Midterm 1 Review

1)Consider the market for minivans. For each the events listed here, identify which of the determinants of supply and demand are affected. Also indicate whether demand or supply is increased or decreased. Then show the effect on the price and quantity of minivans.

  1. People decide to have more kids
  2. A strike by steelworkers raises steel prices.
  3. Engineers develop new automated machinery for the production of minivans.
  4. The price of SUV’s rises
  5. A stock market crash lowers people’s wealth

2)Explain the difference between nominal GDP and real GDP; define GDP deflator; explain the equation Y=C+G+I+NX, what do the letters represent?

3)Suppose the residents of Vegopia spend all their income on cauliflower, broccoli, and carrots. In 2003 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2004 they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100. If the base year is 2003, what is the CPI in both years? What is the inflation rate in 2004?

4)Ketchup is a compliment (and a condiment) for hot dogs. If the price of hot dogs rises what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?

5)The participation of women in the U.S. labor force has risen dramatically since 1970.

  1. How do you think this rise affected the GDP?
  2. Now imagine a measure of well-being that includes time spent working at home and taking leisure. How would the change in this measure of well-being compare to the change in GDP?

6)It has been suggested that a cigarette tax is a way to reduce smoking. What effect would this tax have on the markets for other tobacco products like cigars and chewing tobacco?

  1. Are these goods substitutes or complements for cigarettes?
  2. Using a supply and demand diagram, show what happens in the markets for cigars and chewing tobacco if the tax on cigarettes is increased and if the tax is decreased.

7)When deciding how much of their income to save for retirement, should workers consider the real or nominal interest rate that their savings will earn? Explain.

8)Explain the difference between saving and investment as defined by a macroeconomist. Which of the following situations represent investment? Saving? Explain.

  1. Your family takes out a mortgage and buys a new house.
  2. Your roommate earns $100 and deposits it into account at a bank
  3. You borrow $1000 from a bank to buy a car to use in your pizza delivery business

9)Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming this economy is closed; calculate consumption, government purchases, national saving, and investment.

10)Explain budget deficit and budget surplus; what is crowding out?

11)Where does the supply of loanable funds come from? Where does the demand for loanable funds come from?