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Econ 302 - Practice Midterm 1

Spring 2024

1 Multiple-Choice Questions

1. Which sector has the biggest labor share in the United States in the 21st century?

A. Agriculture

B. Services

C. Manufacturing

D. Government

2. What is included in GDP?

A. Income from selling old furniture online

B. Money spent on failed ventures

C. Rent paid by renters to landlords

D. Home cooked meals

3. Consider an economy described by the Solow Model. If there is an outside shock that increases the capital stock, what would happen to the steady state capital stock?

A. Increase

B. Decrease

C. Stay the same

D. Uncertain

4. Consider a small economy where the total population is 10,000. The number of people employed is 6,000. Among the people who are actively looking for jobs, 3,000 of them are unemployed. What is the unemployment rate of this economy?

A. 10%

B. 30%

C. 33.3%

D. 40%

5. In the same economy as the question above, what is the labor force participation of this economy?

A. 50%

B. 60%

C. 66.7%

D. 90%

6. Consider an economy that produces two good, fish and chips. What is the real GDP growth in percent?

A. 13.6%

B. 15.6%

C. 16.8%

D. 17.0%

7. What is the CPI of the economy above?

A. 33.0%

B. 35.2%

C. 44.5%

D. 53.7%

8. A country’s production funtion is Cobb-Douglas: Yt = AtKtαL1t−α. What is the growth rate of output Yt as growth rates of capital (Kt), TFP (At) and labor (Lt)?

A. gY = gA + αgK + (1 − α)gL

B. gY = gA − αgK − (1 − α)gL

C. gY = gA · αgK + (1 − α)gL

D. gY = gA + gK + (1 − α)gL

9. Most of the output growth is projected to come from labor.

A. True

B. False

10. What does the Marginal Propensity to Consume (MPC) measure?

A. The rate at which consumption changes in response to a change in government spending.

B. The rate at which consumption changes in response to a change in interest rates.

C. The rate at which consumption changes in response to a change in population size.

D. The rate at which consumption changes in response to a change in disposable income.

11. What is depreciation?

A. Capital investment in a given period.

B. Capital accumulated during the life of a firm.

C. The part of the capital stock that wears out during the period.

D. The increase in the value of assets over time.

12. What is a trade balance?

A. Difference between imports and exports.

B. Difference between exports and imports.

C. Total value of imports.

D. Total value of exports.

13. Who is unemployed?

A. A person who is without a job, looking for it in the last five weeks, and ready to start in a month.

B. A person who is without a job, looking for it in the last four weeks, and ready to start immediately.

C. A person who has a job but looking for another one in the last 3 weeks.

D. A person who has a job and is content with it.

14. Which of the following statements are true? (More than one statement may be true)

A. Labor force is a larger group of people than the group of unemployed people.

B. Civilian population of age 16 and older.

C. Unemployment is the ratio of the number of unemployed people to total popu-lation of age 16 and older.

D. Unemployment is the ratio of the number of employed people to the total pop-ulation.

15. Which of the following identity is associated with expenditure approach in measuring GDP?

A. Y = C + I + G

B. Y = C + I + G + EX - M

C. Y = C + I + G - EX + M

D. Y = C + I - G + EX - M

2 Numerical Questions

1. The labor force participation rate in the United States in 2023 is approximately           .

2. In general, Consumption moves           (less or more) than Current Disposable Income.

3. The GDP per capita in the United States in 2023 is approximate           .

4. Consumption           (increases with, decreases with, or is independent of) the real interest rate.

5. If in an economy, the nominal GDP growth of a country was 8% and the real GDP growth was 4%. The rate of inflation is about           .

6. Suppose the government starts to spend more on military spending, what will happen to national savings and the real interest rate?                           

7. The share of labor income in the United States is approximately           .

8. If output Yt = 100 and in t + 1 it grew by 2. What was the growth rate?           .

9. Continuing from the last question question if Yt+10 output grew by 40. What was the average growth rate over the decade?           .

10. If the growth rate of output is 2% per year. How many years (approximately) would it take for the output of this country to double?           .

11. A country’s production function is Cobb-Douglas: Yt = Kt α (AtLt) 1−α . Express the growth rate of output per worker (Yt/Lt) as growth rates of capital per worker (Kt/Lt) and TFP (At)                                            

12. Continues from the last questions. If the annual growth rate of capital, labor, and output is 4%, 1% and 2%, respectively and the abor share is given as constant: 2/3. Calculate the growth rate of TFP.           .

13. If consumption is equal to $1, investment is $2, government spending is $1, ex- ports are $10, GDP is $8. Write down the $ value of imports.           .

14. If in steady state, the values of capital and investment are 10 and 1 respectively, what is the depreciation rate?           .

15. In an economy where capital is fixed at K = 27 and firms face prices P = 2 and wages W = 1 what is the optimal labor demand (assume F(K, L) = K1/3L 2/3 ).           .

3 NIPA

Assume an economy with two firms. Firm A producers wheat and firm B producers bread. In a given year, firm A produces 50,000 bushels of wheat, sells 20,000 bushels to firm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B producers 50,000 loaves of bread, and sells all of it to domestic consumers at $2 per loaf. Firm 2 pays consumers $20,000 in wages. In addition to 50,000 loaves of bread consumers buy from firm B, consumers import and consume 15,000 loaves of bread, and they pay $1 per loaf for this imported bread. Calculate gross domestic product for this year using (a) the product approach, (b) the expenditure approach, and (c) the income approach.

4 Solow Model

1. Consider a version of the Solow growth model in which output at time t is determined by the production function Yt = 0.2Kt + 0.8Lt . The depreciation is given by δKt , where the depreciation rate is δ = 0.2. Saving is given by sYt , where the saving rate is s = 0.5. Assume that population Lt is constant, i.e. does not grow with time. Calculate the steady state capital per person, k ss. Also, calculate the steady state output per person and consumption per person, y ss and c ss, respectively.

2. Consider an economy with Cobb-Douglas production technology: Yt = AtKt αLt1−α. The annual labor growth rate is gL and TFP stays the same At = A. Capital depreciation rate is δ, and the saving rate is s.

(a) Write down the law of motion for capital per worker.

(b) Derive the steady state level of capital per worker.

(c) Assume the economy initially lies in steady state. At time t, households start to save at a higher rate s′ > s. Derive the new steady state capital per worker and plot the change of capital per worker over time.

(d) Assume TFP grows at constant rate gA. Is there a steady state level of capital per worker? Does the capital per worker grow at a constant rate? If so, what is it?