MIDTERM 2 ECN 201 SPRING 2012

1. A-Definition of frictional unemployment. 2. C-The type of unemployment that rises during recessions and depressions. 3. B- Definition of structural unemployment. 4. E- Discouraged workers are NILFs. They are not unemployed nor are they employed for that matter. 5. D-people who are frictionally or structurally unemployed are naturally unemployed. D is the best answer but I will also accept A and B. 6. B- 6 people are officially unemployed since they are actively looking for work. 100 people are in the labor force, which is the sum of the employed and the unemployed (i.e. 94+6). So the unemployment rate is 6/100 or 6/(94+6) or 0.06 or 6%. 7. A- the change in business inventories is a component of gross private domestic investment which is a part of gdp. 8. D-GDP only includes final goods, not intermediate goods. 9. A- net exports plus imports = (exports imports) + imports = exports. 10. B- gdp deflator = nominal gdp / real gdp. Hence (nominal gdp) = (gdp deflator) *( real gdp). 11. B-do it yourself work is not counted by national income accountants when they total up gdp. 12. A-(nominal gdp) equals (real gdp) in the base year since they both use the same set of prices. 13. A-Real GDP in 2010 = 2010 quantities times base year prices = $4*4 + $7*2 + $40*20 = $830. 14. A- The mpc is C/Y = (100.90-100)/(151-150) = 0.90. 15. C-The tax multiplier is mpc/(1-mpc) - 0.9/(1-.9) = -9. So a rise in taxes reduces gdp and a fall in taxes raises gdp in a simple Keynesian economy. 16. C- The multiplier for a rise or fall in government spending (or investment) is 1/(1-mpc). So if the mpc is 0.9, the multiplier for I or G is 1/(1-.9) = 1/0.1 = 10. So a $100 rise in government spending should raise GDP by 10*$100 or $1000. 17. C-if the mpc is 0.5, then the multiplier for taxes is -0.5/(1-0.5) of -1. So a $1 tax cut should raise real gdp by (-1)*(-1) = +1. So a $900 tax cut should raise real gdp by (-1)*(-900) = +900. And full employment is restored. If only it were this simple in the real world. We used to think it was. 18. B-every time you look at a price tag in a store, you are using the unit of account function of money.

19. D- cash in a banks vault is not money. Only if it comes out of the bank does it become part of the official money supply. 20. D-the FOMC does open market operations. Makes sense. 21. A- velocity by definition is nominal gdp divided by the money supply. Hence V = $800/$200 = 4. 22. B-if the real rate of interest = nominal rate of interest minus inflation, then nominal interest equals real rate plus inflation rate. 23. A- when recessions or depressions occur, somebody has to be the fall guy. Keynesians blame capital investment. Milton Friedman denied this. His fall guy was the Federal Reserve. 24. B-money to interest to investment to GDP. A great triple play combination. 25. B- OMO is number one in monetary policy. 26. A-nice job security. Seven for 14. 27. D-out of thin air. And no jail time.