| Econ 375a | Exam 1 |
Part I: Essays.
1. Explain what GDP measures and what it does not include. Explain why the rate of growth in nominal GDP can sometimes be a misleading statistic.
2. How is the money supply in the United States defined? How does the Federal Reserve control the money supply?
3. Suppose you were a senator writing a bill to index Social Security and federal pensions. That is, your bill would adjust these benefits to offset changes in the cost of living. Would you use the GDP deflator or the CPI? Why? (In your answer, make sure you point out how the CPI and the deflator differ.)
4. What is unemployment? Why is the unemployment rate always greater than zero? A graph of the labor market will be useful. Label all axes and curves.
5. In the country of Geemeled, the velocity of money is constant. Real GDP grows by 5 percent per year, the money stock grows by 14 percent per year, and the nominal interest rate is 11 percent. What is the real interest rate? Show all derivations.
6. According to the model discussed in Chapter 3 of the text, what ensures the equality between supply and demand for goods and services? Explain how this mechanism works.
7. What determines the overall level of consumption and investment expenditures according to the model discussed in Chapter 3 of the text?
Part II: Calculations.
8. For the economy described in the table below, what are net exports equal to? Show your work. [5 points]
| GDP Expenditures | |
| Consumption | $840 |
| Investment | 650 |
| Government Purchases | 520 |
| Exports | 380 |
| GDP | 1,950 |
9. Consider an economy that produces and consumes beer and automobiles. In the table below are data for two different years.
| Year 2000 | Year 2010 | |
| Price of an automobile | $60,000 | $70,000 |
| Price of a keg of beer | $70 | $80 |
| Number of autos produced | 100 | 120 |
| Number of kegs of beer produced | 500,000 | 400,000 |
Using the year 2000 as the base year, compute for Year 2010 nominal GDP and real GDP. Show all work.
10. Assume that equilibrium GDP is 5,000. Consumption is given by the equation C = 500 + 0.6Y. Investment is given by the equation I = 2000 - 100r, where r is the real interest rate in percent. There is no government. What is the equilibrium interest rate? Demonstrate that savings equals investment.
11. An economy's production function is Y = 50K.5L.5, and K = 100 and L = 100. The following equations describe the goods market in the closed economy. Show all work!
C = 500 + 0.7(Y-T)
I = 2000 - 100r
G = 600
T = 600
a) What does Y equal?
b) What does C equal?
c) What is the equilibrium real interest rate, r, for this economy?
d) What does I equal?
e) What does private saving equal?
f) What does public saving equal?
g) What does national saving equal?