Q: Suppose the inflation rate is calculated as $$\pi_{t+1} = \frac{p_{t+1} - p_t}{p_t} \times 100\%. If $$the price level increases from 200 to 210, what is the inflation rate?

$$\frac{210 - 200}{200} \times 100\% = 5\%$$

Q: Suppose the desired capital stock ($$K^*) is 120 $$units, the current capital stock ($$K_t) is 100 $$units, and the depreciation rate ($$d) is 10$$%. What is the level of investment ($$I_t) $$according to the formula $$I_t = K^* - K_t + dK_t$$?

$$I_t = 120 - 100 + 0.10 \times 100 = 30$$

Question 1

Suppose the nominal GDP of a country increased from $$10 trillion to 11 $$trillion over one year, while the GDP deflator rose from 100 to 105. What is the real GDP growth rate for that year?

Accepted Answer

$$\frac{11}{105} \div \frac{10}{100} - 1 = 0.0476 or 4.76$$%

Question 2

Which of the following best describes the difference between the Consumer Price Index (CPI) and the GDP deflator?

Accepted Answer

The CPI measures the price of a fixed basket of consumer goods, while the GDP deflator measures the prices of all final goods and services produced domestically.

Question 3

If the marginal product of labor (MPN) equals the real wage ($$\omega$$), what does this imply about the labor market?

Accepted Answer

Firms are maximizing profit by hiring labor up to the point where the value of the marginal product equals the real wage.

Question 4

A country’s government increases its purchases temporarily. According to the saving-investment diagram, what is the most likely short-run effect on the real interest rate and investment?

Accepted Answer

The real interest rate rises and investment falls.

Question 5

Suppose the inflation rate is calculated as $$\pi_{t+1} = \frac{p_{t+1} - p_t}{p_t} 	imes 100\%. If $$the price level increases from 200 to 210, what is the inflation rate?

Accepted Answer

$$\frac{210 - 200}{200} 	imes 100\% = 5\%$$

Question 6

Which of the following is an example of frictional unemployment?

Accepted Answer

A recent college graduate searching for their first job.

Question 7

According to the permanent income theory, how will a temporary increase in income affect consumption?

Accepted Answer

Consumption will increase by less than the increase in income.

Question 8

If the government increases taxes but also increases government spending by the same amount, what is the predicted effect on national saving according to the Ricardian Equivalence Proposition?

Accepted Answer

There will be no effect on national saving.

Question 9

Suppose the desired capital stock ($$K^*) is 120 $$units, the current capital stock ($$K_t) is 100 $$units, and the depreciation rate ($$d) is 10$$%. What is the level of investment ($$I_t) $$according to the formula $$I_t = K^* - K_t + dK_t$$?

Accepted Answer

$$I_t = 120 - 100 + 0.10 	imes 100 = 30$$

Question 10

Which of the following would shift the labor demand curve to the right?

Accepted Answer

A positive supply shock that increases productivity.

Question 11

If the real interest rate increases, what is the likely effect on current consumption and saving, assuming the substitution effect dominates?

Accepted Answer

Current consumption decreases and saving increases.

Question 12

Which of the following best describes the concept of the natural rate of unemployment?

Accepted Answer

It is the sum of frictional and structural unemployment present when the labor market is in equilibrium.

Question 13

According to Okun’s Law, if the unemployment rate falls by 1 percentage point, by how much does output typically increase, assuming Okun’s coefficient is 2?

Accepted Answer

Output increases by approximately 2%.

Question 14

If private saving is $$S_{priv} = Y_{disp} - C$$, and disposable income increases while consumption remains unchanged, what happens to private saving?

Accepted Answer

Private saving increases.

Question 15

A country experiences a negative supply shock. What is the likely effect on the marginal product of labor (MPN) and the labor demand curve?

Accepted Answer

MPN decreases and the labor demand curve shifts left.

Question 16

If the user cost of capital is given by $$uc = \frac{(r + d)p_K}{1 - 	au}$$, what happens to the user cost if the corporate tax rate ($$	au) $$increases?

Accepted Answer

The user cost of capital increases.

Question 17

Which of the following is NOT included in the calculation of GDP using the expenditure approach?

Accepted Answer

Purchases of used cars by consumers.

Question 18

If the marginal product of capital in the future ($$MPK_f) $$equals the user cost of capital ($$uc$$), what does this imply for the desired capital stock?

Accepted Answer

The firm is at its desired capital stock.

Question 19

Which of the following best illustrates the life-cycle model of consumption and saving?

Accepted Answer

A worker saves during their working years and dissaves during retirement.

Question 20

If the government runs a budget deficit, what is the effect on public and national saving, all else equal?

Accepted Answer

Public saving decreases, and national saving decreases.

Macroeconomics Midterm 1 Review: Measurement, Productivity, and Consumption

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