QUIZ 1: Macro Winter 2008

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Q(estion 1

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)(t ans*ers in t#e s+ace +ro,ided- Calculators are allowed. Answers will be graded on a partial credit scale. Perfect answers with the appropriate documentation of your work will be given the complete score; answers with an intuitive attempt at the correct procedure but a wrong answer will be given 50% credit; answers with a totally incorrect procedure even if the answer is correct! will be given either 0 or " point. !#is im+lies t#at .o( m(st s#o* .o(r *or/ to get 0(ll credit1111 #uppose you were given the following data about average hourly wages of all private $.#. employees for the following years. All wages are reported in current year dollars i.e.% &00' wages are in &00' dollars% etc.!. ( also listed the corresponding CP( for those years. )hese data are actual $.#. wage and CP( data. ( picked data from *une of each year so the CP( and wage data will correspond to the same time period. )he current base year of the CP( is "+,& CP( in "+,& - "00!. &00' &005 &005 &006 &004 .ominal /ourly 0age 3"5.'4 3"5.64 3"6.0, 3"6.4' 3"4.50 1easured CP( 2evel ",'.5 ",+.' "+5.0 &0&.5 &04.,

a! (n &00' dollars% what was the real wage in the $.#. in &0047 $se the CP( data to convert the &004 nominal wage into the &004 real wage e8pressed in &00' dollars!. 5 points! !#is *as rig#t 0rom t#e s(++lemental notes: 2002 Real Wage (in 200$ dollars 3 2002 Nominal Wage (in 42002 5 6)I(200$ "6)I(2002 3 12-70 5 18$-7"202-8 3 418-$&

b! )here is a growing body of evidence that finds that the CP( inflation rate is overstated by " percentage point per year even with the innovations they have made in measurement during the last "5 years!. )ake as given that the CP( inflation rate overstates the true inflation rate by " percentage point per year. Assuming that the &00' CP( level is measured correctly% what should be the 9true: le,el of the CP( for the $.#. in &0047 (n other words% assume that the &00' CP( is measured correctly. Ad;ust the &004 CP( for the inherent measurement error!. $se the e8act formula. 5 points! !#is *as slig#tl. #arder t#an +art (a 9(t not 9. m(c#We are ass(ming t#e 200$ 6)I le,el is meas(red correctl.- !#e in0lation rate is 9iased 9. 1: +er .ear (t#at means t#e 200$%2007 in0lation rate; t#e 2007%2008 in0lation rate; t#e 2008%200& in0lation rate and t#e 200&%2002 in0lation rate are all 9iased (+*ards 9. 1: Mat#ematicall.; t#at im+lies t#at t#e 2002 6)I is 9iased (+*ards 9. (1-01 0o(r in0lation c.cles 7

(1 +ercent 0or

In ot#er *ords; t#e 6)I in 2002 (tr(e le,el ad<(sted 0or meas(rement error 3 6)I in 2002 (re+orted "(1-01 7 6)I 2002 (tr(e le,el 3 1''-&' (some +eo+le too/ t#e mis%meas(rement to #a,e occ(rred o,er 8 .ears t#is is not correct 9(t; I ga,e $ o(t o0 7 +oints 0or +eo+le *#o did t#is so; i0 .o( +ro,ided an ans*er o0 1'2-21 (*#ic# is 202-8"(1-01 8 .o( recei,ed $ o(t o0 7 +oints -

c! $sing the 9true: level of the CP( for &004 which you computed in part b!% solve for the 9true: growth rate in real wages in the $.#. between &00' and &004 i.e.% what is the real growth rate in wages once you ad;ust for the measurement error in the CP( inflation rate!. $se the e8act formula. <our answer should be presented as a 0i,e%.ear gro*t# rate i.e.% your answer should be something like 88.88%!. 5 points! =i,en .o(r ans*er to +art 9; t#is s#o(ld 9e eas.- Real Wages in 2002 meas(red in 200$ +rices (ad<(sting 0or mismeas(rement 3 12-70 5 (18$-7"1''-&' 3 418-'8Notice; t#e *ages are m(c# #ig#er t#an in real terms t#an com+(ted in +art a - !#is ma/es sense since I told .o( t#at t#e +rice inde> *as mismeas(red (+*ards?o* do .o( com+(te t#e real gro*t# in *ages 9et*een 200$ and 2002@ (Real *ages 2002 Real Wages 200$ "Real Wages 200$ 3 (18-'8 18-$2 "18-$2 3 $-'2: !#is is #o* I as/ed .o( to com+(te t#e real *ages (i0 *e all com+(te it t#e same *a.; it ma/es it easier 0or m. grader to grade =i,en t#at; man. o0 .o( com+(ted t#e real *age gro*t# in alternate *a.s-

Airst; some o0 .o( com+(ted t#e BNNUBCIZDE c#ange in t#e real *age (instead o0 $-'2 gro*t# rate o,er t#e 0i,e .ears; .o( com+(ted an ann(aliFed gro*t# rate o0 (1-0$'2 1-"7 1 3 0-'8: +er .ear- D,en t#o(g#t t#is *as against t#e directions; I ga,e 0(ll credit 0or t#is ans*erSecond; some o0 .o( (sed t#e a++ro>imation 0orm(la: )ercentage c#ange in nominal *ages in0lation rate 3 +ercentage c#ange in real *ages 1$-21:%8-88: 3 7-$$: % i0 .o( ga,e t#e a++ro>imation 0orm(la; I ga,e .o( $ o(t o0 7 +ointsCastl.; conditional on ma/ing a mista/e in +art 9; *e did not +enaliFe .o( i0 .o( carried t#ro(g# t#at mista/e to +art c- !#e onl. ca,eat o0 t#at is t#at *e #ad to 0ollo* .o(r *or/ to see t#e carr. t#ro(g# mista/e- I0 .o( did not s#o* .o(r *or/ clearl. (as I 0orce0(ll. instr(cted in t#e instr(ctions at t#e 9eginning o0 G(estion 1 ; t#at is .o(r 0a(lt- Bs a res(lt; *e *ill +enaliFe 0or carr. t#ro(g# mista/es i0 *e cannot 0ollo* .o(r *or/- (Remem9er; m. grader is doing t#e grading it is not #is <o9 to g(ess *#et#er .o( /no* *#at is going on or not so; i0 .o( did not s#o* *or/; +oints *ill 9e ded(cted Q(estion 2 (n this =uestion% circle all of the tr(e statements to the following =uestion stem. .ote> )here may be multiple tr(e answers or there may be no tr(e answers. <ou should view this as a series of true?false =uestions where you are suppose to circle all of the statements that are tr(e given the =uestion stem!. 5 points total @ one point each!. According to the material we have covered in class so far% which of the following are true7 a. (n macroeconomic e=uilibrium% aggregate income is e=ual to the sum of consumption% investment% government spending% and net e8ports.

!r(e- !#is *as eas.- H 3 e>+endit(re 3 income 3 +rod(ction- Bggregate e>+endit(re 3 6 I I I =INJ- So; it is tr(e t#at income; in eG(ili9ri(m; *ill eG(al aggregate e>+endit(reb. Aecessions are always accompanied by falling inflation rates.

Aalse- Bs *e sa* in class; s(++l. side recessions (0rom t#e aggregate s(++l. c(r,e mo,ing aro(nd ca(se recessions and rising +rice +ress(res (in0lation c. )he growth rate in real BCP over a given period! will always e8ceed the growth rate in nominal BCP over the same period! if the inflation rate over that period is negative.

!r(e- !#is is <(st mat#- Real =E) gro*t# 3 Nominal =E) gro*t# in0lation rate- !#e onl. *a. t#at Real =E) gro*t# can e>ceed nominal =E) gro*t# is i0 t#e in0lation rate is negati,ed. #tarting in the early "+,0s% BCP volatility declined dramatically in the $nited #tates relative to the previous five decades.

!r(e- !#is is <(st a 0act 0rom class- See t#e lect(re notes-

Q(estion $ (n 9Dig Euestions and Dig .umbers: Economist 4?"5?&006!% the article describes a large 9device: developed by 0illiam Phillips an economist from 2#F! that is on display in 2ondonGs #cience 1useum. 0hat was the purpose of the devise developed by Phillips7 <our answer should be brief no more than 4 words or so! @ ( am ;ust trying to get a sense of who read the articles and retrained some basic information. 5 points! !#ere *ere man. ans*ers to t#is G(estion t#at *ere acce+ta9le incl(ding: model o0 t#e econom.; circ(lar 0lo* o0 income and e>+endit(re; s.stem o0 +i+es to model econom.; K We ga,e credit 0or all +la(si9le ans*ers (e,en i0 some o0 .o( *rote more t#an se,en *ords in t#e 0(t(re; I *ill 9e m(c# stricter on t#e *ord limit it im+oses an (n0air 9(rden on t#e grader *#en +eo+le gi,e 7 sentence ans*ers to somet#ing t#at can 9e ans*ered in less t#an 2 *ords -