# Aem 1300 Second Quiz July 8, 2016 name: cornell net id (Cornell Email Address) Signature

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AEM 1300

Second Quiz

July 8, 2016

NAME: ___________________________________________________

CORNELL NET ID (Cornell Email Address) __________________________
Signature ________________________________________________________

Point values for each question are indicated. Total points – 20

Part I: Multiple Choice Questions. Circle the correct answer. One Point Each!

1. Which of the following would be counted in the calculation of GDP?

1. Sales of goods that were produced outside our domestic borders

2. Sales of used goods

3. Transfer payments made by the government

4. Intermediate goods that are used to produce other final goods

5. The purchase of a new computer by a local firm

1. A construction company purchased ten tons of steel for use in a building project the firm is presently under contract to complete. The value of the steel the company purchased is:

4. None of the above.

1. The interest rate on a U.S. government Treasury bill is 5.10%, and the rate of inflation is 3.40%. The real interest rate is:

1. -1.70%

2. 1.80%

3. 1.70%

4. 0%

1. Recently, Jane has grown dissatisfied with her job and decides to try a new career in a new city. She quits her job, and begins the process of moving and finding new employment. Before this event, the last time she was unemployed was when her company was forced to dismiss her and some of her coworkers during a severe recession. The example of Jane leaving her firm for a new career is an example of ______ unemployment, and the example of Jane being laid off during a recession is an example of ______ unemployment.

1. frictional; cyclical

2. structural; frictional

3. natural; structural

4. cyclical; frictional

1. A student had to pay some unexpected taxes, and in a desperate attempt to raise money ended up selling her laptop informally to a friend. The value of the laptop she sold to her friend is:

4. None of the above.

Table 1. for Questions 7 and 8
 Good Quantity Consumed 2011 Price 2012 Price Hair Spray 5 cans \$1.50/can \$1.00/can Gasoline 20 gallons \$4.00/gallon \$4.10/gallon

1. Suppose CPI is computed using only two goods: hair spray and gasoline. To compute the level of the CPI index, a government agency uses the quantities and prices given above. From 2011 to 2012, the level of CPI is:

1. Increasing.

2. Decreasing.

3. Constant.

4. Not determined by given information.

1. Given your answer to the last question, the trend of the price level can best be described as:

1. Inflation

2. Deflation

3. Hyperinflation

4. No Change

8. Which of the following activities affects GDP?

1. A drug dealer sells \$10000 worth of illegal drugs.

2. You bought a used textbook \$50 from Ebay.

3. Apple Inc. issues new shares of stock to finance the construction of a plant in Texas.

4. General Motors buys new equipment to produce cars in Detroit,

5. None of the above.

9. If nominal GDP has increased, then we can conclude that:

1. Everybody in the economy is better off

2. Price levels are higher

3. There is more unemployment

4. All of the above

5. None of the above

10. GNP in Country X will be larger than GDP if

1. Country X lets immigrants freely enter the country and they send money home

2. Country X lets foreign companies mine gold there.

3. Country X earns profits on stock holdings in country Y

4. All of the above

5. None of the above

Part II: Essay Questions
Question 1 (6 points total)

1. What does GDP measure? (1 point)

The total market value of all final goods and services produced within a given period by factors of production located within a country

1. Briefly describe one of the two main approaches to measuring GDP. (1 point)

• Income approach: a method of computing GDP that measures the income–wages, rents, interest, and profits–received by all factors of production in producing final goods and services.

• Expenditure approach: a method of computing GDP that measures the total amount spend on all final goods and services during a given period.

1. What is the difference between GDP and GNP? Give an example of a good or service that would count as GDP in the US but not count as GNP (2 points)

• GDP is a territorial measure – GNP is based on factor ownership

• Examples could be a foreign owned factory, expatriate labor, etc.

1. Describe a situation where the nominal economy is growing, but the real economy is not. (2 points)

Price levels increase over time, but the real value of all final goods is not increasing over time.
Question 2 (4 points total)
 http://www.nytimes.com/2013/06/08/business/employment-in-us-lags-where-it-was-in-2007.html Employment in US lags where it was in 2007 The American economy may be the world’s biggest, but when it comes to job creation since the recession hit at the end of 2007, it is far from a leader. Indeed, contrary to the widespread view that the United States is an island of relative prosperity in a global sea of economic torpor, employment in several other nations has bounced back more quickly, according to a new analysis by the Bureau of Labor Statistics. The government reported Friday that the nation added 175,000 jobs in May, continuing a 32-month run of job gains. The unemployment rate moved up slightly to 7.6 percent, from 7.5 percent in April. But overall employment in the United States remained 2.1 percent below where it was at the end of 2007, according to the statistics bureau. By comparison, over the same period, between December 2007 and March 2013, the number of jobs was up 8.1 percent in Australia; Germany, the biggest economy in the troubled euro zone, has managed a 5.8 percent gain in employment. “The United States is way below where it should be,” said Lawrence F. Katz, a professor of economics at Harvard. “We had a massive downturn and a tepid recovery.”

1. What unemployment rate concept is Professor Katz referring to when he says: “The United States is way below where it should be.”

Natural Rate of Unemployment: the unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes it is taken as the sum of the frictional unemployment rate and the structural unemployment rate.

1. The labor force can be decomposed into the sum of two mutually exclusive components. Write an equation you could use to compute the unemployment rate in terms of these two quantities if you had the real numbers. Given what the report says, which component is causing the unemployment rate to decline?

• l = u + e

• The unemployment rate is u/(u+e) , the report indicates e is growing, causing the rate to decline.