Economics 219
Practice
Midterm #1
1) ( 5 points) Suppose that the return on a 90-day T-Bill is 2%. What would the annualized return be? (Note: it is acceptable to leave this as a mathematical expression)
2)
( 5
points) It is usually assumed that labor and capital are complements in production. What
does this assumption imply about the relationship between employment and the
productivity of capital?
3) ( 5 points) Annual returns in the stock market over the past 50 years have averaged around 12% while annual returns to government securities such as 90 day T-Bills and 10 yr. T-Bonds have averaged 4% and 6% respectively. How can we account for the difference in returns?
4) (5 points) Suppose that the nominal interest rate on 1-year government bonds is 5% and the yearly inflation rate in 2.5%. What is the real return on 1-yr. Government bonds?
5) (5 points) Interest rates tend to rise prior to an economic expansion and fall prior to a contraction. How can this fact be explained by “consumption smoothing”?
6) ( 5 points) Analyze the following statement: “The 1980 movie E.T. made more money than the 1939 movie Gone with the wind.
7) (5 points) What does it mean for an economic variable to be procyclical or countercyclical? Give an example of a procyclical and coutercyclical variable.
8) (5 points) Why is it that long term securities such as 10 year T-Bills tend to pay higher returns than short-term securities such as 90 day T-Bills?
9)
(10
points) Suppose
the government passes some new legislation that makes it easier for foreigners
to immigrate to the US. As a
result, thousands of new immigrants flood into the United States.
a)
What
should happen in the labor market as a result of the large influx of workers?
What happens to the real wage and employment?
What should happen to national income?
b)
What
should happen to savings, investment, and the real interest rate?
10) (10 points) Recently, there has been some discussion of having the government issue “indexed bonds”, meaning bonds whose payments are indexed to inflation. Suppose the government in 1996 issues a 3-year indexed bond, promising to pay $250 in constant 1996 dollars each year from 1997 until 1999.
a)
If the inflation rate is 4% per year, what will the dollar payments be in
1997, 1998, and 1999?
b) Suppose the nominal interest rate is 7% per year. Compute the value of the indexed bond. Why might investors prefer indexed bonds to non-indexed bonds?
11) (10 points) Suppose that there are 100 people in the economy. Of these, 90 people are either working or actively looking for a job. Each month, 5 people lose their job, and take one month to find a new one. Each January, 3 people lose their job and take a year to find a new job.
a) What is the unemployment rate in the economy?
b) What is the participation rate?
c) What is the average duration of unemployment?
12) (10 points) Suppose you have the following data on an economy:
Gross Domestic Product (Y): $1000
Government Purchases (G): $200
Tax Revenues (T): $150
Private Savings (S): $100
Find Consumption Expenditures (C) and Investment Expenditures (I).
13) (10 points) Empirically, average labor productivity are positively correlated with output while the real wage has little or no correlation with output. Can we explain these empirical facts using our labor market model? Explain.
14) (15 points) Suppose that you are a college senior. You are currently earning $5,000 per year working at the campus bookstore. Next year, after graduation, you expect to earn $30,000 per year. The interest rate on both saving and borrowing is 5%.
a) Sketch your budget set for spending this year and next year. Be sure to label the relevant points. Would you most likely be a borrower or a lender? Why?
b) Suppose you learn that your future income will be higher that you
originally anticipated. How do you think this will affect your savings decision?
15)
(15
points) The Acme
Rug Co. has the following technology for producing rugs.
|
#
of Looms |
#
of Rugs (per yr) |
|
1 |
100 |
|
2 |
180 |
|
3 |
240 |
|
4 |
270 |
|
5 |
285 |
|
6 |
295 |
|
7 |
300 |
Looms cost $1000 apiece while the rugs can be sold
for $10 apiece. Looms depreciate at
a rate of 10% per year and the nominal; interest rate is 5%.
a)
Calculate
the marginal product of capital
b)
Calculate
the user cost of capital
c)
How many
looms should the Rug Company purchase? (assuming it currently has none)
16)
(15
points) Suppose the nominal wage rate is $10/hr., and the average price of
consumption goods is $2. You have
80 hours per week available to work.
a)
Sketch
your budget constraint and indicate a labor choice.
b)
Now,
suppose that you receive an unexpected inheritance of $100 from a long lost
aunt. Show the effect of this gift
on your budget constraint and your labor choice.
c)
Suppose that your firm adds a “time and a half” overtime premium.
That is, any hours over 40 hrs/wk. Pay $15 dollars rather than $10.
What happens to your budget set? What
happens to your labor supply decision? (Be
careful here!)
17)
(15
points) Suppose you have the following information regarding the production of
Hula-Hoops