Q: Suppose the cost of a basket of goods in 2025 is $100, and in 2020 it was $32.40. What is the Consumer Price Index (CPI) for 2020, using 2025 as the base year?

$ \frac{32.40}{100} \times 100 = 32.4 $

Q: An economy has an adult population of 1,000, with 600 employed and 60 unemployed. What is the unemployment rate?

$ \frac{60}{660} \times 100 = 9.09\% $

Q: Suppose the marginal propensity to consume $ c_1 = 0.5 $. If GDP fell by 3% of $15,000$ billion in 2009, by how much would government spending need to increase to prevent the decrease in output? (Assume the spending multiplier is $ \frac{1}{1 - c_1} $)

$ \frac{0.03 \times 15,000}{2} = 225 $ billion

Q: Suppose the money demand function is $ M^d = Y(0.35 - i) $ and annual income $ Y = 60,000 $. What is the demand for money when the interest rate is 5%?

$ 60,000 \times (0.35 - 0.05) = 18,000 $

Q: Suppose the money demand function is $ M^d = 0.5Y - 4000i $, nominal income $ Y = 2,000 $, and money supply $ M^s = 700 $. What is the equilibrium interest rate?

$ i = \frac{0.5 \times 2,000 - 700}{4,000} = 0.15 = 15\% $

Q: If the Federal Reserve wants to increase the equilibrium interest rate by 10 percentage points, given $ M^d = Y(0.25 - i) $, $ Y = 100 $, and initial $ M^s = 20 $, what should the new money supply be?

$ M^s = 100 \times (0.25 - 0.10) = 15 $

Question 1

Suppose a family spends $100 on a fish dinner at a seafood restaurant. What is the effect of this transaction on GDP?

Accepted Answer

GDP increases by $100, as this is final consumption expenditure.

Question 2

A silver mining company pays its workers $200,000 to mine silver, which it sells to a jewelry company for $300,000. The jewelry company pays its workers $250,000 and sells necklaces to consumers for $1,000,000. Using the value-added approach, what is the GDP of this economy?

Accepted Answer

$1,000,000

Question 3

Given the following data for 2020: 10 cars at $2,000 each, 4 computers at $1,000 each, and 1,000 oranges at $1 each, what is the nominal GDP for 2020?

Accepted Answer

$27,000

Question 4

Suppose the cost of a basket of goods in 2025 is $100, and in 2020 it was $32.40. What is the Consumer Price Index (CPI) for 2020, using 2025 as the base year?

Accepted Answer

$ \frac{32.40}{100} 	imes 100 = 32.4 $

Question 5

An economy has an adult population of 1,000, with 600 employed and 60 unemployed. What is the unemployment rate?

Accepted Answer

$ \frac{60}{660} 	imes 100 = 9.09\% $

Question 6

Suppose the consumption function is $ C = 160 + 0.6 Y_D $, investment $ I = 150 $, government spending $ G = 150 $, and taxes $ T = 100 $. What is the equilibrium output $ Y $? (Recall: $ Y = C + I + G $ and $ Y_D = Y - T $)

Accepted Answer

$ Y = 1000 $

Question 7

Given the behavioral equations $ C = 50 + 0.8(Y - T) $, $ T = 20 + 0.25Y $, $ I = 120 $, $ G = 200 $, what is the algebraic expression for equilibrium output $ Y $? (Hint: Set $ Y = C + I + G $ and solve for $ Y $)

Accepted Answer

$ Y = \frac{50 + 0.8(Y - (20 + 0.25Y)) + 120 + 200}{1 - 0.8(1 - 0.25)} $

Question 8

Suppose the marginal propensity to consume $ c_1 = 0.5 $. If GDP fell by 3% of $15,000$ billion in 2009, by how much would government spending need to increase to prevent the decrease in output? (Assume the spending multiplier is $ \frac{1}{1 - c_1} $)

Accepted Answer

$ \frac{0.03 	imes 15,000}{2} = 225 $ billion

Question 9

Which of the following statements is TRUE regarding the goods market equilibrium?

Accepted Answer

The largest component of GDP is consumption.

Question 10

Suppose the money demand function is $ M^d = Y(0.35 - i) $ and annual income $ Y = 60,000 $. What is the demand for money when the interest rate is 5%?

Accepted Answer

$ 60,000 	imes (0.35 - 0.05) = 18,000 $

Question 11

A bond promises to pay $100 a year from now. If its price today is $75, what is the interest rate (yield) on the bond?

Accepted Answer

$ \frac{100 - 75}{75} = 0.333 = 33.3\% $

Question 12

Suppose the money demand function is $ M^d = 0.5Y - 4000i $, nominal income $ Y = 2,000 $, and money supply $ M^s = 700 $. What is the equilibrium interest rate?

Accepted Answer

$ i = \frac{0.5 	imes 2,000 - 700}{4,000} = 0.15 = 15\% $

Question 13

If the Federal Reserve wants to increase the equilibrium interest rate by 10 percentage points, given $ M^d = Y(0.25 - i) $, $ Y = 100 $, and initial $ M^s = 20 $, what should the new money supply be?

Accepted Answer

$ M^s = 100 	imes (0.25 - 0.10) = 15 $

Question 14

Suppose the consumption function is $ C = c_0 + c_1 Y_D $, investment is $ I = b_0 + b_1 Y $, $ Y_D = Y - T $, $ T = 100 $, $ G = 200 $, $ c_0 = 80 $, $ c_1 = 0.7 $, $ b_0 = 50 $, $ b_1 = 0.1 $. What is the equilibrium output $ Y $? (Hint: $ Y = C + I + G $)

Accepted Answer

$ Y = 1,100 $

Question 15

Which of the following best describes the relationship between bond prices and interest rates?

Accepted Answer

Bond prices and interest rates are inversely related.

Question 16

If the marginal propensity to consume is $ c_1 = 0.8 $ and the tax function is $ T = t_0 + t_1 Y $, what is the formula for the spending multiplier in this economy?

Accepted Answer

$ \frac{1}{1 - c_1 (1 - t_1)} $

Question 17

Suppose the labor force in an economy is 660, and the adult population is 1,000. What is the labor force participation rate?

Accepted Answer

$ \frac{660}{1000} 	imes 100 = 66\% $

Question 18

If the price of a bond that pays $100 in one year is $85, what is the yield (interest rate) on the bond?

Accepted Answer

$ \frac{100 - 85}{85} = 0.176 = 17.6\% $

Macroeconomics Exam 1 Practice: Step-by-Step Guidance

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