EID

Name

First Initial of last name !

ECO 304L
FALL 2014

Midterm 1 Part 1 Problems (KEY) VERSION A

3 questions (50 points)
Instructions:
This exam has two parts:
Part 1 has 3 problems (50 points) and Part 2 has 50 multiple choice questions (50 points).
1. Fill in your name and EID on both parts.
2. Fill in your name and your EID on your SCANTRON
3. Sign the honor code below.
4. Part 1: Answer the questions in the spaces provided.
(It is recommended that you start with Part 1.)
Show your work on the problems to receive full credit.
Part 2: Answer the multiple choice questions on the SCANTRON.
Honor code:
"The core values of The University of Texas at Austin are learning, discovery, freedom,
leadership, individual opportunity, and responsibility. Each member of the University is
expected to uphold these values through integrity, honesty, trust, fairness, and respect
towards peers and community."

______________________________________
full signature

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I.

(____________ of 20 points) Below is a table of data showing the output and prices
for all goods produced in a fictitious economy. The base year is 2012.
Guns

Butter

Widgets
Q

2011
2012
2013

Fill in the table below.

PG

QG

PB

QB

PW

$1,200
$1,300
$1,350

100
110
110

$15
$20
$22

1000
1100
1200

$7,500
$8,000
$10,000

15
20
18

There are subsections below for you to show your work.

Nominal GDP Real GDP (2013)

2011

$270,000

2012 $325,000


2013 $354,900

GDP Deflator

Inflation

------------

1. (___________ of 3 points) Show your calculation of Nominal GDP in 2011.

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2.

(____________ of 3 points) Show your calculation of real GDP in 2013. Also make
sure to fill in the value for real GDP in 2012 in the table, but there is no need to show
your work for that year.

3. (____________of 5 points) Show your calculation of the GDP deflator for 2011 and
2013. Also
fill in the value for 2012, but there is no need to show your
calculation.

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4. (____________ of 4 points) Show your calculation of the inflation rate for 2012 and
2013.

5. (____________of 5 points).Now assume that the nominal interest in 2012 and 2013 is
18.0%. What is the ex post or realized real interest rate in both years?

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II.

(____________ of 15 points) Below is a table of data showing different groups in the

population of the country of Austonia. Use this information to answer the following
questions.

Persons employed full time

5,000
Persons employed part time by choice
750
Persons employed part time that want full-time work
600
Workers who were laid off and who are looking for work
350
Workers that are on temporary lay-off
50
Persons who quit former job to look for new job
250
College students
150
Retired persons
500
Homemakers
300
Prison inmates and persons held in mental health institutions
250
Children under sixteen
1,500
Armed forces personnel
550
TOTAL POPULATION
10,250

6. (____________of 3 points) What is the Adult Civilian Population for Austonia?

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7. (____________ of 4 points) What is the labor force participation rate for Austonia?

8. (_____________of 3 points) What is the employment - population ratio in Austonia?

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9. (____________ of 3 points) What is the unemployment rate in Austonia?

10. (____________ of 2) If Austonia's economy is currently in a recession, then the

unemployment rate that you calculated above must be ___________________ the
natural rate of unemployment (circle one).
A) above
B) below

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III. (____________ of 15 points) The Statistical Bureau for Austonia has determined that
the typical household consumes a basket of goods consisting of just two items,
textbooks and tacos. The basket consists of 10 textbooks and 365 tacos per year.
Below is a table showing the prices for these items in three different years. The base
year is Year 1. Use this information to answer the questions below.
Prices
Year 1
Textbooks
Tacos

$
$

11. (____________ of 3 points).

100.00
5.00

Year 2
$
$

110.00
4.50

Year 3
$
$

120.00
5.00

What is the value of the CPI in Year 1?

12. (____________ of 4 points). Calculate the CPI in Year 2.

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13. (____________ of 4 points).Calculate the CPI in Year 3.

14. (____________ of 4 points). Calculate the inflation rate in Year 2 and Year 3.

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Answer Key
1.

PGQG + PBQB + PWQW = (1200)(100) + (15)(1000) + (7500)(15) = $247,500

2.

where all price are 2011 prices.

To calculate real GDP in any year, the prices in the equations below are base
year (2012) prices.

2013:
3. Let

PGQG + PBQB + PWQW = (1300)(110) + (20)(1200) + (8,000)(18) = $311,000

be the GDP deflator in year t. Then

4.

5.
6. Adult Civilian Population = Total Population - Armed forces personnel - chidlren under
16 - Prison inmates and persons in institutions = 10,250 - 550 - 1500 - 250 = 7950
7. Labor force = E + U; E = persons employed full time + persons employed part time by
choice + persons employed part time that want full-time work = 6,350. U = Worders
laid off who are looking for work + workers on temporary layoff + Persons who quit
former job to look for new job = 650. So Labor force = E + U = 7,000.

8.
9.
10.
11.
12.
13.

Labor force participation rate = Labor force/Adult civilian pop x 100.0% = 7,000/7,950
x 100.0% = 88.1%
Employment - Population ratio = E/Adult Civilian Pop x 100.0% = 6350/7950 x 100.0%
= 79.9%
u = U/(E+U) x 100% = 650/7000 x 100% = 9.3%
A
Since Year 1 is the base year, by definition, the CPI must be 100.0.
The CPI in Year 2 is the ratio of the cost of the basket in Year 2 to the cost in Year 1,
the base year. The cost of the basket in Year 1 is $2825 and in Year 2 the cost is
$2742.50. So the CPI is 2742.50/2825 x 100.0 = 97.1.
The CPI in Year 3 is the ratio of the cost of the basket in Year 3 to the cost in Year 1,

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the base year. The cost of the basket in Year 1 is $2825 and in Year 2 the cost is
$3025. So the CPI is 3025/2825 x 100.0 = 107.1.
14. The inflation rate in year 2 is the rate of change of the CPI or (CPI (year 2) - CPI (year
1))/CPI (year 1) x 100.0%= (97.1 - 100.0)/100.0 x 100.0% = -2.9%.
The inflation rate in year 3 is the rate of change of the CPI or (CPI (year 3) - CPI (year
2))/CPI (year 2) x 100.0%= (107.1 - 97.1)/97.1 x 100.0% = 10.3%.

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