Econ 102 Section 4 – Principles of Macroeconomics

Instructor: C. Burkart

Exam #3  [80 points total]

February 15, 2006

Questions 1 through 15 are worth 4 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.  Be sure to read each question carefully so that you know what it is asking and what each answer means.

1.      The type of unemployment that rises when an economy is in a recession is:

a.      cyclical.

b.      seasonal.

c.      frictional.

d.      structural.

2.      The type of unemployment that rises due to technological innovations is:

a.      cyclical.

b.      seasonal.

c.      frictional.

d.      structural.

3.      The type of unemployment that would be reduced the most by providing information about available job opportunities is:

a.      cyclical.

b.      seasonal.

c.      frictional.

d.      structural.

4.      Which of the following would be a redistributive cost of inflation?

a.      The actual nominal rate on a loan compared to the expected nominal rate.

b.      Reprinting menus and price tags.

c.      Comparison Shopping.

d.      The real amount paid back for a loan compared to the expected real payments.

5.      Which of the following is an example of structural unemployment?

a.      An auto worker who loses his or her job due to a new process that can paint cars during the steel making process.

b.      An auto worker who loses his or her job due to slack demand for cars.

c.      A landscaper who gets laid off during the winter.

d.      A college student looking for a job after graduation.

6.      Mark lends Carolyn $50. He wants to earn a real rate of interest equal to 4%. If the inflation rate is expected to be 20%, what nominal rate of interest should he demand?

a.      4%.

b.      16%.

c.      20%.

d.      24%.

7.      Jack lends Barbara $100. He expects to earn a real rate of interest of 5% and he charges Barbara a nominal rate of 12%. What is his expected rate of inflation?

a.      5%.

b.      7%.

c.      12%.

d.      17%.

8.      A gold coin is an example of:

a.      commodity money.

b.      fiat money.

c.      a bond.

d.      currency issued by private banks.

9.      The value of a price index in the base year is:

a.      always equal to 100.

b.      always a positive percent.

c.      always equal to zero.

d.      measured in percentage terms.

10.  If the current value of the CPI is 75, prices now are:

a.      75% lower than in the base year.

b.      25% lower than in the base year.

c.      75 times higher than in the base year.

d.      2.5 times higher than in the base year.

11.  Your aunt dies and leaves you $1,000 in cash on January 1, 1999. She stipulates in her will that you must either spend all the money immediately or lend it to your Aunt Gertrude. Gertrude has guaranteed to pay you $1,050 on January 1, 2000. You expect the inflation rate to be 6% in 1999. What should you do?

a.      Spend the money because the expected real rate of interest is less than the inflation rate.

b.      Spend the money because the expected real rate of interest is negative.

c.      Lend Gertrude the money because the nominal interest rate is positive.

d.      Lend Gertrude the money because you will earn a real rate of interest of 1%.

12.  Which of the following would be an example of fiat money?

a.      A gold coin.

b.      A gold necklace.

c.      A gold-colored piece of paper money.

d.      A silver coin.

13.  Mike lends Rene $100. He wants to earn a real rate of interest equal to 5%. If the inflation rate is expected to be -3%, what nominal interest rate should he demand?

a.      8%.

b.      2%.

c.      1.6%.

d.      Minus 2%.

14.  The resource cost of inflation refers to

a.      The opportunity cost of the resources spent coping with inflation.

b.      The redistribution of resources due to inflation.

c.      The lost purchasing power due to inflation

d.      The lost real income due to inflation

15.  If prices (as measured by the CPI) fell by one-half and nominal wages fell by one-third, what would happen to real wages?

a.      They would fall by one-third.

b.      They would increase.

c.      They would decrease.

d.      They would remain unchanged.

Question 16 [10 pts.] Some hypothetical country uses the same method to calculate the unemployment rate as the U.S. Bureau of Labor Statistics (BLS).  From the data below, compute this country’s unemployment rate:

1,000,000 searching / 5,000,000 labor force => 20% unemployment

Question 17 [10 pts] Given the following year-end data; calculate the inflation rate for years 2, 3, and 4.  Calculate the real wage in each year:

Extra Credit [10 pts. up to max total score of 80/80] Complete the following table (CPI numbers are for the end of each year).