E2 opens in the testing center tomorrow (Oct. 8) at 7am and runs through next Monday (Oct. 14) night at 11:59pm.Bleys will be holding his regular office hours this week and next. I will stay in touch electronically.

Class today is devoted to discussion of requested questions from

E2 practice exam

1.

If an economy’s GDP falls, then it must be the case that the economy’s • income falls and saving rises. • income and saving both fall. • income falls and expenditure rises. • income and expenditure both fall.

3

James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent. How much do the housing services provided by the two houses contribute to GDP? • $0 • $10,000 • $12,000 • $22,000

5

Darin grows and sells marijuana to Jennifer. Thomas is an organic farmer who sells broccoli to Jennifer. Marijuana is an illegal good and broccoli is a legal good. Assume that if Jennifer marries either, they give her what they use to sell her. Which of the following statements is consistent with the way GDP is computed? • GDP will fall if Jennifer marries either Darin or Thomas.. • GDP will fall if Jennifer marries Darin but not if she marries

Thomas. • GDP will fall if Jennifer marries Thomas but not if she marries

Darin. (Marijuana doesn’t count since it is illegal.)• GDP remains the same whether Jennifer marries Darin or Thomas.

9

If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then • U.S. consumption increases, U.S. net exports decrease, and U.S.

GDP decreases. • U.S. consumption increases, U.S. net exports decrease, and U.S.

GDP is unaffected. • U.S. consumption decreases, U.S. net exports increase, and U.S.

GDP increases. • U.S. consumption decreases, U.S. net exports increase, and U.S.

GDP is unaffected.C increases when she buys dress. NX = X – M. Since the dress is an import NX falls by the amount of the dress sale. Therefore, the overall result is no change in U.S. GDP.

10

If in some year real GDP was $5 trillion and the GDP deflator was 200, what was nominal GDP? Know RGDP = NGDP / def x 100So…$5T = NGDP/200 x 100$5T = NGDP/2$10T = NGDP

14

When computing the cost of the basket of goods and services purchased by a typical consumer, which of the following changes from year to year? • the quantities of the goods and services purchased • the prices of the goods and services • the goods and services making up the basket • All of the other answers are correct.Fixed mkt basket is used for the CPI. This is by definition.

16

• If 2002 is the base year, then the inflation rate in 2005 equals

Regardless of the base year, the inflation rate for 2005 is still the percentage change in the CPI from 2004 to 2005.

17

Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2004 was

Bskt cost in 2004 ÷ Bskt cost base year X 100$52/$50 X 100 = 104

18The price index was 110 in the first year, 100 in the second year, and 96 in the third year. The economy experienced • 9.1 percent deflation between the first and second

years, and 4 percent deflation between the second and third years.

Since index falls in each successive year a deflation has occurred.Deflation between yr 1 and 2 is (100-110)/110 x 100% = -9%Deflation between yr 2 and 3 is(96-100)/100 x 100% = -4%

19Last year the imaginary nation of Freedonia had a population of 2,700 and real GDP of 16,200,000. This year it had a population of 2,500 and real GDP of 14,640,000. What was the growth rate of real GDP per person between last year and this year?

20. Consider three imaginary countries. In Aziria, saving amounts to $3,000 and consumption amounts to $7,000; in Graniva, saving amounts to $2,000 and consumption amounts to $8,000; and in Tanistan, saving amounts to $4,500 and consumption amounts to $10,500. The saving rate is

After-tax or disposable income = Saving + Consumption and the saving rate is S/D.I.Graniva: D.I. = $2K + $8K = $10K and S/D.I. = $2K/$10K = .2 or 20%Tanistan: D.I. = $4.5K + $10.5K = $15K S/D.I. = $4.5K/$15K = .3 or 30%

21. On a production function, as capital per worker increases, output per worker • increases. This increase is larger at larger values of

capital per worker. • increases. This increase is smaller at larger values of

capital per worker. • decreases. This decrease is larger at larger value of

capital per worker. • decreases. This decrease is smaller at larger value of

capital per worker.Suggestion: Review diminishing returns to capital (chapter 12).

29. Which of the following are effects of an increased budget deficit?

• at any interest rate the supply of loanable funds is less; a higher interest rate reduces private saving

Suggestion: Review the notion of “crowding out” from chapter 13.

30. If there is a surplus of loanable funds, then

Supply of L.F.

emand for L.F

At i1 the quantity supplied exceeds the quantity demanded so the interest rate will fall.

32

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer’s interest income was tax free. This would shift the • supply of loanable funds to the right, causing interest rates

to fall. • supply of loanable funds to the left, causing interest rates

to rise. • demand for loanable funds to the right, causing interest

rates to rise. • demand for loanable funds to the left, causing interest

rates to fall.

37. John is a stockbroker. He has had several job offers, but he has turned them down because he thinks he can find a firm that better matches his tastes and skills. Curtis has looked for work as an accountant for some time. While the demand for accountants doesn’t appear to be falling, there seems to be more people applying than jobs available.

• John is frictionally unemployed, and Curtis is structurally unemployed.

John is holding out on taking job offers because he thinks he can find a job that better matches his tastes and skill. (Frictional unem)

Curtis has had no job offers so far. Since there are more people applying than jobs available the implication is that the wage rate is above the equilibrium wage. (Structural unem)

40. President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that • Both could be right if L.F. grew faster than employment.

Say # unem = 10 and # emp = 90 so U rate = .1 or 10%

Time passes…

# unem = 12 and # emp = 105 (higher than 90 so Bigego is right.)U rate = 12/117 = .10256 or 10.3% (higher than 10% so Pander is also correct.)Note that the L.F. grew faster than employment in my example.L. F. growth = (117-100)/100 = 17% and emp growth = (105-90)/90 = 16.7%

41. In 2009, based on concepts similar to those used to estimate U.S. employment figures, the Japanese adult non-institutionalized population was 110.272 million, the labor force was 65.362 million, and the number of people employed was 62.242 million. According to these numbers, the Japanese labor-force participation rate and unemployment rate were about

41. Given pop = 110.272m, L.F. = 65.362m, #emp = 62.242m

Find # unem to derive u rate. Know L.F. = # emp + # unem so…# unem = L.F. - # emp = 65.362m – 62.242m = 3.12mU rate = # unem/L. F. x 100%= 3.12m/65.362m = .0477 or 4.77%L.F.P. rate = L. F./pop = 65.362m/110.272m = .5927 or 59.27%

42. If the government imposes a minimum wage of $4, then how many workers will be employed? A minimum wage of $4 is below the equilibrium wage so there will be no unemployment due to the government policy. The # employed = 50 x 100 = 5000.

We

Le

45

Efficiency wages contribute to • frictional unemployment and the natural rate of unemployment. • frictional unemployment but not the natural rate of

unemployment. • structural unemployment and the natural rate of unemployment. • structural unemployment but not the natural rate of

unemployment.Natural rate = frictional + structuralStructural occurs when the wage rate is held above the equilibrium wage rate.