ECON102: MACROECONOMICS MID-TERM EXAM

1) The Economy cannot be considered fully employed unless the measured unemployment rate is below 1%. Agree or disagree and ?explain your answer in a paragraph.? ?

2) A) Why would you expect the inflation rate to ?accelerate? if the actual unemployment rate declined to a level ?lower? than the "full employment" unemployment rate (NAIRU) and remained at that low level for a year or longer? Explain your answer in a few sentences.

B) Draw an AS/AD diagram illustrating your answer to part (A). Be sure to label all lines and axes in your diagram clearly.

3) A) Suppose Jean Splicer, an investor, buys $500,000 of shares of stock in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for $530,000. Assume the value of the CPI at the date of Jean's purchase was 190 and rose by the sale date one year later to 200 while the value of the GDP Deflator was 120 at the time of her purchase and rose to 125 by the date she sold her shares. What was Jean's ?real rate of return? on this investment?

B) Explain why you used either the CPI data or the GDPD data in your answer to part A.

4) A) Suppose that several months of data showed the CPI increasing at a 4 % annual rate due largely to increases in the price of energy and food related commodities following several years when the CPI only increased by 2.2 % per year. Suppose this increase causes investor ?expectations? of annual inflation to also increase from 2.2% to 4%. Assume, at the same time that fears of higher inflation create concerns that rising interest rates will derail the economic recovery and lead to another recession. Assume the resulting increase in risk aversion among investors drives the expected ?real rate of return? required to equate investor demand to the existing supply of 1 year Treasury notes down to 0.2 % from .6%. What would you expect to happen to the ?nominal yields? on 1-year T-notes during the period over which these changes in inflation expectations and required real yields occurred? (Give a numerical answer if possible) Explain your reasoning.

B) Draw a supply/demand diagram of the ?US Treasury bond market? to illustrate the effects on it of the developments cited in part A. (Note: you do not have to include the exact numerical price before and after the change in expectations.) Label your diagram clearly for credible answer!

5) Between Q1, 2014 and Q1, 2015 measured Output in the non- farm business sector increased by 3.2%. During this time period the unemployment rate fell from 6.6% to 5.5% and total hours worked in the nonfarm business sector increased by 2.8%. What was the % rate of change in labor productivity over the year? Explain your answer briefly.

6) Suppose that the Federal Government announced a tax rebate of $500 for all individuals filing singly and $1000 for all families filing jointly or as head of household in the upcoming tax year. Further, suppose that the Government budget included a broad based reduction in Government spending on goods and services, whose total amount was equal to the total amount of the tax rebates. What would be the overall impact on AD of these policy changes or would the policy change effects completely cancel each other out? Explain your answer briefly but concise to the point.

7) The Federal Reserve open market committee, which meets once discuss monetary policy met on June 21, 2016. Investors around the world are searching for clues about how soon and how fast the Fed will raise interest rates. In the FOMC report and Janet Yellen press conference following the meeting, what Aggregate Demand and Aggregate Supply circumstances influenced the Fed's guidance on the timing of future interest rate increases? (Note: the Fed does not use the words Aggregate demand and aggregate supply in its communications, but the underlying concepts very much inform their policy decisions).

8. Use the data in the Table below to answer the questions asked in a and b on each of the 3 basic macroecon variables for the US economy:

a. Calculate the changes in inflation rates, unemployment rates and the RGDP growth rates for the years from Year 2007 through 2015 and show them in a new column next to each of the values of the three variables (a template of the table is given below).

Source: for CPI and U-Rate date: ?www.bls.gov?; For RGDP data: ?www.bea.gov

b. Based on those calculations, briefly analyze the overall economic performance over the last 9 years (2007-2015) and critically predict about these three macroeconomic variables for 2016-17.

Hint: While predicting the trend for 2016-17 (based on the growth rates and trend you estimated in the table above), it is imperative to observe the most recent data on these three variables.