Economics 102
Macroeconomic Analysis
Siena College
Fall 2011 Professor
Martha Olney
Office Location: Colbeth 110
Office Hours: Thurs 3-5 in Colbeth 110
MWF 11:20-12:20, starting at Siena 224 and ending
either in Siena Fac Lounge or at Colbeth 110
Midterm #2 from previous terms
This is the second midterm from Prof. Olney's Spring 2011
offering
of Economics 1.
The exam was written as a 50
minute exam.
Question
1 (18 points total; 8 minutes total) Food
trucks are essentially take-out restaurants on wheels.They park at the
curb, you walk up and order,
they sell you cooked food.There are
lots of food trucks in San Francisco.Each truck
offers a slightly different
menu.Opening
your own food truck
business is relatively cheap and easy. a.(5 points) Would you characterize
food trucks as perfect competition, monopoly, or
monopolistic competition?Why? b.(5 points) Last year, the typical
food truck owner earned abnormal economic profit.Draw a graph
that illustrates this situation. c.(8 points) In the long run, would
you expect food truck owners to continue earning abnormal
economic profit? Why
or why not? Question
2(18 points total; 8
minutes total) Where
you live in your 30s and 40s is influenced by where you go
to school.For
example,
If you went to
high school in . . .
and you went to
college in . . .
then in your 30s
and 40s, you’re likely to live in . . .
group 1
Iowa
Iowa
Iowa
group 2
Iowa
not Iowa
not Iowa
The
state of Iowa
offers college scholarships to students in group 1
(graduated high school in Iowaand attend college in Iowa).The state does not offer college
scholarships to students in
group 2 (graduated high school in Iowabut attend college in another state). a.(8 points) What is the definition
of “positive externality”?Draw a graph
at the right that illustrates the private optimum and the
social optimum when there
are positive externalities.Label your
graph carefully. b.(10 points) What is an economic
justification for Iowa
offering scholarships only to students in group 1? Will Iowa’s
scholarship policy generate the socially optimal quantity
of Iowa
students attending college?Explain.Be complete. Question
3(24 points total; 11
minutes total) Answer
any 3 of the following 4 questions.If you answer all four, your GSI will only grade
the first three.So
there is no advantage to answering all
four.Choose
3. a.(8 points) Where is the following
activity recorded on the expenditure side of GDP
accounting?Give
a one-sentence defense of your answer. •The City of Berkeley hires a
local paving company to
repave Telegraph
Avenue. b.(8 points) Give an example of
someone who is not counted in the national
unemployment rate, but is
part of the nation’s unemployment problem.Give a one-sentence defense of your answer. c.(8 points) What does it mean for
the economy to be in an “unemployment equilibrium”? ANSWER
THIS QUESTION ONLY IF YOU SKIPPED ONE OF THE PREVIOUS
THREE QUESTIONS d.(8 points) When businesses expect a
decline in future sales due to a recession, what happens
to investment
spending?Give
a one (or two) sentence
defense of your answer. Question
4 (15 points; 7 minutes) Suppose the
economy can be described by the following
equations (all values are billions of dollars per month): C
= 100 + 0.8YdEX
= 500TR = 1,500 I
= 300IM
= 500TA = 1,000 G
= 400 What
is the equilibrium level of output and
income?Show
all your work or you will
receive zero (0) points on this question.If you cannot solve this problem without a
calculator, set it up and go
as far as you can to receive as much partial credit as
possible.No
calculators allowed during the exam. Question
5 (10 points; 4 minutes)Explain
carefully and complete why GDP falls by more than $600
billion per year if
government spending is reduced by $600 billion per year. Question
6 (15 points total; 7 minutes total) a.(8 points) According to article
#19b, “The Two-Track Economy: Inequality Emerging from
Today’s Recession,” by
Simon Johnson, what does Johnson see as an unusual
characteristic of the
recovery we are now experiencing? b.(7 points) If Johnson is right, we
would want to change some of the equations we typically
use to describe the
economy (the equations in #4).Suggest
change(s) that would capture the phenomena Johnson
discusses.
This is the second midterm from Prof. Olney's Spring 2010
offering
of Economics 1.
The exam was written as a 50
minute exam.
1. At tanning salons, you pay
money to
have lamps shine on your skin, giving you an instant
tan. The
lamps emit ultraviolent radiation, which has bad health
effects
including cancer. Higher cancer rates increase health
costs for
everyone (not just those with cancer).
a. What is the negative externality associated
with “using
a tanning salon”?
b. The health insurance reform bill signed into
law last
month includes a 10% tanning tax. For every $100 spent
on
tanning, $10 must be paid in a tax. What effect will
this tax
have on the price and quantity of tanning at tanning
salons? Draw
a graph at the right that supplements your answer.
c. Will the new quantity of tanning be the socially optimal
quantity? Explain.
2. One provision of the health insurance reform bill is that
insurance
companies can no longer cancel insurance after someone becomes
sick. Does this provision make the moral hazard problems
worse,
or not as bad? Explain. (Define “moral hazard” in
your
answer.)
3.
a. List the three characteristics of a
monopolistically competitive industry.
b. Explain why profits equal zero in the long run
in
monopolistically competitive industries.
c. Draw a graph at the right that shows the
long-run
equilibrium for a firm in a monopolistically competitive
industry.
4. Based on article #22, “Can Consumers Spend Asia Out
of
Recession,” (Business Week, March 15, 2009), what is the key
difference
between Taiwan's and Japan’s government programs to stimulate
demand? All else constant, in which country – Taiwan or
Japan –
would the program have the greatest effect on their GDP?
Why? An answer that makes stuff up gets fewer points
than an
answer which honestly states “I didn’t read the article.”
5. Answer 3 of the 4 parts of this question
a. Why is advertising “not recorded” when it
is
purchased by a business, but “recorded” as G when it is
purchased by a
government agency?
b. Why is it possible for the unemployment
rate to
stay the same even when there are 162,000 more jobs?
c. Why is it possible for the 2009 consumer
price
inflation rate to be 2.1 percent when the cost of food fell in
2009 by
1.5 percent?
d. Can the macroeconomy be in equilibrium even
when the
unemployment rate is 10 percent? Explain.
6. Decreased construction spending – a component of investment
– led
the way into this recession.
a. Explain why the drop in housing prices caused a
drop in
investment in housing construction. Include the concept of
“expected
rate of return” in your answer.
b. Explain why the drop in housing construction
caused a
much larger drop in real GDP.
c. In which case would the drop in GDP following
the drop
in housing construction be greater:
• [case 1]
Consumers have
access to credit
• [case 2]
Consumers do not
have access to credit
Explain.
This is the second midterm from Prof. Olney's Spring 2009
offering
of Economics 1.
The exam was written as a 50
minute exam.
1. Firm A produces a product
with
no close substitutes, and there are significant barriers to
entering
the industry. Firm B is in an industry with no barriers to entry
and
many firms, but they all produce differentiated products.
What
type of industry is Firm A in? What type of industry is
Firm B
in? Which firm can earn profit in the long-run? Why?
2. Three professors of large-enrollment courses have
different
reactions to students talking and chatting with each other
during
class.
• Professor A never says
anything
to stop students from talking.
• Professor B calls on the
talkers
and asks if they have a question to ask.
• Professor C requires the
talkers
to stand, publicly humiliates them, and then kicks them out of
class.
a. Using economic language, compare the three
reactions and discuss their effects on the quantity of talking
during
class. In which class will there be the most
talking? In
which class will there be the least talking? At the right,
draw a
graph that illustrates your answer.
b. Whose reaction to talking during class is
optimal? Explain.
3.
• Monopoly is when there is
one
seller and lots of buyers.
• Monopsony is when there
is one
buyer and lots of sellers.
Based on what you know about monopoly, would you expect the
monopsony
price to be above, below, or the same as the perfectly
competitive
price? Explain your answers.
4. Suppose the economy can be described by the following
equations (all values are billions of dollars per year):
C = 100
+
0.8YD
I =
100
G = 200
EX =
400
IM =
500
TR =
300
TA =
400
a. What is the equilibrium level of output and
income? Show all your work or you will receive zero (0)
points on
this question. If you cannot solve this problem without a
calculator, set it up and go as far as you can to receive as
much
partial credit as possible. No calculators allowed during
the
exam.
b. Draw a graph that shows the determination
of macro
equilibrium for this economy. Label everything clearly.
5. Everyone would like to know when the recession will end and
when the
economy will return to normal.
a. What is the current unemployment rate in
the
US? Why does that rate understate the true extent of the
unemployment problem? Define your terms.
b. Suppose the economy reaches an unemployment
equilibrium by the end of 2009. What does that mean?
c. According to the article #18, “The Menace
of an
Unchecked Housing Bubble,” by Dean Baker, what would be the
macroeconomic effects of the bubble bursting? In your
answer,
include enough detail from the article so that we know you read
the
article. An answer that makes stuff up gets fewer points
than an
answer which honestly states “I didn’t read the article.”
d. Clearly explain why and how the $787
billion
fiscal stimulus will generate more than $787 billion in output
and
income.
e. Autonomous consumption has fallen for (at
least)
two reasons:
• The
credit
crisis: banks are unwilling to lend to households
• The
bursting
of the housing bubble: home equity has plummeted
Why would the recession end sooner if the drop in autonomous
consumption was due to the credit crisis rather than the
bursting of
the housing bubble? Draw a graph if it would make your
explanation more clear.
This is the second midterm from Prof. Olney's Spring
2008
offering
of Economics 1.
The exam was written as a 50
minute exam.
1. Bears have
become a
problem at Lake Tahoe, even wandering onto the beaches where
children
play. When families put their household garbage outside in
not-bear-proof containers, bears eat the garbage and then return
regularly. So local communities around Lake Tahoe now
require
that families purchase & use bear-proof garbage containers
which
cost $250 each.
Last year, if you put your garbage out in a
not-bear-proof container, you had to pay a fine of $100 for the
first
offense and $500 for the second & each subsequent
offense.
But you could get back all the money you paid in fines once you
bought
a bear-proof container. There were still lots of problems
with
bears last year. This year, the fine is $300 for the first
offense,
and $1,000 for the second & subsequent offenses and you
can’t get
the money back after you buy a bear-proof container.
a. What is the definition of “negative
externality”? Why is “putting household garbage in a
not-bear-proof container” an activity that generates negative
externalities at Lake Tahoe?
b. Compare last year’s fine and this year’s
fine: do
you think this year’s fine will do a better job, a worse job, or
the
same job of eliminating the use of not-bear-proof garbage
containers? Explain.
2. Suppose the economy can be described by the following
equations (all values are billions of dollars per year):
C = 800 +
0.6Yd
EX = 1500
TR =
1000
I = 1000
IM =
2000
TA = 1500
G = 3000
a. What is the equilibrium level of output and
income? Show all your work or you will receive zero (0)
points on
this question. If you cannot solve this problem without a
calculator, set it up and go as far as you can to receive as
much
partial credit as possible. No calculators allowed during
the
exam.
b. At the right, draw a graph that shows the
determination of macro equilibrium for this economy. Be
sure to
show the values of the intercept, slope, and equilibrium income.
3.
a. Spending for construction of new houses has
fallen
by $200 billion per year. As a result, will GDP fall
by
$200 billion per year, more than $200 billion per year, or less
than
$200 billion per year? Clearly and completely, explain
why.
(Assume there is no policy reaction. And remember: just
giving
the name of an economic concept is not the same as explaining.)
b. Some mis-informed people said that the drop
in
construction (noted in part a) posed no problem for the U.S.
economy
because “those workers were all undocumented workers from Mexico
who
will go back to Mexico.” The premise of that statement is
incorrect. But let’s assume – incorrectly, but for the
sake of
argument – that indeed all the laid off workers in construction
were
undocumented workers from Mexico who returned to Mexico after
being
laid off. (That’s not true, but let’s make the assumption
for a
few minutes.) Compare two situations: [1] all the laid off
construction workers returned to Mexico, and [2] all the laid
off
construction workers stayed in the U.S. Would the effect
on U.S.
GDP of the drop in construction spending when all laid-off
workers
return to Mexico be smaller than, larger than, or the same as
the
effect when all laid-off workers stay in the U.S.?
Explain.
4. The Federal Reserve (the Fed) conducts monetary
policy.
Suppose the economy begins at the Fed’s target inflation rate
and
target unemployment rate, which are shown as infl0 and un0 in
the graph
in part c below.
a. When construction spending decreases (as in
Question 3a) and the unemployment rate rises, what effect does
this
have on the inflation rate? Why?
b. The Fed reacts. What does the Fed do
to
fight the effects of the decrease in construction
spending? Why
will the Fed’s action affect unemployment and inflation?
c. At the same time that construction spending
decreases, the economy experiences a cost shock that increases
oil
prices. Draw the Phillips Curve at the right. Label
the
initial position – before anything happens – as point A.
Show the
effect of the decrease in construction spending as point
B. Show
the effect of the cost shock as point C. Show the combined
effect
of the Fed fighting the decrease in construction spending and
the oil
cost shock as point D.
d. Can the Fed simultaneously fight both the
construction spending decrease and the oil cost shock?
Explain.
5.
a. What does it mean for a household to earn
the
“median income” in the U.S.? In 2005, what was the median
household income in the U.S.? (Round to the nearest
$10,000).
b. Since 2000, has the U.S. income
distribution
become more or less unequal? Drawing on article #16,
(“Special
Report: The Rich, the Poor and the Gap Between Them - Inequality
in
America.” The Economist, June 17, 2006), offer one piece
of
evidence that illustrates the change in income inequality and
one
possible reason for the change in income inequality since
2000.
This is the second midterm from Prof. Olney's Spring
2007
offering
of Economics 1.
The exam was written as
a 50
minute exam.
1. Laptops can be
beneficial
to students for note-taking. But web surfing,
solitaire, email,
you-tube, and more is distracting to students seated
behind the laptop.
a. Consider
Sorena. His
private marginal cost of using the laptop in class is the
wear and tear
on the laptop and the risk the laptop will be lost or
stolen. His
downward-sloping marginal benefit is better
note-taking. But
Sorena also checks email, surfs the web, and watches an
occasional
you-tube video during class.
Draw a graph at the
right
that shows (1) how many hours per semester Sorena would
want to use his
laptop, and (2) the socially optimal number of hours per
semester that
Sorena should use his laptop in class. Explain.
b. An econ student
tells the
prof she should impose a penalty (essentially, a tax) on
laptop users
who are doing more than just note-taking. What
determines the
size of the penalty? Will the penalty eliminate the
distracting
behavior? Why or why not?
2. Article #14, “The
Lemongrass War,” describes competition between two
Indonesian
restaurants in Queens, New York: Padang Raya (owned by Mr.
Rahman
Imansjah) and Manangasli (owned by Ms. Nani Tanzil).
a. Why does
“monopolistic
competition” characterize Padang Raya and Manangasli?
b. Padang Raya opened
first,
in June 2004. Draw a graph that shows the
profit-maximizing price
and quantity of meals sold and the profit earned at Padang
Raya when
Ms. Tanzil worked there as a chef.
c. Then Ms. Tanzil
was
fired. In August 2005, she opened her own
restaurant,
Manangasli. In your graph, how would you show the
effect of this
new restaurant on Padang Raya? (Tell us. Don’t draw
it.)
Why?
3. Suppose the
economy can be
described by the following equations (all values are
billions of
dollars per quarter):
C
= 200 +
0.8Yd
I = 300
G = 400
EX = 500
IM = 500
TR = 400
TA = 500
a. What is the
equilibrium level of output and income? Show all
your work or you
will receive zero (0) points on this question. If
you cannot
solve this problem without a calculator, set it up and go
as far as you
can (cost of not fully solving = loss of 3 points).
No
calculators allowed during the exam.
b. Government
spending for
military equipment and personnel rises by $100 billion per
quarter. Will the equilibrium level of output and
income rise by
more than, less than, or exactly $100 billion per
quarter?
Explain why.
4. The Federal Open
Market
Committee (FOMC) of the Federal Reserve (the Fed) conducts
monetary
policy.
a. When the Federal
Reserve
lowers interest rates, does investment spending fall,
rise, or stay the
same? Why?
b. When the
unemployment rate
falls, does the inflation rate fall, rise, or stay the
same? Why?
c. What is an
inflation
dove? An inflation hawk?
d. The inflation rate
and the
unemployment rate are initially both at the Fed’s target
or goal
rates. Then the price of oil rises due to supply
restrictions. What does the Fed do when oil prices
rise if the
FOMC members are inflation hawks? What does it do if
the FOMC
members are inflation doves?
Draw a Phillips
Curve graph
at the right which shows the effects of the rise in oil
prices and the
Fed’s reaction. Label the initial position “A”, the
hawk position
“H”, and the dove position “D”.
5. Answer only two
(2) of the
three (3) parts in this question.
a. Define “gross
domestic
product.” What was the 2006 value of nominal GDP for
the United
States?
b. Is everyone who is
out of
work “unemployed”? Explain. What was the
February 2007
unemployment rate for the United States?
c. What is the
“consumer price
index”? What was the inflation rate in the U.S.
between December
2005 and December 2006?