ECON545 Quiz 2 Guidelines

Recall that Keller courses are built around Terminal Course Objectives (TCOs). At the conclusion of the course, you will even be asked to rate the extent to which the TCOs have been covered. There are 9 TCOs specified for GM545. Review the TCOs by clicking on Course Syllabus at the top of the course home page, and then clicking on the Terminal Course Objectives link. Also, please note that the TCO(s) to be covered during any given week are specified in the Objective section for that course week.

Quiz 2 addresses material covered in Weeks 4 and 5 of the course. The TCOs at issue are:

Course Objective Description

E Given an introduction to key macroeconomic variables, distinguish between real and nominal output variables, between various inflation measures, and demonstrate the derivation of the unemployment rate; assess the sensitivity of strategic policy decisions based on these measures to the quality of available statistical data.

F Given increasing interdependencies between trading nations and the analogy of foreign currency as a commodity, analyze the effects of demand and supply pressures on exchange rates; students must demonstrate an understanding of trade barriers in general, as well as the effectiveness of institutional entities (e.g., GATT, NAFTA, and EU).

You will note that the problems that have been assigned from the book focus on these TCOs. The problems address the basics while Discussions topics focus on applications. The quizzes emphasize the basics. So, make sure you completely understand the assigned homework problems before attempting the quiz.

I have provided a carefully engineered set of Quiz 2 Guidelines for this quiz. So be sure to study using these guidelines to assist you in studying for the quiz.

The 2.5 hour quiz will consist of 9 short answer questions 6 @ 15 points each, 3 @ 20 points each (150 points total).

You will have to make calculations, so be prepared for that. In all cases, to receive full credit, you must provide appropriate support for any conclusion that you make. If you are asked to make a calculation, the complete calculation must be shown. Formatting numerical calculations can be difficult in the online environment, so do not spend a lot of time arranging things in the neatest way. Just make sure that what you have done is clear to any informed reader. No answer should require more than a few sentences. Remember that all required calculations must be displayed.

Preparation is everything. If you are well prepared (by working through all of the issues below BEFOREHAND until you are comfortable with them), then this quiz will be a “piece of cake.” If you are not prepared, then expect some difficulties.

When you take the quiz, remember to save answers frequently. Any problems should be reported to the Help Desk immediately.

Here is what to focus on in each chapter:

Chapter 15. Introduction to Macroeconomics

.Know the definition of GDP.

.Know what gets included or excluded when calculating GDP.

. Know how to calculate Nominal GDP and Real GDP given a fictitious economy with 2 products and the quantities produced and prices for those products. Here’s an example for you:

Sample Problem 1
Suppose the country of Alpha produces two goods, guns and butter. In 1997 (the base year – know what this means), Alpha produces 1,000 guns priced at $200 and 10,000 butters priced at $1 each. In 1998, Alpha produces 800 guns priced at $400 and 9,000 units of butter priced at $2. What are Nominal and Real GDP values for Alpha in 1997 and 1998?

OK. Let’s create a chart for the answers to this question and explain the answers.

1997 1998 Price Quantity Price Quantity
Alpha
Guns $200 1,000 $400 800

Butter $1 10,000 $2 9,000

Answer

To get Nominal and Real GDP for 1997, just multiply price x quantity for each good produced in Alpha, then add up the dollar values for each good, i.e.,

Nominal GDP (1997) = [$200 x 1,000] + [$1 x 10,000] = $210,000 Real GDP (1997) = [$200 x 1,000] + [$1 x 10,000] = $210,000

Nominal GDP and Real GDP are the same in the base year, because when you calculate Real GDP you use base year prices, and since we’re already in the base year, the calculations are the same.

To get Nominal GDP for 1998, just multiply price x quantity for each good produced in Alpha, then add up the dollar values for each good, i.e.,

Nominal GDP (1998) = [$400 x 800] + [$2 x 9,000] = $338,000

For Real GDP in 1998, you need to use the quantities produced in 1998 and the prices from 1997 (the base year). Another way of stating this is that we’re assuming the price never changed between 1997 and 1998, i.e. keeping prices constant, and just looking at the change in production (quantity). Real GDP (1998) = [$200 x 800] + [$1 x 9,000] = $169,000

That’s it for the calculations.

An interesting side note is that if you just had the Nominal GDP number for 1998 you might think the economy grew, when in fact, as you can see from the Real GDP calculation for 1998, the economy shrank when compared to 1997.

Chapter 16. Measuring Inflation and Unemployment

. Know how to calculate the unemployment rate.

Chapter 25. International Trade

. Know the principle of comparative advantage.

. Know how to solve a problem using the principle of comparative advantage.

.Know how to calculate the limits of the terms of trade between two countries, and the information required to establish the limits of the terms of trade.

Chapter 26. Open Economy Macroeconomics

. Know what an exchange rate is and how to calculate one.

.Know how to determine whether a currency has appreciated or depreciated versus another currency.

.Know factors which cause a currency to appreciate or depreciate relative to another currency.

.Know the effect on imports and exports when a currency appreciates.

.Know the effect on imports and exports when a currency depreciates.

Yes. There is a lot of material here, BUT REMEMBER THAT THE KEY IS TO DO ALL OF THE HOMEWORK PROBLEMS and STUDY THE ANSWERS TO THE HOMEWORK PROBLEMS, and you should do fine on QUIZ 2.

Good luck. I want all of you to do well.