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Econ 1120 - INTRODUCTORY MACROECONOMICSPRELIM #1 – Wissink – Spring 2019 – March 5

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId: _____________________ Your Student Number: ________________________________

Brief Survey on Studying (2 points): Your answers to these questions have absolutely no impact on your exam score, and I will remove all your names before I analyze this data.

(1) We've had 11 classroom lectures so far this term. How many did you attend?

(2) Not including attending lectures, how much time have you spent on this class each week doing things like reading or working on problem sets?

a. less than one hourb. 1-2 hoursc. 3-4 hoursd. 5-6 hourse. 7+ hours

(3) How much time did you spend studying for this prelim?a. less than one hourb. 1-4 hoursc. 4-8 hoursd. 9+ hours

(4) Did you mostly study for this prelim by yourself or with other students in the class?

a. mostly by yourselfb. mostly with other students in the classc. about half by yourself and half with other students in the class

(5) When did you do most of your studying for this prelim?a. the night before and day of the examb. spread over multiple sessions over multiple days starting before the

night before the exam

(6) What did you do to study for this prelim? (Choose all that apply)a. Reviewed the lecture slides and/or your notes and/or Panopto videosb. Read the bookc. Identified areas or topics you are struggling with and got help (e.g.,

used office hours, sections, the ETC, the LSC)d. Studied the MEL quizzes and other MEL contente. Worked problems from the posted sample problem setsf. Worked problems from the posted sample prelimsg. Explained or taught the material to someone elseh. Used outside web based tutorials of content

One more time, please…Econ 1120 - INTRO MACRO - PRELIM #1 – Wissink – Spring 2019 – March 5

________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) name

Your NetId:_____________________ Your Student Number:________________________________

Instructions and Exam Taking Policy:

There are two sections in this exam. Answer all questions.

Part I: 14 multiple choice/fill in the blank questions @ 3 points eachPart II: 3 problems @ 14, 21 and 21 points respectivelyTotal Points = 98 + 2 points for doing survey = 100, Total Time = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If there is something troubling you about a question, write us a note on the exam somewhere and we will deal with it as we are grading. If you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you.

RESTROOM USE: If you absolutely need to use the restroom raise your hand and wait for the proctor. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, IPODS OR DEVICES WITH CALCULATOR “APPS” or large screens.NO GRAPHING CALCULATORS. NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.

Check the section (i.e., DIS#) you regularly attend - that is where you will pick up your graded prelim

Survey = ______________

MC/FIB =___________________

Q1 = __________________

Q2 = __________________

Q3 = __________________

TOTAL SCORE: =____________

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1. The post hoc, ergo propter hoc fallacy is

A. naively assuming something about the way the economic world ought to be.

B. the error of reasoning that concludes that if event A happened today and event B happens tomorrow, then event A necessarily caused event B.

C. an expression that means "other things being equal."D. the error of reasoning that concludes that what is true for one is

necessarily true for all.E. the error of reasoning that concludes that if A and B happen today

and are correlated, then event A caused event B.

2. The figure with wine and cars shows the production possibility frontier for an economy that produces only those two goods. Which one of the following statements is true?

A. The marginal opportunity cost of a car at point B is greater than the marginal opportunity cost of a car at point A.

B. Point A is more efficient than point E.C. Point A is better than point E.D. The marginal opportunity cost of wine is smaller at

point A than it is at point B.E. None of the statements above are true.

3. Consider only Japan and the U.K. Suppose the marginal opportunity cost of a tea bag in terms of sugar in Japan is 2 grams. Suppose the marginal opportunity cost of a gram of sugar in the U.K. is 3 tea bags. If the two countries trade without government restrictions, transportation costs are negligible, and markets are competitive, then the likely terms of trade for tea bags will fall in the range of

A. 4 to 5 grams of sugar per tea bag.B. 3 to 4 grams of sugar per tea bag.C. 2 to 3 grams of sugar per tea bag.D. 1/3 to 2 grams of sugar per tea bag.E. 1/4 to 1/2 grams of sugar per tea bag.

Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.Circle the letter for your answer or fill in your answer in the blank provided.

4. Which one of the following will increase the supply of popcorn at football games this fall?

A. A decrease in the price of hot pretzels, a substitute in consumption for popcorn.

B. A decrease in the price of popcorn popping oil, an input.C. A decrease in the number of companies making popcorn.D. An increase in the price of popcorn.E. An increase in the income of football fans.

5. Suppose that the demand function for cups of coffee at a local cafe in London is as follows: QD = 600 + 7F – 0.5J + 1.9G.Which one of the following statements is most true?

A. Variable G is most likely the price that the coffee shop owner paid for her coffee beans.

B. Variable J could not be the price of tea, which is a substitute for coffee.

C. The demand for coffee must be vertical.D. If coffee satisfies the “law of demand” then F is most likely the

price of coffee per cup.E. Variable F is most likely the price of donuts – since everyone in

London likes to eat a donut with their coffee.

6. Consider the following perfectly competitive market for oranges: QD = 60 – 5P (demand) and QS = 5P and (supply)Now suppose that demand for oranges increases by 20 units at each price. After the increase in demand, which of the following is correct?

A. The equilibrium price increases by $2, and the quantity traded increases by 10.

B. The equilibrium price increases to $8, and the quantity traded decreases to 40.

C. The equilibrium price increases by $2, and the quantity traded increases by 20.

D. The equilibrium price is unchanged, and the quantity traded increases by 20.

E. None of the above are correct.

7. Consider the market for ground beef represented by the figure, which is initially in equilibrium at point J. Assume that ground beef is an inferior good. Which one of the following could explain a movement to a new equilibrium at point M?

A. A change in tastes away from hamburgers combined with an increased price for cattle feed.

B. An increase in buyers' incomes combined with a cost-saving technological improvement.

C. A decrease in the price of hot dogs combined with an increased price for labor.

D. A decrease in buyers' incomes combined with a decrease in the number of acres owned by cattle ranches.

E. A drop in the population combined with an increased price for an alternate form of packaged beef.

Price ($/slice)

QuantityDemanded

(pizza slices)

QuantitySupplied

(pizza slices)$1.25 6000 0$1.50 5000 500$1.75 4000 1000$2.00 3000 1500$2.25 2000 2000$2.50 1500 3000$2.75 1000 4000$3.00 500 5000$3.25 0 6000

8. The table shows the daily demand and supply information for the pizza market at Florida’s Disney World. Suppose the current volume of trade is observed to be Q = 1000 slices? Which one of the following statements is true?

A. The market is in its natural equilibrium.B. There is a price floor equal to $1.75 in the market.C. There is a price ceiling of $1.75 in the market.D. There is a quantity quota of 500 slices in the market.E. None of the above.

9. Which one of the following would NOT be counted as “Private Domestic Investment” in the United States’ GDP accounts for this year?

A. General Motors building a factory in Ithaca this year.B. Increases in General Motors’ inventories of cars produced in

Detroit this year but not sold.C. New private residential housing structures built this year in Boston.D. The issue of a share of stock by General Motors sold to an

employee of General Motors this year.E. Walmart buying a fleet of trucks that were made in Detroit this

year.10. As actually measured by the U.S. government, reported GDP will understate the true theoretical social value of output produced by the economy

A. because reported GDP does not account for environmental degradation caused by increased output production.

B. because reported GDP only counts the sum of value added at each stage of production.

C. because reported GDP excludes the value of stay-at-home spouses that work for the family.

D. because reported GDP excludes the value of the wages paid to government employees for current production.

E. because reported GDP excludes transfer payments to low income people.

11. Which one of the following transactions’ value would NOT be represented, one way or another, either in the income loop or the expenditure loop in the calculation of U.S. GDP in 2019?

A. Legal fees you paid your Ithaca-based attorney for work in 2019 to settle a law suit.

B. Wages paid to legal Mexican farm workers by a farmer located in Arizona in 2019.

C. Body armor made in West Virginia in 2019 and purchased by the defense department for the military to use in Afghanistan.

D. Lumber manufactured in South Carolina in 2019 that was used by Stickley Furniture in Syracuse to make tables in 2019.

E. Transfer payments made by the government in 2019 to families classified as working poor.

12. A country's GNP will definitely exceed its GDP if ________ foreign citizens work in the country and ________ of the country's citizens work abroad.

A. no; manyB. many; noneC. many; many

D. no; noneE. nothing but; none

TABLE A

13.

Refer to Table A. Assume that year 2 is the base year.

Based only on this information, calculate the implicit GDP deflator index for year 3.

Your answer: ____________________________

14. Consider the simple closed economy of Cheddar which has only four goods: coffee, bread, milk and cheese. There is no government, and no international trade. The table provides ALL the information you need to know on prices and total output/production in two consecutive years. Note the following very important additional information:

Coffee, bread and cheese are final goods only. Milk is consumed by households as a final good AND used as

an intermediate good by firms in the production of cheese. It takes 2 cups of milk to make each pound of cheese. This is

the case in both years. Half the coffee produced in 2018 was not sold until January of

2019. All other output produced in 2018 was sold in 2018.

Year 2018 Year 2019

ItemsPriceper unit

Quantity produced

Priceper unit

Quantity produced

Pounds of Coffee $800 100 $900 80

Loaves of Bread $2.50 1000 $2.00 1500

Cups of Milk $1.50 1000 $2.00 1200Pounds of

Cheese $4.00 200 $5.00 300

Calculate Cheddar’s nominal GDP for the year 2018.

Your answer: ____________________________

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1. "Cornell Slope Day" sunglasses are sold in a perfectly competitive market. The supply and demand curves are characterized by:

QD = 100 - 10P (demand)QS = -20 + 10P (supply)

a) Carefully graph the supply and demand curves for sunglasses. For full credit, be sure to label both axes and both curves and label the numerical values at the price-intercepts and quantity-intercepts.

b) What are the equilibrium price and equilibrium quantity in this market? Illustrate and label the values in the graph using P* and Q*, respectively.

c) Now suppose that the new Cornell president decides to impose a price ceiling of $3/unit on this market. Why might she do that?

d) Fully analyze the likely impact of this policy using your graph and the stated demand and supply equations. In your opinion, is this policy a good or bad idea? Defend.

ANSWERS

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

ANSWERS

2. Recall our class discussion of England, Portugal and France making yards of cloth (C) and barrels of wine (W). Suppose they have individual PPF’s as described in class.

a) If these three countries are the only ones making wine and cloth, determine and graph the “international” joint PPF. Make your graph large enough so the graders can easily see your work. Put barrels of wine on the vertical axis and yards of cloth on the horizontal. For full credit make sure you label the axes and the values of cloth and wine at end points and any kinks.

b) Determine and graph the “international” supply curve for wine. For full credit make sure you label your axes.

c) Suppose the demand curve for wine intersects your supply curve at 10 barrels of wine. What, evidently, is the current market price for wine?

d) At this market equilibrium, how much wine is each country making? How much cloth is each country making?

ANSWERS

ANSWERS

3. Assume the following is a description of everything you need to know (and possibly more than you need to know) about the economy of Ivyland in 2017. Ivyland’s currency is the dollar. Note that all dollar amounts are in millions of current or nominal 2017 dollars. Any expenditure items NOT listed can be assumed to have a value of $0.

(1) $2,000 = Personal consumption expenditures(2) $650 = Government consumption and gross investment plus government transfer payments to

low income people(3) $80 = Government transfer payments to low income people(4) $300 = Gross private domestic investment excluding changes in business inventories(5) $50 = Net private domestic investment excluding changes in business inventories(6) $100 = Gross investment via changes in business inventories(7) $250 = Depreciation or capital consumption allowance(8) $200 = Exports(9) $190 = Imports(10) $500 = Profits(11) $5,000 = Wages

a) Calculate the value of current or nominal 2017 GDP using the expenditure loop approach. Show some work.

b) If real 2017 GDP in 2008 dollars is reported to be $2,000 million, what is the implicit GDP deflator index (base year = 2008)?

c) Based on the implicit GDP deflator index, what is the average annual amount of inflation since the base year?

d) Suppose you and your sibling have always lived and worked in Ivyland. Your sibling’s salary upon graduation from Yale in 2008 was $40,000. You graduated from Cornell in 2017 and took a job with a starting salary of $65,000. Suppose the jobs are – for all intents and purposes – identical, except for starting salary. Who did better “money-wise”, you or your sibling? Defend your position.

The rest of the questions for this problem can be answered with no reference back to the numbers given.

e) Briefly but concisely identify two important ways in which the Consumer Price Index (CPI) differs from the implicit GDP deflator index.

f) Identify and briefly discuss two reasons why the way in which we calculate nominal GDP might misrepresent its true value as an indicator of social welfare.

ANSWERS

ANSWERS

Answers: Prelim 1, econ 1120, Spring 2019

1 . B

The error of reasoning that a first event causes a second event because the first event occurred before the second event.

2. EChoice A is false since there is no MOC at B since it’s inside the PPF, or one could argue the MOC is zero. Choice B is false since points A and E are equally efficient. Choice C is false since there is nothing to insist that A is better than E or vice versa, the PPF does not illustrate that. Choice D is false. Either there is no MOC at point B, or you could say the MOC at point B is 0. That said, no matter what the MOC is at point A, it is larger than the MOC at point B.

3. DNote that the MOC for a tea bag in the U.K. is 1/3 a gram of sugar. So the U.K. has the C.A. in sugar and would need to cover its costs, but the U.K. could not charge higher than what Japan would incur to produce tea themselves. Therefore, the likely terms of trade for tea bags would fall in range of at least 1/3 a gram of sugar and not more than 2 grams of sugar per tea bag.

4. BA fall in the price of hot pretzels decreases popcorn demand - not supply. Popcorn popping oil getting cheaper will indeed increase supply! Decreasing the number of firms decreases supply. A changes in the price of popcorn changes quantity supplied, not supply. Increasing income of football fans will either increase or decrease demand for popcorn, depending on if popcorn is a normal or inferior good.

5. BLook at the algebraic signs in front of each variable and ask yourself if they make sense given the multiple-choice options. The answer is not A because this would affect supply, not demand. For C to be correct, we need to have that J is zero, and it is not. If the law of demand is to be satisfied, then F should enter with a negative sign. E is wrong since if donuts and coffee are complements, then the sign should be negative in front of F.

6. AEquilibrium is where QD = QS, i.e. 5P = 60-5P; P* = $6 and Q* = 30. If demand increases by 20 units at each price, QD = 80-5P; new equilibrium at 5P = 80-5P; P* = $8 and Q* = 40. Therefore, P increases by $2 and Q increases by 10.

7. DMoving from J to M requires a decrease in supply and increase in demand. A change in tastes away from hamburgers which use beef as an input will reduce demand for beef, so A is not the correct answer. An increase in buyers’ income will in fact, decrease demand for beef since in this this setting, it is an inferior good, so choice B won’t work. Hot dogs can be considered to be substitutes to hamburgers which use ground beef, so a decrease in their price will reduce demand for burgers and therefore ground beef, so C is incorrect. Similarly for E. D is the correct answer: a decrease in buyers’ income given beef as an inferior good will increase demand, and a decrease in the number of land owned by cattle ranches will decrease supply.

8. CQ* is 2000 and P* is $2.25. The price floor is not binding. The ceiling is! So trade will be truncated at Q=1000. If there was a quota at 500, it would bind and there could not be 1000 traded.

9. D

D just represents financial capital and not something produced for real investment. All the other items are. Note that the cars produced and not sold go into GDP as inventory investment.

10. CA. is wrong since this issue tends to make it so reported GDP overstates the truth.B. is wrong since the correct thing to do is to only count value added, otherwise you are double counting.C. is correct – all the work by home production goes unaccounted for.D. is just wrong, since these wages are included in GDP.E. is wrong since GDP does not include these payments and shouldn’t if we are measuring output

11. ESince nothing was produced for the transfer payments they don’t count in GDP.

12. ASee definitions of GNP versus GDP.

13. 135.9IGDPDI = (60x1.20 + 140x1)/(60x1.20 + 140x.6)

14. $84,200The answer is: 100 * $800 + 1000 * $2.5 + 600 * $1.5 + 200 * $4 = $84,200. Note: Coffee that was not sold in 2018 is still included in the GDP as I (through inventory increase). 400 cups of milk were used as an intermediate good in the production of cheese and, thus, were NOT included in the GDP calculation.