1. ECON 100 Lecture 26
Wednesday, May 14

2. MIDTERM 2 FRIDAY May 16
6 30 PM

3. Office hours for midterm exam #2
Wednesday – Thursday to and – Friday to and – 15 30

4. A few words about the second midterm exam

5. Midterm 2 topics GDP CPI Unemployment Production and growth
The financial system: saving and investment
The open economy
Lecture note slides for Midterm 2: LN 16 – 25.
Midterm #1 topics will not be on the exam!
Only material covered in the lectures and lecture note slides.

6. Exam format 50 multiple choice questions, 60 minutes Closed book exam
For each question
Correct answer 2 points
Wrong answer 0 points
Unmarked question ½ point
Bring your pocket calculator

7. Make up exam policy
Same format, same topics, same level of difficulty as the regular midterm exam #2
Must have valid excuse
Will be scheduled either before or during the first days of the final exam period, which is May 22 to June 1
No make up for the make up!

8. Studying for the second midterm
Do the midterms for 2012 and 2013
(re)Do the exercise sets
Come to office hours
Go to KOLT
Read the slides
Read the book (last resort if nothing else works)

9. THE SAMPLE EXAM

10. 1. The labor force equals the
number of people who are employed.
number of people employed + the number of people unemployed.
number of people who are unemployed.
adult population.
ANS: B

11. 2. Which of the following is counted as unemployed according to official statistics?
George, a full-time student who is not looking for work
Larry, who has retired (emekli) and is not looking for work
Mary, who is waiting for her new job to start
All of the above would be counted as unemployed.
ANS: C

12. 3. Sam just lost his job, but isn't yet looking for a new one. Sam is
counted as unemployed and part of the labor force.
counted as unemployed, but not part of the labor force.
not counted as unemployed, but counted as part of the labor force.
not counted as unemployed or counted as part of the labor force.
ANS: D

13. 4. For the economy as a whole
expenditure exceeds (is greater than) income because of taxes.
income must equal expenditure.
income exceeds expenditure because of saving.
expenditure exceeds income because of the government budget deficit.
ANS: B

14. 5. Gross Domestic Product is defined as the market value of
all final goods and services produced by a country’s citizens in a given period of time.
every good and service produced within a country in a given period of time.
all final goods and services produced within a country in a given period of time.
all goods and services produced by a country’s citizens in a given period of time.
ANS: C

15. 6. An American company has a fast-food store in İstanbul
6. An American company has a fast-food store in İstanbul. The value of the goods and services produced in the store are included
in both Turkish GDP and U.S. GDP.
in U.S. GDP, but not Turkish GDP.
partly in Turkish GDP and partly in U.S. GDP.
in Turkish GDP, but not U.S. GDP.
ANS: D

16. 7. The four components of GDP are consumption,
money supply, government purchases, and exports.
investment, transfer payments, and imports.
investment, government purchases, and net exports.
investment, government purchases, and foreign exchange
ANS: C

17. 8. Productivity is the growth rate of real GDP.
average amount a worker produces per hour.
level of real GDP.
None of the above is correct.
ANS: B

18. 9. The productivity of U.S. workers is higher than that of workers in many countries that have less capital. Which of the following arguments concerning these facts is logically consistent?
If U.S. workers have more capital, they should have lower productivity.
Productivity in the United States is higher because the United States has more workers than those countries having low productivity.
The United States could have greater productivity because its workers have both more human capital and more physical capital per worker.
None of the above is logically consistent.
ANS: C

19. 10. Which of the following is human capital?
a company’s cafeteria
the exercise equipment in a company’s gym
employees’ knowledge of the production process
All of the above are correct.
ANS: C

20. 11. Which of the following would increase productivity?
an increase in the amount of equipment per-worker
an increase in the knowledge and skills of workers
an increase in the number of employed workers
All of the above are correct.
ANS: both A and B seem like good answers to me!

21. 12. The CPI is a measure of the overall cost of
producer inputs.
personal imports.
goods and services bought by a typical consumer.
goods and services produced in the economy.
ANS: C

22. 13. Most, but not all, soccer balls used in the United States are imported from other nations. If the price of soccer balls increases, the GDP deflator will
increase, but the consumer price index will not increase.
increase less than the consumer price index.
increase more than the consumer price index.
not increase, but the consumer price index will increase.
ANS: B

23. 14. Which of the following is the most accurate (correct, precise) statement about the relationship between the nominal interest rate and the real interest rate?
The real interest rate is the nominal interest rate minus the rate of inflation.
The real interest rate is the nominal interest rate minus the price level.
The real interest rate is the nominal interest rate times the price level.
The real interest rate is the nominal interest rate times the expected price level divided by the current price level.
ANS: A

24. 15. In 1970 Professor Fellswoop made $12,000, in 1980 he earned $24,000, in 1990 he earned $36,000. The CPI was 40 in 1970, 60 in 1980, and 100 in Given this information we can say that in terms of 1999 dollars, Professor Fellswoop’s salary was highest in
1970, and lowest in 1980.
1990, and lowest in 1980.
1980, and lowest in 1970.
1990, and lowest in 1970.

25. 2011 exam has no `open economy` questions

26. 42 Canada (the largest trading partner of the US) experiences an economic slowdown (recession, falling incomes, rising unemployment, etc.) Other things being equal
a. US net exports will not change
b. Canadian net exports will decrease
c. US net exports will increase
d. X US net exports will decrease

27. 44 Korean car manufacturer Hyundai expands its production facilities in Izmit. This transaction will _________ Turkey’s net capital outflow, and is considered a foreign ______ investment.
a. increase, direct
b. decrease, portfolio
c. X decrease, direct
d. increase, portfolio

28. 45 A country imports $250 billion of goods and services and exports $160 billion of goods and services. What is the value of net exports?
a. $160 billion
b. X –$90 billion
c. $410 billion
d. $90 billion

29. 46 A country (such as Turkey) that has large trade deficits (NX < 0) also has ___ saving, relative to its investment, and is a net _____ of loanable funds in international financial markets.
a. X low, borrower.
b. low, lender.
c. high lender.
d. high, borrower

30. 49 France saves €1,000 billion and French net capital outflow is ‒€200 billion. French domestic investment (I) must be
a. €1,000 billion.
b. €200 billion.
c. X €1,200 billion.
d. ‒€200 billion

31. 50 A trade deficit means that the country as a whole is spending _______ its current income, AND is ____________ enough savings to finance its investment.
a. less than, not generating
b. X beyond, not generating
c. beyond, generating
d. less than, generating

32. Short answer questions

33. 1) The GDP of Farmistan has only two goods : milk and honey
1) The GDP of Farmistan has only two goods : milk and honey. Prices are quoted in US dollars.

34. Milk
Honey
year P Q 1 $2 10 $5 20 2 $4 15 30
Compute nominal GDP in each year: Year 1: $2 x 10 + $5 x 20 = $120 Year 2: $4 x 15 + $4 x 30 = $180
Increase:
This example is similar to that in the text, but using different goods and different numerical values.
Suggestion: Ask your students to compute nominal GDP in each year, before revealing the answers. Ask them to compute the rate of increase before revealing the answers.
In this example, nominal GDP grows for two reasons: prices are rising, and the economy is producing a larger quantity of goods.
Thinking of nominal GDP as total income, the increases in income will overstate the increases in society’s well-being, because part of these increases are due to inflation.
We need a way to take out the effects of inflation, to see how much people’s incomes are growing in purchasing power terms. That is the job of real GDP.
50%

35. Compute real GDP in each year, using year 1 as the base year:
Pizza
Latte
year P Q 1
$10 10
$2.00 20 2 $4 15 30 $2 $5
Compute real GDP in each year, using year 1 as the base year:
Increase:
This example shows that real GDP in every year is constructed using the prices of the base year, and that the base year doesn’t change.
The growth rate of real GDP from one year to the next is the answer to this question:
“How much would GDP (and hence everyone’s income) have grown if there had been zero inflation?”
Thus, real GDP is corrected for inflation.
Year 1: $2 x $5 x 20 = $120
Year 2: $2 x $5 x 30 = $180
50.0%

36. GDP deflator for year t =
[nominal GDP in year t]
[real GDP in year t]

37. year Nominal GDP Real GDP GDP deflator 1 $120 100 2 $180
Again, the growth rate of real GDP from one year to the next is the answer to this question:
“How much would GDP (and hence everyone’s income) have grown if there had been zero inflation?”
This is why real GDP is corrected for inflation.

38. 2) The statistics for the country of Absurdistan in year 2007 show that there were 15 people who are unemployed, and 45 people who were employed. The adult population of the country in that year was 80. Use this information to calculate a. the labor force b. the labor force participation rate c. the unemployment rate

39. Adult population: 80
Employed: 45
Employed: 15
Labor force is unemployed + employed: = 60
Labor force participation rate =
100x [labor force / adult population] :
100x [60/80] = 75%
the unemployment rate 100x[unemployed / labor force] : 100x[15/60]= 25%

40. 3) The typical consumer in the Democratic Republic of Fun consumes 10 hamburgers and 15 movie tickets. The table (see next slide) shows their prices for 2004 – 2006.
The base year is 2004.

41. 10 hamburgers, 15 movie tickets
Question: How much did the basket cost in 2004?
Answer: 200!
10x5 + 15x10 = 200

42. 10 hamburgers, 15 movie tickets
What is the CPI in 2005?
In 2005 the basket costs 310 = 10x7 + 15x16.
CPI(2005) = 100x(310/200) = 155

43. 10 hamburgers, 15 movie tickets
What is the inflation rate from 2004 to 2005?
Inflation = % change in the CPI
[(155 – 100)/ 100]x100 = 55%

44. 4) In a closed economy, explain the effects of an increase in the government (public) deficit on the capital markets (market for loanable funds). How is the real interest rate affected by this? How is the and investment affected by this? Draw a graph and explain your answer. Do not forget to label the axes.

45. €800 €1,200 Interest S2 Supply, S1 Rate Demand 1. A budget deficit
decreases the
supply of loanable
fund
s . . .
€800 6% 2.
. . . which
raises the
equilibrium
interest rat
e . . .
€1,200 5%
Loanable Funds 3.
. . . and reduces the equilibrium
quantity of loanable funds.
(in billions of euros)
Copyright©2010 South-Western

46. End of the lecture