QUIZ 1: Macro Spring 2009

Name:

______________________ !"!# $:%0&10:00

Q(estion 1

Section Registered (circle one

!"!# 10:00&11:%0

! ':00&9:00

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 implies t#at )o( m(st s#o* )o(r *or+ to get ,(ll credit---- (.alc(lators are allo*ed/ "n today#s lecture$ we are going to discuss historic changes in house prices at a variety of levels of aggregation (country$ %.&. state$ %.&. metropolitan area (city $ etc. . 'elow is actual data on ()*"(A+ house prices as measured by ),-.) (an agency of the %.&. government for three %.&. cities. ,or each city$ the ),-.) house price inde/ is a ()*"(A+ inde/ and is anchored at !00 in the first 0uarter of !115 (!1152! . 'elow is the ),-.) inde/ for 'oston$ (ew 3ork$ and &an ,rancisco for the first 0uarter of !145$ !110$ and !116. "n the last column$ " give you the level of the consumer price inde/ (7P" for that 0uarter (where the base year of the 7P" is the first 0uarter of !148 . "n this 0uestion$ we will use the 7P" to convert all nominal variables into real variables. !1452! !1102! !1162! 0oston 59.4 !!!.8 !04.6 Ne* 1or+ .it) 5!.6 !06.8 !05.6 San 2rancisco 50.! !!8.8 !09.9 .3I !.08! !.865 !.515

a "n !1102! dollars$ what was the real value of the !1452! ),-.) price inde/ for 'oston: Put your answer in the bo/ below. ;ake your calculations to 8 digits. (5 points I am going to ans*er t#is 4(estion in t*o steps/ Step 1 *o(ld 5e to con6ert t#e nominal 19$7Q1 price inde8 ,or 0oston into a real 19$71Q1 price inde8 (meas(red in 19$2Q1 dollars / !#en I *ill con6ert t#e real meas(re in 19$2 dollars into a real meas(re in 1990 dollars/ !#e t*o steps are o(tlined 5elo*/ i 9 9 9 ii 9 9 9 Real price o, 0oston 19$7Q1 #o(se price inde8 (meas(red in 19$2 dollars : 19$7Q1 Nominal 3rice Inde8" 19$7Q1 .3I :%/$"1/021 :2/'9 Reall price o, 0oston 19$7Q1 price inde8 (meas(red in 1990Q1 dollars 19$7Q1 Real 3rice Inde8 in 19$2 dollars ; 1990Q1 .3I :2/'9 ; 1/2<: '</1$

1o( co(ld #a6e comp(ted t#is ans*er in one step (ta+ing ,orm(la in (i and m(ltipl)ing it t#ro(g# 5) 1990Q1 .3I / !#is is t#e *a) I did it in t#e s(pplemental notes b %sing the e/act formula$ what was the real change in the ),-.) house price inde/ for &an ,rancisco between !1102! and !1162!: Put your answer in the bo/ below. Provide answers to two decimal points (e.g.$ //.//% . (5 points !o do t#is= )o( need to comp(te t#e real price o, t#e nominal >2?@> price inde8 in San 2rancisco ,or 5ot# 1990Q1 and 199<Q1/ 1o( can con6ert t#e nominal #o(sing price indices into real prices anc#ored in an) )ear (19$2Q1= 1990Q1= etc/ / As long as t#e real prices t#at )o( are comparing are meas(red in t#e same )ear t#at is all t#at is important/ I am going to report t#ings in 1990Q1 prices/ I do t#is ,or simplicit)/ In 1990Q1 prices= t#e 1990Q1 real 6aria5le (>2?@> #o(sing price inde8 e4(als t#e 1990Q1 nominal 6aria5le (t#at is 5) de,inition / !#is B(st sa6es me a calc(lation 5eca(se I onl) #a6e to *orr) a5o(t con6erting t#e 199< nominal 6aria5le into a real 6aria5le anc#ored in 1990 prices/ !#e proced(re to con6ert t#e 199< San 2rancisco nominal prices into a real price anc#ored in 1990 is e8actl) t#e same as t#e proced(re *e (sed ,or 0oston a5o6e/ A,ter t#at= *e B(st ta+e t#e gro*t# rate 5et*een t#e t*o real 6aria5les (meas(red in 1990Q1 prices / Step 1 .omp(te Real 199<Q1 >2?@> ?o(se 3rice Inde8 (meas(red in 1990Q1 prices 199<Q1 Real >2?@> San 2rancisco ?o(se 3rice Inde8 (in 1990Q1 prices 9 199<Q1 Nominal ?o(se 3rice Inde8 ; (1990Q1 .3I " 199<Q1 .3I 9 10%/% ; (1/2<: " 1/:97 9 $2/'% Step 2 & .omp(te t#e gro*t# rate in real prices 5et*een 1990Q1 and 199<Q1 Real gro*t# rate in >2?@> #o(se prices in San 2ran 5et*een 1990Q1 and 199<Q1: 9 C199<Q1 real price inde8 1990Q1 real price inde8D"1990Q1 real price inde8 9 C$2/'% 112/2D " 112/2 9 &2'/%:E Again= )o( co(ld #a6e comp(ted t#e real prices in an) )ear )o( *anted/ As long as )o( comp(ted 5ot# t#e 1990Q1 and 199<Q1 nominal #o(se price indices into real indices anc#ored in t#e same )ear prices= )o( *o(ld #a6e gotten t#e same ans*er ()o( s#o(ld pro6e t#is to )o(rsel, / Q(estion 2 "n this 0uestion$ circle all of the tr(e statements to the following 0uestion stem. (ote< All three answers may be tr(e answers or none of the answers may be tr(e. 3ou should view this as a series of three separate true=false 0uestions where you are suppose to circle whether or not the statements is tr(e (given the 0uestion stem . P+.A&. .IR.F@ )(+3 ;>%. &;A;.*.(;&. (? points total @ two points each . According to the material we have covered in class so far$ which of the following are true:

a.

"n macroeconomic e0uilibrium$ a !% increase in aggregate e/penditure always implies a !% increase in disposable income (holding ta/es (; and transfers (;r constant .

2alse t#is *as t#e #ardest 4(estion on t#e 4(iG/ Remem5er= in e4(ili5ri(m= total e8pendit(re 9 total prod(ction 9 total income (5eca(se demand 9 s(ppl) / 0) de,inition (gi6en in class = disposa5le income (1 d e4(als 1 ! H !r/ So= a I1 increase in 1 (total e8pendit(re in e4(ili5ri(m *ill lead 5) de,inition to a I1 increase 1d (#olding ! and !r constant / ?o*e6er= it *ill not lead to t#e same 3@R.@N!AJ@ increase/ A one percent increase total income *ill lead to a greater t#an 1E increase in 1 d i, ! K !r and it *ill lead to a less t#an 1E increase i, ! L !r/ !#e +e) is t#at t#e scaling ,actor o, a I1 c#ange in 1 is not t#e same i, ! does not e4(al !r (or= p(t anot#er *a) t#e scaling ,actor is di,,erent i, initiall) 1 does not e4(al 1 d / 1o( s#o(ld pro6e t#is to )o(rsel, (B(st ma+e (p some n(m5ers and comp(te t#e percentages / !#is 4(estion ma) seem sill) to )o( (testing le6els 6ers(s percentages = 5(t it is not/ !#e pop(lar press o,ten con,(ses le6els and percent c#anges and t#e) sometimes ma+e a 5ig deal *#en t#e percentage c#ange in t*o 6aria5les di,,ers (e6en t#o(g# t#e act(al c#anges in t#e 6aria5les are t#e same / In terms o, interpretation= sometimes it is important to t#in+ in le6els and ot#er times it is important to t#in+ in percent c#anges/ !#at is *#) I am as+ing t#is 4(estion/ I *ant )o( to 5e reticent o, t#e di,,erences/ b. Aiven what we learned about ABP accounting in class$ a C!00 purchase of 7itibank stock this year by %.&. consumers (i.e.$ the household sector will be measured as a C!00 increase in this year#s measured %.&. consumption (7 .

2alse t#is came directl) ,rom t#e slides/ 0()ing stoc+s B(st trans,ers reso(rces ,rom cons(mers to ,irms (*e classi,) t#is t)pe o, trans,er as 5eing Msa6ingN / !#is transaction s#o*s (p no*#ere in JO3 acco(nting/ >nce t#e ,irm spends t#e mone)= it *ill s#o* (p as in6estment (i, t#e stoc+ *as an initial o,,ering / I, it *as B(st 5o(g#t on t#e e8c#ange= it is B(st a trans,er o, reso(rces ,rom one mem5er o, t#e #o(se#old sector (t#e one 5()ing t#e stoc+ to anot#er mem5er (t#e one selling t#e stoc+ / Some people as+ me MP#at i, t#ere *ere 5ro+er ,ees associated *it# t#e same o, t#e stoc+QN I, t#at is t#e case= onl) t#e part o, t#e I100 t#at comprised 5ro+er ,ees *o(ld s#o* (p in cons(mption (t#e cons(mer *o(ld 5e pa)ing ,or ser6ices t#at #elp t#em *it# t#eir sa6ing decisions / !#e 5ro+er ,ees *o(ld 5e onl) a ,raction o, t#e I100/ c. Aiven the model that we foreshadowed in class last week$ large positive increases in aggregate supply will imply growing ABP and falling inflation rates (price levels $ all else e0ual.

!r(e t#is also came directl) ,rom t#e slides (alt#o(g# *e did t#e re6erse / An increase in aggregate s(ppl) #olding aggregate demand constant (all else e4(al *ill p(t do*n*ard press(re on prices and ca(se 1 to increase/ R(st li+e o(r micro class= increase in s(ppl) red(ce prices and increase o(tp(t/ !#is *as t#e easiest 4(estion on t#e 4(iG (it *as B(st li+e 4(estions on t#e t*o practice 4(iGGes / Q(estion % >eferring back to our discussion of the Areat *oderation$ what are two e/planations that we discussed in class as to why aggregate volatility in the %.&. was lower from !148D8006 than it was during the prior three decades. .ach answer should not be more than 4 words each. Erite very clearly (or my ;A will not be able to give credit . Also your answers should not be repetitive @ in other words$ give 8 distinct answers. (8 points total @ ! point each !#is came directl) ,rom class/ I, )o( *ere in class= t#is *as straig#t ,or*ard/ An) t*o o, t#e ,ollo*ing *o(ld *or+: i. ii. iii. iv. Q(estion 7 "n FBiagnosing BepressionG (Economist !=9=8001 $ the article discusses what constitutes an economy being in a FdepressionG. Although the article does not provide a formal definition$ it does suggest some principle criteria for distinguishing a depression from a normal recession. (ame any one of the criteria discussed in the article. 3our answer should be brief (no more than !0 words or so @ " am Hust trying to get a sense of who read the articles and retrained some basic information. (5 points An) one o, t#e ,ollo*ing *o(ld 5e ,ine: i ii A recession *#ere real JO3 declines 5) more t#an 10E A recession t#at lasts more t#an % )ears F(c+ 0etter in6entor) management 5) ,irms Increase in credit card (sage (and de5t more generall) 5) #o(se#olds 0etter implementation o, macro polic) 5) polic) ma+ers/

!#ere *as anot#er criteria o(tlined 5) t#e c#ie, economist o, ANZ 5an+ *#ic# incl(ded some o, t#e ,ollo*ing: iii i6 6 A recession ca(sed 5) a decline in asset prices or a credit cr(nc# A recession t#at leads to de,lation A recession t#at needs to 5e ,o(g#t *it# ,iscal polic) as opposed to monetar) polic)

3ersonall)= I am not s(re I #a6e e6er #eard a de5ate a5o(t *#en somet#ing 5ecomes a depression as opposed to a recession/ I *o(ld 5e inclined to (se de,initions i = ii or i6 m)sel,/ !#is *ill 5e interesting to see #o* t#is pla)s o(t in t#e academic comm(nit)/

!o 5e #onest= I am less interested in s(c# terms/ S#o(ld I care an) di,,erentl) i, U/S/ JO3 ,ell 5) 9/999E t#an I *o(ld i, it ,ell 5) 10/001EQ I care a5o(t act(al economic per,ormance (as opposed to t#e *ords (sed to descri5e t#em /