Midterm Exam (DUE 6/19) FileProblem Set (Take Home) #2 (DUE 7/1) File

EC 201-Principles of Macroeconomics
Exam #1
EC 201-Principles of Macroeconomics
BHCC-Summer 2019
Exam #1
NAME_______________________________________________________________________
Instructions: Please answer ALL of the Questions from 1 to 13 Below. For questions requiring computations, please show your work completely to get full credit. Good Luck!
1.
In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI has 50 units of food and 10 units of clothing. (4 points)
    
    food
    clothing
    2002 price
    $4
    $10
    2003 price
    $6
    $20
a. What are the percentage increases in the price of food and in the price of clothing?
Food: )*100=50% ; Clothing: ()*100 =100%
b. What is the percentage increase in the CPI? (hint: Calculate % change in total market basket for the goods from 2002 to 2003)
Cost of CPI basket in 2002 = ($4 x 50) + ($10 x 10) = $300100()=100.00%
Cost of CPI basket in 2003 = ($6 x 50) + ($20 x 10) = $500 100()=166.67%
The percentage increases in CPI = 166.67%-100%=66.67%
2. List and explain in your own words the three major problems in using the CPI as a measure of the cost of living. (6 points)
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive.
(2) Introduction of new goods. Because the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced.
(3) Unmeasured quality change. Not all quality changes can be measured.
3. Henry Ford paid his workers $5 a day in 1914 when the CPI was 10. Today with the price index at 177 the $5 a day is worth how much? (2 points)
$ 5* 177/ 10 = $88.5 at today’s times.
4. Both the standard of living and the growth of real GDP per person vary widely across countries. (TRUE/FALSE)
True
5. What is a production function? Write an equation for a typical production function, and explain what each of the six terms represent. (7 points)
A production function is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs - generally capital and labor.
A typical production function could be written as
Y= AF (L, K, H, N)
Where:
Y denotes the quantity of output,
L the quantity of labor,
K the quantity of physical capital,
H the quantity of human capital, the quantity of natural resources and,
A is a variable that reflects the available production of technology.
6. Which of the following is an example of the "brain drain"?
a.
A country's most highly educated workers emigrate to rich countries.
b.
A country has such a poor educational system that human capital falls over time.
c.
The population of a country grows so fast that the educational system can't keep up.
d.
A country steals patented technology from another country.
7. In the first segment from the video, “Commanding Heights,” the famed Latin American economist Hernando de Soto tells the story of a coffee bean farmer from Tanzania, who when asked whether he can produce proof that he owns the land, asserted that he had no official deed but that he had purchased the land from someone years ago and the fact that he lives there today is proof enough that he owns it. In your own words, explain what De Soto’s main argument is about property rights and how it relates to a country’s standard of living? (2 points)
De Soto’s assertion about property rights in third world countries like Tanzania is that such countries do not have a national formal system in the field of law and information, thus the property market is highly unorganized and there are lot of informal norms which is based on trust, proximity and nepotism. Thus, many property in such countries lack proper papers and documentation that make it difficult for its conversion to capital and thus cannot be used as investment.
8 Below is a graph showing the market for loanable funds.
Market for Loanable Funds
Assume that this economy is currently running a major deficit. Show on the graph above what would happen to the interest rate and investment (as marked by the quantity of loanable funds available to firms) if the government pursues policies that would go from a...