Macroeconomics Practice Final Exam

This practice exam is designed to test your understanding of macroeconomics concepts covered
throughout the course. The practice exam, like the actual exam, is divided into three sections,
each requiring a different level of explanation and problem-solving. A formula sheet, identical to
the one provided in this document, will be available for your use during the exam.

Section 1: Short Problems

• Format: 15 short problems
• Coverage:
o One problem from each of the 12 chapters covered in the course.
o Three additional problems from chapters covered after the midterm exam.
• Expectations: Brief explanations or showing of work as necessary. These problems
should not take very long to solve.
• Point Value: 20 points per question (300 points total).

Section 2: Long Problems

• Format: 3 long problems (choose 2 to answer).
• Coverage:
o One problem from a chapter covered on the midterm.
o Two problems from chapters covered after the midterm.
• Expectations: These problems require detailed explanations and complete work to
demonstrate your understanding.
• Point Value: 75 points per question (150 points total for this section).

Section 3: Essay Questions

• Format: 3 essay questions (choose 2 to answer).
• Coverage:
o One question from a chapter covered on the midterm.
o Two questions from chapters covered after the midterm.
• Expectations: Write thorough, essay-style responses with clear reasoning and references
to course concepts.
• Point Value: 75 points per question (150 points total for this section).

Total Points for the Exam: 600 points

Section 1: 300 points
Section 2: 150 points
Section 3: 150 points

Potentially relevant formulas:

 𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋

𝑁𝑋 = 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 − 𝑖𝑚𝑝𝑜𝑟𝑡𝑠

𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 100 ∗
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃

𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑖𝑛 𝑦𝑒𝑎𝑟 2 − 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑖𝑛 𝑦𝑒𝑎𝑟 1

𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑦𝑒𝑎𝑟 2 = ∗ 100
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑖𝑛 𝑦𝑒𝑎𝑟 1

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑎 𝐺𝑖𝑣𝑒𝑛 𝑌𝑒𝑎𝑟

CPI = ∗ 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟

CPI this year − CPI last year

Inflation rate = ∗ 100
CPI last year

Price level today

Amount in today's dollars = Amount in year T dollars ×
Price level in year T

Price level Region 1

Amount in Region 1 dollars = Amount in Region 2 dollars ×
Price level in Region 2

Real interest rate = Nominal interest rate - Inflation 𝑟𝑎𝑡𝑒

𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 = 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = 100 ∗
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒

𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = 100 ∗
𝐴𝑑𝑢𝑙𝑡 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

𝑀𝑜𝑛𝑒𝑦 𝑆𝑢𝑝𝑝𝑙𝑦 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑐𝑦 + 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠

𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠
𝑅𝑒𝑠𝑒𝑟𝑣𝑒 𝑅𝑎𝑡𝑖𝑜 (𝑅) =
𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠

1
𝑀𝑜𝑛𝑒𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
𝑅
 𝑀𝑜𝑛𝑒𝑦 𝑆𝑢𝑝𝑝𝑙𝑦 = 𝑀𝑜𝑛𝑒𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 ∗ 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠

𝑀∗𝑉 =𝑃∗𝑌

% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑀 + % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑉 = % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑃 + % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑌

𝑁𝑜𝑡𝑒: 𝑀 = 𝑀𝑜𝑛𝑒𝑦 𝑆𝑢𝑝𝑝𝑙𝑦, 𝑉 = 𝑉𝑒𝑙𝑜𝑐𝑖𝑡𝑦, 𝑃 = 𝑃𝑟𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙, 𝑌 = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃

1 1
∆𝑌 = ∆𝐺 𝑤ℎ𝑒𝑟𝑒 𝑖𝑠 𝑡ℎ𝑒 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
1 − 𝑀𝑃𝐶 1 − 𝑀𝑃𝐶

Part 1: Short Problems (answer every question directly on this exam paper giving brief
explanations and/or showing your work as needed)

1. You have the afternoon free. You have a choice between going to the movies with a friend or
studying economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and
$4.50 on popcorn. If you choose to study economics for three hours, you will raise your exam
grade by 10 points. What is your opportunity cost of going to the movies?

2. Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels),
or a combination of the two. Which point(s) on the graph is(are) efficient production possibilities? Which
point(s) on the graph is(are) unattainable given current resources and technology?

3. What is Catherine’s opportunity cost of producing ice cream?

4. At a price of $3, is there a shortage or surplus, and how large is the shortage/surplus?

5. The country of Batavia produces only chocolates and watches. Below is a table with recent
information on Batavia production and prices. The base year is 2009. What was the inflation rate
for 2010?
Price of A Box of Boxes of Quantity of
Year Price of Watches
Chocolates Chocolates Watches
2008 $4 100 $50 10
2009 $5 90 $50 15
2010 $5 100 $60 15
2011 $6 80 $65 12
6. The table below lists annual consumer price index and inflation rates for a country over the
period 2010-2013. Assume the year 2010 is used as the base year. Calculate the missing value
that belongs in space B.
Consumer
Year Inflation Rate
Price Index
2010 100
2011 120 B
2012 A 15%
2013 134 C

7. In the figure below, illustrate and briefly explain the catch-up effect.

8. The table below lists the number of people by labor force classification for the country of
Shelbyville. What is the size of the labor force, and the size of the adult population?
Employed 80 million
Unemployed 20 million
Not in the Labor Force 60 million
9. At a minimum wage of $125, how much is the surplus of labor?

10. A bank has $30,000 in deposits and has $5,400 in reserves. What is its reserve ratio?

11. If the reserve ratio is 10 percent, then a person depositing $1400 into a bank can create up to
how much new money?

12. If velocity is 6, real output is 10,000, and M is 20,000 what would the price level be? If M
increases to 25,000 but V and Y do not change, what happens to the price level?

13. Suppose the economy starts at P3 and Y2. If there is a decrease in government purchases,
identify the price and output levels that the economy would move to in the short run.
14. Suppose that there are no crowding-out effects and the MPC is .9. By how much must the
government increase expenditures to shift the aggregate demand curve right by $10 billion?

15. The economy is currently at point A. To stabilize output, what could the government do
through fiscal policy?

Part 2: Long Problems (select 2 questions to thoroughly answer on the essay sheet)

1. Using the outline below, draw a circular-flow diagram representing the interactions between
households and firms in a simple economy. Explain briefly the various parts of the diagram.
2. Indicate the impact of the following events on C, I, G, and NX, and draw appropriately labeled
diagrams representing the impact on aggregate demand for the US.
a. The US government spends $300 billion on new aircraft carriers.
b. Canada, the country the US exports the most goods and services to, experiences an
economic boom.
c. An increase in prices decreases the real value of consumers’ wealth.

3. For each of the following scenarios, determine the short-run effects on output using an
appropriately labeled aggregate demand – aggregate supply diagram. Then, determine how the
central bank of the United States could adjust the money supply and interest rates to stabilize
output.
a. Canada enters a recession, causing US net exports to decrease.
b. In the hopes of gaining more support for the upcoming election, the President implements
an executive order that cuts personal income taxes in half.

Part 3: Essays (select 2 essays to write about on the essay sheet)

1. Evaluate the appropriateness of using GDP to measure the health of the economy. What are
the shortcomings of GDP? Why is it still a widely used economic indicator?

2. List and define any two of the costs of inflation.

3. Why does the SRAS curve slope upwards while the LRAS is a vertical line? In your response,
be sure to thoroughly explain sticky-wage theory and sticky-price theory.

Part 1 Answers

1. $12.50 and 10 points on your exam grade

2. Q, R, U, and V efficient and S and X unattainable
3. It takes Catherine 8/5 of an hour (96 minutes) to produce a quart of ice cream and 4 hours
(240 minutes) to produce a cake. So, her opportunity cost of a quart of ice cream is
96/240 = 2/5 cakes.
4. There is a shortage of 100.
5. 2009 is the base year so the GDP Deflator is 100. Nominal GDP was $5x90 + $50x15 =
$1,200. Real GDP was $5x90 + $50x15 = $1,200. The GDP Deflator = 100 x Nominal
GDP/Real GDP = 100. For 2010 Nominal GDP was $5x100 + $60x15 = $1,400. Real
GDP was $5x100 + $50x15 = $1,250. The GDP deflator = 100 x nominal GDP/real GDP
= 100 x $1,400/$1,250 = 112. The inflation rate for 2010 = (2010 GDP Deflator - 2009
GDP Deflator)/2009 GDP Deflator = (112 - 100)/100 = 12/100 = 12%
6. 20%
7. The catch-up effect is observed when a relatively poor country with little capital and low
productivity starts to experience rapid growth. In such a country, small increases in
capital substantially raise workers’ productivity and make rapid growth possible. In the
 figure, the production function is relatively steep for small amounts of capital, and that
feature is central to the catch-up effect. For illustrations, refer to the slides.
8. The labor force is 100 million, and the adult population is 160 million.
9. 20 surplus
10. 18 percent
11. $12,600
12. P = MV/Y. With the numbers given, P = 12. When the money supply increases to 25,000,
P increases to 15.
13. P2 and Y1
14. An MPC of .9 means the multiplier = 1/(1 - .9) = 10. The increase in aggregate demand
equals the multiplier times the change in government expenditures. So to increase
aggregate demand by $10 billion, the government would have to increase expenditures by
$1 billion.
15. Reduce government purchases and/or increase taxes

Since parts 2 and 3 have longer responses, I do not have an answer key for you. However, you
can visit me in my office if you would like me to review how you have answers these parts of the
practice exam.