EXAM#2: ANSWER KEY

Santa Rosa Junior College

Macroeconomics: Exam #2 (Short-Answer Questions)

 

1. Review question #10 in the study guide.

2. Here is a hint on how to approach the problem:

If the unemployed are 5.7% of the labor force, then the employed must be 94.3% of the labor force. In other words,  (1-.057%).

3. Here is a prior example of this question: Review it, learn it and apply it to the actual question and values used in your exam. If I gave you the answers directly, most of you wouldn't do your part in learning how to do it. Or watch the lecture in which we did this problem in class.

Let’s say you graduate from college and accept a job in 2021. You decide to compare your starting salary with your grandfather’s and mother’s starting salaries. The salaries you compare are:

  • You: $85,000 per year beginning in 2021
  • Your mother: $38,000 per year beginning in 1992
  • Your grandfather: $10,500 per year beginning in 1950 

a. To compare these salaries, you decide to use the CPI, using 1983 as the base year and fill in the missing cells: 

Year

CPI

1950

26.5

1983

100

1992

144.5

2020

253.1

b. Convert both your mother’s salary and your grandfather’s salary to 2019 dollars. Enter your answers in the table below. Show your work. Answers without any work shown will not be considered.

Grandfather’s 1950 salary in 2020 dollars

$10,500 x (253.1/26.5) = $100,285

Mother’s 1992 salary in 2020 dollars

$38,000 x (253.1/144.5) = $66,559

c. Briefly articulate what else, other than the CPI, could have been used for comparison. Which is better and why?

The GDP deflator as an index could have been used as well. However, the CPI used here is a better index because it represents a basket of goods that consumers spend their money on. So it compares the purchasing power of your income versus your relatives’ income spent on basically the same time of goods (consumer goods).

d. Articulate the results of your comparison. In other words, what can you say about your starting salary versus your mother’s and your grandfather’s?

A proper answer here would make reference to the fact that while your grandfather may have had a much smaller starting salary than yours, his purchasing power was much greater than yours as is evidenced by the fact that his starting salary in 2020 equivalent dollars is $100,285, which is greater than your $85,000.

 Your mother’s starting salary, while nominally and by real terms lower than yours, is also significant in today’s dollars as it reflects an equivalent 2020 value of $66,559.

4. Given your newly acquired knowledge of GDP, unemployment and inflation, briefly articulate whether the U.S. economy is currently operating in the Keynesian, intermediate or Neoclassical segment of the short-run aggregate supply curve. Please limit your response to one short paragraph of fifty words or less.

It was not enough to tell me in which segment you think the economy is. That only garners you two points. You need to substantiate with GDP, unemployment and inflation values. I was looking for neoclassical segment due to extremely low unemployment (well below the natural rate of unemployment), high rates of inflation resulting from increases in AD that raise the price level with proportionally less increases in GDP. If you answered intermediate, you received some credit based on whether your discussion of GDP, unemployment and inflation made sense. If you answered Keynesian, you probably received very little points because it's the total opposite of the neoclassical segment in which the U.S. Economy does not find itself.

5. Briefly discuss whether inflation is good or bad. Keep your response to 50 words or less.

On the one hand, a moderate rate of inflation (around 2% which is what is targeted by the Central Bank) is good because it signals economic activity; on the other hand, rates of inflation that outpace the rate of growth of real wages and income can be harmful because they reduce the value of money and reduce purchasing power.

6. Review the "Work it Out" problem on page 275 and 276 in the textbook. That is where I pulled this question from.

The answer to part b can be found on page 275 as well.