EXAM 2

PRINCIPLES OF MACROECONOMICS

Lecture Outline/Topics

INSTRUCTOR: JAMES SONDGEROTH

The questions below and previous and succeeding ones will function as learning objectives for

The three midterm multiple-choice exams will consist of between 30 and 90 questions. These exams will be administered on-line through the course's Blackboard site. A wi-fi connectd laptop or tablet will be needed to take them. (If a student does not have such a devise, the instructor will provide a paper version if notified 48 hours in advance.) The exans will be administered during class. These exams must be completed during the 80 minutes the class normally meets.

A practice exam will be available on Blackboard for each exam to enable students to better prepare of the exams.

For each exam, students will be allowed to use one sheet (8.5 X 11) of paper with handwritten notes on both sides. These notes must be turned in after students complete each exam. Up to ten extra credit points will be awarded for these notes based on their thoroughness.

This exam will cover material from chapters 6, 7, 8, 9, and 10.


  1. Measuring Inflation
    1. What is the CPI?
    2. How is it constructed, and how does it measure inflation?
    3. Why is it so important to so many people in the U.S. today?
    4. What are some of it weaknesses?

  2. The Consumer Price Index and Measuring Inflation

    YEAR

    CPI

    		 1982-84=100

    YEAR

    CPI
    1914 10 all years give 1981 94.0
    1918 16.5 average CPI 1990 133.8
    1920 19.4 except '29  2000 174.0
    1929 17.3(high) and '33 2007 207.3
    1933 12.6(low)   2008 215.3
    1940 14.0   2009 214.5
    1945 18.0   2010 218.1
    1950 25.0   2012 229.6
    1960 29.8   2013 233.0
    1966 32.9   2014 234.8
    1970 39.8   2015 238.7
    ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
    .(Except for '29 to '33 and 2015, all values are from December of each year.)

    Show all your calculations when answering the following questions.

    1. What was a dollar in 2015 worth in 1914 dollars?
    2. If a textbook cost $180 in 2015, how much would it have cost in 1966 if real prices have not changed since then?
    3. If grandmothers were giving $10 bills as gifts to their grandchildren in 1950, how much would grandmothers today have to give their grandchildren so that grandchildren in 2015 would have the same purchasing power with their gifts as grandchildren in 1950 had with their $10 bills?
    4. What was the inflation rate from 1929 to 1933? What was happening during that time?
    5. What was the inflation rate from 1970 to 1981?
    Check your answers with the Bureau of Labor Statistics inflation calculator.

  3. Describe in detail the household survey of unemployment and, in the context of the survey, explain what is meant the terms below and give the number or rate of each based on the table below for the following dates-- December 2007; June 2009; and January 2013.:
    1. employed
    2. unemployed
    3. not in the labor force
    4. the unemployment rate
    5. the labor force participation rate
    6. the employment rate (employment -population ratio)
      December 2007 June 2009 January 2014
    Civilian noninstitutional population > 16 233,290,000 235,695,000 246,762,000
       Civilian labor force 153,918,000 154,730,000 155,460,000
           Employed 146,273,000 140,003,000 145,224,000
    http://data.bls.gov/cgi-bin/surveymost?ln

     

  4. Unemployment and Full Employment (Chapter 6)
    1. Give the definitions of:
      1. Frictional Unemployment;
      2. Structural Unemployment;
      3. Cyclical Unemployment;
      4. Natural Unemployment.
    2. Explain what is meant by full employment in macroeconomics, and explain why the unemployment rate might well be greater than zero at full employment.

  5. Circular Flow Model Used in Macroeconomics (Chapter 7)
    1. Draw the circular flow of economic activity, labeling all economic actors, markets, and money flows.
    2. Point out on the graph (and explain in words) where one might build a dam or dams to measure GDP by:
      1. the expenditure approach--only one dam needed
      2. and also by the income approach.-- three dams needed

  6. GDP (Chapter 7)
    1. Give the verbal definition of GDP including all major elements of it, and derive the general mathematical formula from this definition.
    2. Why are money prices used in calculating GDP?
    3. What items are not included in the calculation of GDP?
    4. How is it calculated using the expenditure approach?
    5. How is it calculated using the income approach?
    6. How is it calculated using the value added approach?
    7. Explain the problem of "double-counting" and how it can be avoided.

  7. Discuss the strengths and weaknesses (i.e., problems) of using GDP data: (Chapter 7)
    1. to measure the social well being of a nation,
    2. in making comparisons of one nation to another,
    3. and in making comparisons of one time period in a given nation's history with another time period 100 years earlie in the same nation's history.
    (GDP facts),(Gapminder),(about Purchasing Power Parity, PPP index),(List of countries by GDP (PPP)),(CIA GDP/capita)

  8. Suppose you are given the following information about some hypothetical economy and its national income accounts (which nonetheless closely follows the NIPA data for 2007 III annualized). Use this information to answer the questions that follow. (Amounts are in billions of dollars) (Chapter 6) (These figures are from the Bureau of Economic Analysis National Income and Product Account Tables which can be found at http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1.)
    Indirect Business Taxes $919.0
    Corporate profits $1208.9
    Corporate profits taxes $469.4
    Retained earnings $330.8
    Proprietors' income $1038.4
    Rental Income $62.1
    Net Interest $1171.1
    Exports $1685.7
    Imports $2380.4
    Income Receipts from rest of world $855.6
    Income Payments to rest of world $754.9
    Net National Product $12380.8
    Government expenditures for Goods and Services $2716.5
    Personal current Transfer receipts $1742.3
    Social Security Taxes (employee & employer) $981.5
    Personal Consumption expenditures $9785.7
    Gross Private Domestic Investment $2162.9
    Disposable personal income $10257.5

    1. Find GDP.
    2. Find the percentage Net Exports is of GDP.
    3. Find GNP.
    4. Find depreciation (capital consumption allowance).
    5. Find National Income.
    6. Find Wages and Salaries.
    7. Find the percentage 'Wages and Salaries' is of National income.
    8. Find Personal Income.
    9. Find Personal Income Taxes.
    10. Find Personal Saving.
    11. Find the percentage Personal Saving is of Disposable Personal Income.

  9. Business Cycle  (Chapter 7)
    1. What is the business cycle?
    2. Draw a hypothetical graph of a business cycle labeling the five phases of the cycle.
    3. Explain what is happening during each phase of the cycle with:
      1. output,
      2. employment,
      3. and inflation. 

  10. Aggregate Demand (Chapter 8)
  11. Shifts in the Aggregate Demand Curve (Chapter 8)  
  12. Aggregate Supply--Short and Long Run (Chapter 8)
    1. Draw a graph of the Short Run Aggregate Supply curve and explain why it is upward sloping.
    2. Now, on the same graph, draw the Long Run Aggregate Supply Curve and explain why it is vertical.
    3. Explain what the intersection of the Short Run Aggregate Supply and the Long Run Aggregate Supply curves indicates in our model of the macroeconomic economy.

  13. Shifts in the Aggregate Supply Curves (Chapter 8)
    1. List and discuss the things that will make the Short Run Aggregate Supply curve shift to the left or to the right. Illustrate.
    2. List and discuss the things that will make the Long Run Aggregate Supply curve shift to the left or to the right. Illustrate.

  14. With the use of the Aggregate Demand and the Short Run and Long Run Aggregate Supply curves, explain and illustrate both long and short run equilibrium (one above and one below Long Run Equilibrium) and explain and illustrate the two basic causes of recession (one graph each). (Four graphs needed in all.) (Chapter 8 and 9)

  15. Say's Law (Chapter 9)
    1. What is Say's Law?
    2. Explain why the classical economists thought there was no inherent tendency in the market system to overproduction, recession, and depression.
    3. How did the classical economists explain recessions?

  16. Inflation, Recession, and Government Non-intervention -- The Classical View (Chapter 9)
    1. Draw an A.D./A.S. graph showing an inflationary gap.
    2. Draw an A.D./A.S. graph showing a recessionary gap.
    3. Using the same graphs you have drawn in A and B, show what the long run equilibrium position would be in each case if the government did nothing (i.e., let the economy self-adjust).

  17. Explain Keynes' four main criticisms of classical economic theory as they relate to explaining the Great Depression. Note in your discussion what Keynes thought was the most important reason. (Chapter 10 and Lecture Notes)

  18. List Keynes' four main criticisms of classical economic theory as they relate to explaining the Great Depression. Based on Keynes' main criticism of classical economic theory, explain what he proposed to do to get the U.S. and British economies out of the Great Depression. (Chapter 10 and Lecture Notes)

  19. The Keynesian Framework of Analysis I: The Keynesian Consumption Function I (Chapter 10)
    1. What are the basic characteristics of the Keynesian consumption function?
    2. What is meant by "autonomous consumption"?
    3. What are the definitions of:
      1. Marginal Propensity to Consume,
      2. and Marginal Propensity to Save?
    4. How are MPC and MPS related?

  20. The Keynesian Framework of Analysis II: The Keynesian Consumption Function II (Chapter 10)
    To show your understanding of the Consumption function, build a table with at least six income levels showing the following information:
    1. Disposable Income,
    2. Change in Disposable Income,
    3. Consumption,
    4. Change in Consumption,
    5. Marginal Propensity to Consume,
    6. Saving,
    7. Change in Saving,
    8. Marginal Propensity to Save.

  21. The Keynesian Framework of Analysis III: The Total Expenditures/Total Production Model (Chapter 10)
    1. List and Explain the three simplifying assumptions made by the Simple Keynesian Model.
    2. Show on a 450 graph how to derive a Total Expenditures Curve.
    3. Using TE/TP graphs, show on separate graphs:
      1. The economy at Full Employment equilibrium.
      2. The economy at equilibrium with a Recessionary Gap.
      3. The economy at equilibrium with a Inflationary Gap.

  22. The Multiplier Effect. (Chapter 10)
    Define what the multiplier is AND explain how and why it works.
    Use a table with rounds of spending and a graph with a 450 Reference Line to help illustrate your answer.