period the real wagegrows by 3 percent while the nominal wage grows by 2 percent. Show your work. Percentage change in real wage ≈ Percentage change in nominal wage-Percentage change in pricePercentage change in price ≈ Percentage change in nominal wage-Percentage change in real wagePercentage change in price ≈ 2%-3% = -1%3. (5 points) Suppose that a Japanese firm buys an existing U.S. firm (located in the U.S. and using American workers) and sends some of its Japanese managers to operate the firm and oversee the American workers. Assume that the firm’s output is unchanged, but that the former U.S. managers are now unemployed. Describe the effect of this transaction on U.S. GDP and U.S.


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UW-Madison ECON 302 - Answers to First Midterm

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