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Basic Macroeconomics_Examinations_Midterm Examination_Tak Home Macroeconomics CRN 31731 ECON 1100-D625 Midterm Examination Fall 2019 Instruction: Answer 4 of the following 5 questions using no more than 1-page for each question (4-pages in total for the midterm examination), and a separate page to illustrate each graph (3-pages in total for the midterm examination). Question 2 and Question 5 are mandatory. You must them. Although, this is not a timed examination, if you are timing yourself, each question should take you on average no longer than 20-minutes to answer. If you want to receive extra credit you may answer all 5 questions. I will grade for only the highest of the 4 questions answered from the 5 questions, and I will grade for the lowest of the 5 questions at 10% for end of term extra credit. There is no need to rewrite each question. It is sufficient to type only your answers with the corresponding question number into a Word document. However, be certain to incorporate every step instructed in the question into your answer. I will be reading your answers critically for the content. I am available by email to answer any questions related to the midterm examination. The completed midterm examination must be submitted as a hard-copy in class on Friday, November 1st. Best of luck! Student’s Name: ________________________________ 2 1.) Scarcity and Choice (20 Points) _________/_________ Understanding what the market system does well and what it does badly is essential for developing solutions to the fundamental economic problem: how to best manage the resources of society despite their scarcity. As a result, all economic decisions involve trade-offs. A well- functioning market system facilitates such decisions by assigning an input to where it will best serve society. The supply and demand model show how a competitive market behaves. This model is the most basic tool used by economists to measure and illustrate how the interactions in a market system determine price and quantity. First, briefly explain the reason(s) why the true cost of any decision is its opportunity cost; Next, list the three factors of production that economists characterize into resources and briefly explain the reason(s) choices must be made among a limited set of possibilities; Then, briefly explain an optimal decision you recently made. In doing so, be certain your answer includes an explanation of the reason(s) it best served your objectives and how you allocated resources in your decision-making process; and, Lastly, critically analyze the following video (you need not watch more than 5-minutes of the video) focusing on one area of inquiry related to scarcity and choice. In doing so, you should limit your use of information in your analysis to the production possibilities frontier and the principle of efficiency: Land Rush https://www.pbs.org/video/why-poverty-land-rush/ 3 2.) Demand, Supply and Price Control (20 Points) __________/__________ A demand curve is a graphical representation of how much of a good or service households will want to buy at different prices. A supply curve is a graphical representation of how much of a good or service a firm is willing to sell at some specific price. The intersection of the demand and supply curve is called equilibrium. First, briefly explain the laws of supply and demand. In doing so, be certain your answer includes an explanation of the relationship between price and quantity for goods that are substitutes and for goods that are compliments; Next, briefly explain the relationship between price and quantity above the equilibrium price, and the relationship between price and quantity below the equilibrium price. In doing so, be certain your answer includes an explanation of the two separate conditions that result from each relationship; Then, using the following supply and demand schedules for eggs, graphically illustrate the supply curve and demand curve for eggs, being certain that you fully label the graph. In doing so, be certain your answer includes labeling the equilibrium price and quantity of eggs; Demand Schedule Price of Eggs (per dozen) Quantity of Eggs (dozen) $8.00 1 $5.00 2 $3.00 4 $2.00 8 $1.50 10 Supply Schedule Price of Eggs (per dozen) Quantity of Eggs (dozen) $8.00 10 $5.00 8 $3.00 4 $2.00 2 $1.50 1 Next, graphically illustrate simultaneous shifts of the demand and supply curves for eggs, where there is a small rightward shift of the supply curve and a larger leftward shift of the demand curve, being certain that you fully label the graph. In doing so, be certain your answer includes an explanation of what happens to the equilibrium price and equilibrium quantity of eggs as a result of the shifts and what could have caused the supply curve to shift rightward and what could have caused the demand curve to shift leftward; Then, briefly explain the two types of price controls that result in market inefficiency. In doing so, be certain your answer includes an explanation of the relationship between price and quantity for goods as well as specific market inefficiencies that result from each of the two types of price controls; and, Lastly, critically analyze the following article focusing on one area of inquiry related to supply and demand. In doing so, you should limit your use of information in your analysis to content only from Chapter 4 Supply and Demand – An Initial Look: Biggest US Egg Producer Plunges As Supplies Soar And Prices Drop https://www.bloomberg.com/news/articles/2019-09-30/biggest-u-s-egg-producer-plunges-most-ever-as-supplies-soar 4 3.) GDP & National Accounts (20 Points) __________/__________ National income accounts measure the level of aggregate economic activity in a country. GDP is the total value of all final goods and services produced in the economy during a given year. Aggregate spending is a way to calculate the total spending on domestically produced final goods and services in the economy by adding together consumer spending, investment spending, government purchases of goods and services, and exports minus imports (C+I+G+X-IM). First, briefly explain the following economic relationship: Production = Expenditure = Income In doing so, be certain your answer includes an explanation of the role firms and households engage in this representation of the national income accounting system; Next, identify the five components that the national income accounting identity decomposes GDP into; Then, briefly explain the differences between intermediate goods and services and final goods and services; Next, briefly explain the reason(s) why Physical Capital Depreciation, Home Production, the Underground Economy and Externalities are not measure by GDP. In doing so, be certain your answer includes and explanation of the reason(s) why GDP leaves out these factors as well as how these factors impact the economy; Then, calculate nominal GDP, real GDP and the GDP deflator in the following fiscal years and briefly explain the differences in the use of each type of GDP and the GDP deflator in explaining an economic condition: Next, briefly explain how national income is used to measure economic activity and the reason(s) why GDP is a measure of an economy’s production, not the increase in its well-being; and, Lastly, critically analyze the following article focusing on two areas of inquiry – one related to supply and demand and the other related to GDP. In doing so, you should limit your use of information in your analysis to content only from Chapter 4 Supply and Demand – An Initial Look, Chapter 5 An Introduction to Macroeconomics and Chapter 8, Aggregate Demand and the Powerful Consumer: GM Buyers And Owners Could Soon Start Feeling Impact of UWA Strike https://www.cnbc.com/2019/09/21/gm-buyers-and-owners-could-soon-start-feeling-impact-of-uaw-strike.html GM Chevy Quantity Price Quantity Price Nominal GDP Real GDP (2014) GDP Deflator 2014 30 $35,000 15 $48,000 2015 50 $52,000 30 $60,000 5 4.) Income Determination (20 Points) __________/__________ We live in a world of great disparities. Standards of living, educational opportunities, health services, and infrastructure differ across countries. Economists study such disparities to understand and explain why an economy grows and becomes more prosperous over time while fundamental factors remain that keep poor countries poor. First, calculate the market basket value, consumer price index and inflation rate, and briefly explain the significance of each in your calculation in explaining an economic condition: Next, calculate the exchange rate and Mexican Income per capita in U.S. dollars and briefly explain the significance of your calculation in explaining an economic condition: Then, calculate the purchasing power parity (PPP) and Mexican Income per capita, purchasing power parity in U.S. dollars and briefly explain the significance of your calculation in explaining an economic condition: Next, briefly explain how GDP is used to understand the differences that exist across countries; Then, briefly explain the correlation between income per capita and welfare measures (i.e. absolute poverty and life expectancy)? In doing so, be certain your answer includes an explanation of what this correlation suggests about income per capita as a measure of welfare; Next