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Midterm #1

Smitka sections Economics 102 Midterm #1 Fall 2017

Due 5:00 pm Tuesday October 10th in Huntley 125B
You may type or handwrite. No Blue Book required.
Pledge! Please limit your time to 90 minutes.

Read everything before you write anything. Show off! – use jargon. This is NOT an essay exam. Aim for brevity. Budget 5 minutes per question, and use any remaining time to check your answers. You may handwrite or type. If you use more than one sheet of paper, please put your name on each sheet - no need to staple if you do that.

  1.   For centuries politicians have railed against imports; the current administration is not an exception. So why should we allow foreign goods to cross our borders, robbing Americans of job opportunities?
  2.   If the growth of the U.S. economy continues apace, short-term interest rates will rise. (We’ll look at why later this term.) What will happen to the value of the U.S. dollar relative to currencies such as the Chinese yuan and Mexican peso? Is that good or bad?
  3.   GDP accounting
    1.   Investment has been flowing into U.S. stock markets; the S&P 500 and Dow Jones average are all at record highs, and over the last two years the NASDAQ index has risen to 25% above its level at the peak of the dot.com era. How does that affect GDP?
    2.   I just bought a used Subaru Forester. How does that affect GDP? How about if I had bought a new Audi Q-series, all of which are now made in Mexico?
  4.   The “headline” unemployment rate for September 2017 was 4.2%. What are the strengths and weaknesses of that metric for how the labor side of the US economy is doing?
  5.   Keynes, the founder of macro, quipped that in the long run we are all dead. Since it can take an economy decades to reach an equilibrium, models where that’s true have little practical value. Now investment fell during the Great Recession. If President Trump can convince firms to reverse that behavior and permanently raise investment, then will he succeed in making America great again, returning us to the “extraordinary” economy of his childhood?
  6.   Calculating the impact on consumers and businesses of “π” inflation is straightforward, so as long as it remains steady we can build its effect in to wages and other long-term contracts. It is thus irrelevant in a sophisticated economy such as that of the U.S. Or are there exceptions?
  7.   The Consumer Price Index provides a precise measure of how rising prices affect your personal welfare – or does the CPI fall short of that goal? Argue briefly.
  8.   Real vs Nominal: The price of a Big Mac in the U.S. is $3.99; it costs 元20 in China. Given billions of burgers consumed in China, such sales add a lot to China’s GDP. Indeed, across all types of retails sales are up 10.5% while the CPI is up only 0.5%. Meanwhile this past year the exchange rate appreciated from 元6.95 to 元6.65 per US$, so each now burger now adds 20/6.65= $3.01 to GDP, up 4.5%. So – are my calculations right? – per capital GDP is thus up 10.5% + 4.5% or about 15%.