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Second Midterm
Economics 201: Introduction to Macroeconomics
Fall Quarter 2019
Mark Witte
Northwestern University

Do not turn this exam over or begin working until you are told to do so.

We will post scores and grades on Canvas as soon as we can.

The test is out of 165 points and is worth 25% of your class grade. There is no guessing penalty so answer
all the questions. Please be thorough but concise. Verbose answers will not help you. You can use a
calculator. Handing the exam in on time (by 4:50) will gain you a bonus of 4 points. Handing the exam
in after 4:54 will cost you five points with the penalty rising after that.

This exam covers all readings, lectures, sections, and notes through Tuesday, November 5th. Reading
coverage: Krugman & Wells chapters 6-12, Buchholz chapters VI Marx and IX Keynes, Gordon, Gordon,
Klenow, and Rosling, and Yield Curves.
The problems on this page refer to this table and these abbreviations. Consumption = C, Taxes = T,
Investment Demand = ID, Disposable Income = Y-T, Govt. Purchases of Goods and Services = G
Aggregate Expenditure = AE, the MPC is constant, Foreign trade is zero. Autonomous consumption = $500.
AS = Y T Y-T C ID G AE ΔInventories

$4,000 $300 $3,460 $500 $280

$4,400 $300 $3,780 $500 $280

$4,800 $300 $500 $280

$5,200 $300 $500 $280

$5,600 $300 $500 $280

$6,000 $300 $500 $280

$6,400 $300 $500 $280

1. (10 points) Fill in the table.

2. (5 points) How big a rise in government spending would it take to raise equilibrium by $400?

3. (5 points) How much of a tax change would it take to accomplish the same change?

4. (5 points) Although this is the Greatest Economy in History, we cut taxes by $50 and lower interest rates by 1% so that
Investment Demand changes by $20. After all this, what is the CHANGE IN INDUCED CONSUMPTION? (You’ll have
to do math here; the answer won’t necessarily hit any of the table choices exactly. Please show enough of your work that
we can understand how you got your answer.)

Put your short answers here:

2. 3. 4.
5. (5 points) What is the equilibrium output in this economy? Government Spending on Goods & Services is $110. A rise
in after-tax income of $400 raises consumption spending by $360. Autonomous consumption is $30. Taxes are $100.
When pre-tax income is $500, consumption is $390. Imports are $30. Investment demand is $100. Exports are $20.
Please show enough of your work that we can understand how you got your answer.

6. (5 points) In the previous problem, what is the change in inventories when aggregate supply is $2,000? Please show
enough of your work that we can understand how you got your answer.

7. (5 points) Let everyone have an MPC = 0.75 and there are no taxes. Vic Mackey gets paid $400 for overtime work as
a cop. He saves some, and spends the rest to hire Shane to give him thoughtful life philosophy. Shane puts the expected
amount away as savings, and pays the rest to Ronnie for advice on strategic beard growing. Ronnie prudently saves and
spends the rest to have Lem set a fire for him. Including Vic, Shane, and Ronnie, how much induced consumption has
occurred so far? Please show enough of your work that we can understand how you got your answer.

Put your short answers here:

5. 6. 7.
8. (5 points) Compute the “My Mom Gave Me A” Consumer Price Index for 2019, using 2017 as a base year. Please
show enough of your work that we can understand how you got your answer.
(YOUR ANSWER GOES IN THE BLANK AT BOTTOM)
P2017 Q2017 P2018 Q2018 P2019 Q2019

Pickle 5¢ 1 4¢ 3 8¢ 4

Lime 10¢ 1 8¢ 0 15¢ 2

Water 25¢ 1 50¢ 4 75¢ 3

Collar $1 1 80¢ 2 90¢ 3

Bubble gum! 1¢ 5 2¢ 4 10¢ 8

Bazooka-Zooka Bubble gum!

9. (5 points) As you probably read in an excellent recent Daily Northwestern editorial, the 1931 Davis-Bacon act set rules
for how wages would be set on any federally funded project. Congress didn’t want this to be a complication for minor
projects, so these rules only applied above the kingly amount of $2,000! Unfortunately, the law was written in nominal
terms and never updated. Back in 1931, the price level was 15 and now it’s 255. In terms of 2019 prices, what was the
purchasing power of $2,000 from 1931? (Show enough of your work so that we can understand how you reached your
answer.)

Put your short answers here: 8. 9.

10. (5 points) In the biggest deal of its kind ever, Saudi Aramco, the national oil company of Saudi Arabia, will soon sell
shares of stock in itself. The shares will probably pay out $60 billion per year in total, and the relevant interest rate is 4%.
What should we expect the total price of those shares to be? [Hint: What is the present value of those future earnings?]
Please show enough of your work that we can understand how you got your answer.

11. (5 points) How much would that change if interest rates fell to 1%? Please show enough of your work that we can
understand how you got your answer.

12. (5 points) When I took out a mortgage to buy my house, I expected that inflation would be 2% and I was willing to pay
a real interest rate of 2%, so I agreed to an interest rate that took into account those two factors. However, since then,
inflation has been generally around 1.5%. In terms of actual purchasing power, what interest rate have I been paying on my
mortgage?

Put your short answers here:

10. 11. 12.
NOT ON Fall 2021 MIDTERM 2 13. (5 points) President Trump: “Do you think it was luck that got us to the best Stock
Market and Economy in our history. It wasn’t!” Under President Trump, the S&P 500 Stock Index has grown 10% per year.
If we would like to see the S&P Stock index double from where it is right now, how many more years would we want
Donald Trump to remain president? Show enough of your work so we can understand how you got your answer. [Hint 1:
Assume the US Constitution can be amended or ignored so that non-standard length of presidential terms are allowed. Hint
2: Rule of 70.]

NOT ON Fall 2021 MIDTERM 2 14. (5 points) The working-age population is 500. 300 people have full-time jobs. 20
people have part-time jobs and are fine with that. 10 people have part-time jobs and are looking to find full-time jobs. 40
people have no job at all, would like to have jobs, but don’t think that there is a job out there for them right now, and so
aren’t looking. 50 people have no job at all and are actively searching to find employment. The rest are fine with being
without jobs. What is the Labor Force Participation Rate?

NOT ON Fall 2021 MIDTERM 2 15. (5 points) In the previous problem, what is the Unemployment Rate?

Put your short answers here:

13. 14. 15.
16. (5 points) The yield curve….
A. ...normally slopes upward (from left to right) with income on the horizontal and interest rate on the vertical.
B. ...normally slopes upward (from left to right) with time till maturity on the horizontal and interest rate on the
vertical.
C. ...slopes upward (from left to right) before recessions.
D. ...relates the level of investment demand to the real interest rate.
E. ...begins to slope downward (from left to right) as a warning sign of future rising inflation.

NOT ON Fall 2021 MIDTERM 2 17. (5 points) Karl Marx saw the concept of “surplus value” as….
A. ...how much a worker was paid.
B. ...how much a worker produced in terms of value.
C. ...how much workers produced in terms of value minus how much the worker was paid.
D. ...the capital per worker, which determined what a worker could earn.
E. ...the sum of factor payments, inclusive of worker pay and capitalist profit.

NOT ON Fall 2021 MIDTERM 2 18. (5 points) Hans Rosling’s video compared….
A. ...total GDP growth over time for the countries of the world.
B. ...GDP per capita over time for the countries of the world.
C. ...GDP per capita versus capital per capita for the countries of the world.
D. ...lifespan versus income over time for the countries of the world.
E. ...population sizes over time for the countries of the world.

Put your short answers here:

16. 17. 18.
GRAPH 1. (6 points) On a LRAS-SRAS-AD graph, draw an economy in a Recessionary Gap. Label this point A. Show
how we could fix this with fiscal policy. Label this point B. Show how the economy’s Self-Correcting Mechanism would
fix this problem. Label this point C.

GRAPH 2. (6 points) On a well-labeled graph of Real Output versus Aggregate Expenditure (a 45o diagram), show an
economy that is in equilibrium at 1,000. Label that point A. Show how a rise in Investment Demand would change the
equilibrium. Label that point B. Be careful to show how this results in an “multiplier effect.”
NOT ON Fall 2021 MIDTERM 2 GRAPH 3. (6 points) In the Loanable Funds Model, starting from equilibrium at point
A, show how the equilibrium would be affected if everyone came to believe that future inflation would increase. Label this
point B.

NOT ON Fall 2021 MIDTERM 2 GRAPH 4. (6 points) Recall the graph with capital per worker on the horizontal axis
and output per worker on the vertical axis. Starting from point A, show how increased capital per worker would affect
output per worker (label this point B), and show how this effect would be altered if there is also growth of productivity
(label this point C).
 On-time bonus? Yes: +4. No: + 0. Late: -5. (We will mark this one for you.)

ESSAY 1. (15 points) What’s the difference between Headline and Core inflation, and why might policy makers prefer to
use one or the other?

NOT ON Fall 2021 MIDTERM 2 ESSAY 2: (15 points) What does Thomas Piketty mean by “r > g” and why would it
matter?

ESSAY 3: (16 points) What did Keynes think about the relative merits of fiscal and monetary policy and why did he think
this?