Intermediate Macroeconomics
Econ 372
Fall 2019
Exam 1
DUE: 10/15/2019 by 2:30 p.m., in class
-1% for each minute it’s late
Please answer all questions. Your answers should be clear and concise. There are 105 points in total but I will grade the exam out of 100 - points for each question are given in parentheses. For data questions, Iprefer that you print the document and attach it with your exam.
Remember to show all of your work and, if applicable, round to two decimal places. Good luck!
PartI (24 points)
1. (4 points) Suppose a timber company sells $20,000 in logs to a sawmill. The sawmill
processes the logs into lumber and sells the wood to a contractor for $50,000, and the
contractor uses the lumber in a house he builds, selling the final project to a family for
$100,000. Now suppose a new economist surveys these sellers and places $170,000 into the Consumption GDP account. What is wrong with his work?
2. (4 points) How do the GDP Deflator and CPI Index differ in how they calculate inflation rates? If you had a salary contract pegged to the inflation rate, would you prefer the rate calculated from the GDP deflator or CPI?
3. (4 points) Nominal GDP was $19,918910 in Q4 2017 and $20,897,804,000 in Q4 2018. The inflation rate from Q4 2017 to Q4 2018 was 1.928 percent. Using Q4 2018 as the base quarter, what was Real GDP in Q4 2018?
DATA
4. (4 points) Navigate to the August Consumer Price Index News Release from the BLS. The top-level expenditure categories are Food, Energy, and All Items Less Food and Energy (Core Inflation). What is the relative importance for each category in the CPI calculation is the unadjusted 12-month price change for each category?
5. (10 points) Back to the August CPI News Release. Use the second-level expenditure
categories within Core Inflation (non-food, non-energy; there are six within commodities and three within services). Relative importance is calculated based on the purchasing behavior. of the average customer, but a college student living in Durango, Colorado surely doesn’t look like the average American consumer. Approximate your relative importance values based on your own expenditures within the nine spending categories then estimate your very own, individualized core inflation rate. How does your core inflation compare to the BLS average?
You will likely need to use a spreadsheet to calculate the weighted average (your relative importance * price level change in each category) – attach a table with these calculations. Note: you can check that your calculations are working by confirming the actual core inflation rate is 2.4 given the BLS relative importance values.
6. Consider a Cobb-Douglas production function of the following form. Y = AK0.3L0.7
a. (4 points) Suppose a war occurs, the country gets bombed, and the capital stock decreases by 20%. What happens to output (percentage terms) in the country?
b. (4 points) Would the real rental rate of capital increase or decrease?
c. (4 points) Would the real rental rate of capital increase or decrease more than the Marginal Product of Capital?
DATA
d. (5 points) According to the World Bank’s World Development Indicators, what was the Gross Capital Formation as a percent of GDP for both Japan and South Korea in 2017?
e. (5 points) In which country would output fall more if the hypothetical war in ‘part a’ of this question? Why?
Part III (34 total points)
7. Let the following equations characterize an economy:
Y = C + I + G
Output, Y = 1000
Marginal Propensity to Consume, MPC = 0.9
Autonomous Consumption,c(-)= 0
Taxes, T = 250
Government Spending, G = 300
Investment, I = 75 – 5r
a. (4 points) Compute the national saving.
b. (4 points) Solve for the equilibrium interest rate. Suppose the adjusts taxes in order to balance the budget.
d. (4 points) How do taxes change? By what amount? e. (4 points) Compute national saving.
f. (4 points) Determine the new equilibrium interest rate.
g. (4 points) Draw a graph for the market for loanable funds and show what changes in
this graph when the adjusts taxes. Remember to label your graph completely (but don’t worry about the axis intercepts).
DATA
h. (10 points) According to the “Historic Budget Data from the Congressional Budget Office (CBO)” (Google search), what was the budget deficit in 2018? What was the last year we had a budget surplus? Graph revenues and outlays as a percentage of GDP from 1980 to present. Make sure the graph is professional and, as always, include written observations. If anything looks particularly interesting, lookup background details and provide the context.
8. Briefly explain how the following event affects the following three measurements: monetary base, the money multiplier, and the money supply.
a. (5 points) The Federal Reserve reduces the reserve requirement it imposes on banks.
An economy has a monetary base of 100. Calculate the money supply in scenarios (b) and (c).
b. (5 points) People hold equal amounts of currency and demand deposits. Banks hold 10 percent of deposits as reserves.
c. (5 points) People hold five times as much currency as demand deposits. Banks hold 20 percent of deposits as reserves.
DATA
d. (10 points) Navigate to the Federal Reserve’s Monetary Policy website to examine the reserve requirements for your bank (https://www.federalreserve.gov/monetarypolicy/reservereq.htm).
You see that reserve requirements, in practice, depend on banks’ Net Transaction Accounts. What is the amount of Net Transaction Accounts for your bank and what is your bank’s corresponding reserve requirement?
To find your bank’s Net Transaction Accounts:
Bank Folks: FFIEC:https://cdr.ffiec.gov/public/ManageFacsimiles.aspx
Report > UBPR.
Find your bank > Institution Name
Report Period > 6/30/2019 > Generate Report
Navigate to the “Balance Sheet ($)”
Net Transaction Accounts = Demand Deposits + All Now & ATS Accounts. (Report both)
Find your Fed Reserve Requirement
Credit Union Folks: National Credit Union Association (NCUA)
https://mapping.ncua.gov/ResearchCreditUnion.aspx
Credit Union Name > View > Call Report 6/30/2019
Credit unions equivalent to demand deposits are called Share Draft Accounts
Report the value of your Share Drafts then your corresponding Fed Reserve Requirement