Principles of Macro
Test Review

This being the first econ test for many of you, my goal is simply to ascertain whether you have absorbed the material in the book and listened to lectures. No tricks! Each of the questions below demands either a straightforward recitation of information or a simple analytical explanation. Now, on the test, I may (or may not) give you some context for asking the question. But the gist of your answer will be the same. My best advice to you is: READ THE BOOK!!!!!

1. How do economists measure the total output of the economy, and why do we do so?
Best measure we have of the standard of living in a country. Its all the transactions in the economy added up…its your biggest number. It’s a universally used concept and can be used for comparisons.

2. What are the limitations of our measure of output? In other words, what doesn’t it include that is important and what does it include that maybe doesn’t matter so much?
Nothing that’s useless. Doesn’t include household work. Seems a bit ‘wrong’ that when the work is done by one person it’s included but not included when someone else does it e.g. cleaning service vs. cleaning it yourself. Underground economy is not counted in GDP.

3. If I spend my afternoon studying when I could have gone to the Red Sox game, what is the opportunity cost of getting a better grade (assuming there is a correlation between studying and grades)? How might I have reduced the opportunity cost to make the game possible?
Study beforehand and go to game

4. Why is the demand curve downward sloping? Is the demand for Porsches downward sloping? What do we call goods like Porsches?
No because it’s a luxury good. As the price goes up you want more of it.

5. Is the supply curve always upward sloping? Draw the supply of labor curve. Can you imagine a differently shaped curve? How so?
A sideways curve (labor curve) as people make more money thy feel like they can work less

6. True or false: “Without anyone or anything to stand in their way, buyers and sellers will reach agreement at market equilibrium.” Explain.
True

7. Will changes in technology shift the supply curve or do they describe a movement along the curve?
Shift
8. What is the effect on the price of cattle if a nation’s sheep contract a deadly disease and die?
Increase

9. What is the effect on the price of Wisconsin cheese if in a trade spat, US authorities prohibit the import of cheese from Venezuela?
No effect (we do not import Venezuelan cheese)

10. Suppose there is, at a certain price, an excess supply of a good. What can you say about that price compared to the equilibrium price?

11. Suppose the government prevents the price of milk from falling below a certain level, but this has been a great year for agriculture. What will ensue?
Increase in supply of milk, the price will decrease. But if price floor is higher than original equilibrium price then supply will have to meet lower demand. If equilibrium is the price floor and new equilibrium is lower and is prevented form falling down the previous equilibrium is the price that would be set.

12. I will give you data and ask you to construct a price index, e.g. Exhibit 4, page 125 of your text.

13. What is the difference between the CPI and the GDP deflator?
GDP deflator is price index for GDP (all goods in GDP) CPI