Some Practice Problems for Exam 1

 

1. In 1982, the average hourly earnings of private nonagricultural production workers were $7.68 per hour.  By 2000, the average hourly earnings had risen to $13.75.  In 2000, the CPI was 172.2, compared to 96.5 in 1982.  What were the real earnings of private non-agricultural production workers in 2000 measured in 1982 dollars?

 

 

 

 

2. The nominal salary paid to the US President along with data for the CPI are given for various years below:

 

Year	Presidential Salary	CPI (2000 = 100)
1920	75,000	11.6
1940	75,000	8.1
1960	100,000	17.2
1980	200,000	47.9
2000	400,000	100

     

a.       Which year was the real presidential salary the highest?

 

 

 

 

3. Indicate how each of the following activities will affect this year’s GDP:
   1. The $25 sale of a used economics textbook to the UVA bookstore.
   2. Family lawn services provided by Smith’s 16-year-old child.
   3. Lawn services purchased by Smith from the neighbor’s 16-year-old child who has a lawn-mowing business.
   4. $60,000 of income earned by an American college professor teaching in England.

 

 

 

 

Name three things that are omitted from GDP that might cause a downward bias in GDP. 

 

 

 

 

4. The accompanying chart presents 2000 data from the national income accounts of the United States:

 

Component	Billions of Dollars
Personal Consumption	6757
Employee Compensation	5638.2
Rents	140
Gov’t Consumption and investment	1743.7
Imports	1468
Depreciation	1257.1
Corporate profits	946.2
Interest income	567.2
Exports	1097.3
Gross private investment	1832.7
Indirect business taxes	699.6
Self-employment income	710.4
Net income of foreigners	-4.4

 

Choose either expenditure or income approach to calculate GDP – tell which factors go to your approach, and calculate.

 

 

 

5. What is full employment?  When full employment is present, will the rate of unemployment be zero?  Explain.

 

 

 

 

 

6. Using the following data, calculate (a) the labor force participation rate, (b) the rate of unemployment, and (c) the employment/population ratio:

 

Population                             10,000

Labor force                           6,000

Not currently working            4,500

Employed full-time                 4,000

Employed part-time               1,500

Unemployed                          500

 

 

Classify each of the following as either employed, unemployed, or not in labor force.

a.       Sally stays at home to raise her 3 young children.  Sally used to be a teacher, and plans to return to teaching after her children have graduated from high school.

b.      Andrea was recently fired from her job at McDonalds.  Her brother, who owns a Burger King, has told her that he expects to be able to hire her in a few months when business picks up again.

c.       Karen is a college student who grades papers for a mathematics professor for about 5 hours per week at minimum wage.  She has started searching for post-graduation jobs.

 

 

 

 

7. Name the four types of unemployment and give an example of each one.

 

 

 

 

8. Assume that both union and management representatives agree to wage increases because of their expectation that prices will rise 10 percent during the next year.  Explain why the unemployment rate will probably increase if the actual rate of inflation next year is only 3 percent.

 

 

 

 

 

9. Indicate how each of the following would influence US aggregate supply in the short-run:
   1. An increase in real wage rates
   2. A severe freeze that destroys half the orange trees in Florida
   3. An increase in the expected rate of inflation in the future

 

 

 

 

10. Explain how and why each of the following factors would influence current aggregate demand in the United States:

 

1. Rapid growth of real income in Canada and Western Europe.
2. A reduction in the real interest rate.
3. A higher price level

 

 

 

 

11. How will an increase in the inflation rate affect (a) the money rate of interest and (b) the real rate of interest?

 

12. Suppose the only two countries in the world are England and Portugal, and the only two goods that these countries produce are books and coffee.  England can produce 5 books per day and 10 pounds of coffee beans per day.  Portugal can produce 2 books per day and 8 pounds of coffee per day.  Who has the absolute and comparative advantages in each of these goods?  If the countries decide to trade, who produces what and what will the range of prices be of the goods (i.e. coffee must sell for less than ___ books per pound and more that ___ books per pound for the countries to both trade)?

 

 

 

13. If the present value of a good is $40, and the interest rate is 5%, what is the future value of the good a year from now?  In five years?

 

 

 

 

14. If actual inflation is greater than expected inflation, do we expect that firms are hurt or laborers are hurt?

 

 

 

 

15. Why is the supply curve for loanable funds upward-sloping?

 

 

 

 

16. If the average price of the appropriate market bundle of goods was $4,000 (in billions) in 1996 and $6,000 (in billions) in 1999, what is the GDP Deflator for both 1996 and 1999 using 1996 as the base year?

 

 

 

 

17. The nominal salary paid to the President of the United States along with data for the Consumer Price Index (CPI) is given for various years below.

 

 

Year	Presidential Salary	CPI (2000 = 100)
1920	$75,000	11.6
1940	$75,000	8.1
1960	$100,000	17.2
1980	$200,000	47.9
2000	$400,000	100

 

 

 

 

 

 

 

 

c.       The president’s nominal salary was constant between 1920 and 1940.  What happened to real salary?  Can you explain why?