First Midterm

KEY
Economics 201: Introduction to Macroeconomics
Winter Quarter 2024
Mark Witte
Northwestern University

WRITE YOUR ANSWERS IN INK. The test is out of 120 points (19 short questions worth 4 points
each and 4 longer questions worth 11 points each) and is worth 15% 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 3:22) will gain you a bonus of 4
points. Handing the exam in after 3:26 will cost you five points with the penalty rising after that.

This exam covers readings, lectures, sections, and notes through Tuesday, January 30.

1. (4 points) In a market the quantity sold has fallen but the price charged per unit of the product has risen. Why?
A. An increased population of buyers.
B. A higher cost of one of the main inputs.
C. Increased demand for a complement in production.
D. Falling incomes and this is an inferior good.
E. A fall in the price of a substitute in consumption.

2. (4 points) There are more solar panels and wind turbines to generate electricity, but also more electric-powred cars.
What would this be expected to do to the market for electricity?
A. Greater price and quantity.
B. Unclear effect on price but less quantity.
C. Higher prices but an unclear effect on quantity.
D. Higher quantity, but unclear effect on price.
E. Lower prices but an unclear effect on quantity.

3. (4 points) Suppose that inflation and unemployment are both rising. What would cause this?
A. Economic boom
B. Recession
C. Growth recession
D. Supply-side miracle
E. Stagflation

4. (4 points) 2023 Econ Nobel Prize winner Claudia Goldin said that the big driver of the gender gap in pay between
similarly educated spouses…
A. …had essentially disappeared by the 2020s.
B. …is largely the effect of women trading off pay for flexibility in terms of working hours.
C. …is the result of women being less willing to accept jobs that have flexible work hours.
D. …comes from women tending toward professions where people in similar roles are not able to substitute for each
other in terms of customer interactions.
E. …is caused primarily by workplace discrimination by management.
5. (4 points) The video with the muppets advances the case that:
A. Governments gather data from the many consumers and producers to make optimal policy choices for the good of
society as a whole.
B. Firms can work to attract buyers by spending to make their products better or by spending money to lobby
government to change the laws in order to reduce competition from other firms.
C. Government officials work to prevent anyone from engaging in rent-seeking.
D. Companies spend money to hire lobbyists to explain to officials in government what changes need to be made to
regulations in order to make the economy more efficient and benefit society in general.
E. Rent-seeking exists, but it is not a big problem because everyone who is disadvantaged by it has a strong incentive
to fight back against it.

Put your multiple-choice answers here:

1. B 2. D 3. E 4. B 5. B

6. (4 points) In Economics: A Very Short Introduction, Partha Dasgupta argues that

A. …one advantage to living in most low income countries is that at least corruption among public officials is
generally quite low.
B. …low income countries have generally simple economies, which allow institutions like government to perform
their functions relatively rapidly as compared to the time lags higher income countries..
C. ...markets reach Pareto-efficient equilibria that provide shares of output that need not be consistent with
reasonable notions of distributive justice.
D. …monopolies lead to market failures that are uniformly harmful to social welfare.
E. …wealthier countries have a relatively large share of their economies in their agricultural sector, which supplies
them with plenty of food.

7. (4 points) When it comes to equilibrium in the circle-flow diagram,

A. Malthus cited “Say’s Law” to support the idea that economies tended toward equilibrium.
B. Ricardo thought that Say and Malthus were wrong about the stability of equilibrium and that a lack of demand
would often be a problem for free market economies.
C. Ricardo believed that Malthus failed to understand that it was good that total consumption and investment spending
were less than production because unpurchased goods would lead firms to lower prices, which was good for
workers/consumers.
D. Malthus thought that some income leaked out and resulted in spending being too low.
E. Ricardo refuted Malthus’s view by citing Say’s Law that “Demand creates its own supply!” That is, if people are
willing to pay for something, then the market will find a way to produce it.

8. (4 points) Biden versus Trump again?! Why can’t we have an inspiring candidate like Harry Truman? After Truman
left the presidency, he repeatedly complained that he was only getting by financially because he sold his family farm. As a
result, Congress passed the “Former Presidents Act” that provides ex-presidents (including Truman) with a generous
pension. But here’s an interesting thing: Although Truman was relatively poor when he became vice-president, by the time
his term as president ended in 1953, he had a suspiciously high net worth of $650,000 (at least). The price level in 1953
was about 25 and now is around 300. In real purchasing power terms, how much would Truman’s net worth be in terms
of today's prices? (Show your work.)
ANSWER: $650,000 1953$ * (CPINow/CPI1953) = $650,000*(300/25) = $7,800,000 (or $780,000 if you use my CPI = 30
typo.) Sadly, Truman was actually shady as hell. https://nymag.com/intelligencer/2021/07/the-truman-show.html

9. (4 points) For the US last year, nominal GDP grew by 6.2%. The price level grew by 3.6%. What was the growth in
real GDP? Also, the US population grew by 0.5%. What was the growth in real GDP per person?
ANSWER: Nominal GDP growth - Price level growth = RGDP growth
6.2% - 3.6% = 2.6%
RGDP growth - Population growth = Real per capita GDP growth
2.6% - 0.5% = 2.1%

Put your multiple-choice and short answers here:

6. C 7. D 8. $7,800,000 9. %ΔRGDP = + 2.6%
($780,000)
%ΔRGDP/Pop = + 2.1%

The questions on this page all refer to various parts of the following table:
P $5 $10 $15 $20 $25 $30 $35 $40
QD 1,000 450 300 250 200 180 150 100
QS 200 240 300 350 400 450 500 550

(Put your answer in the space at the bottom of the page.)

10. (4 points) What is the equilibrium market price and quantity?

ANSWER: P = $15, Q = 300

11. (4 points) There is a price ceiling of $10. How much would be sold in this market? What would be the
surplus (+) or shortage (-)?
ANSWER: Q sold = Qs = 240. Shortage = Qd - Qs = 450 - 240 = 210

12. (4 points) How much would be the per unit “rent” in this market if there were a maximum quota of 200
supplied?
ANSWER: P to demanders - Price to sellers = $25 - $5 = $20

13. (4 points) Suppose that the government wanted to enforce a price floor of $40 per unit by purchasing enough
to make $40 the market price. What quantity would the government have to buy?
ANSWER: Would need to sell Qs = 550, when Qd = 100, so would need government to buy 450.

14. (4 points) For sellers who were operating in this market when it was at the original equilibrium, what is the
per unit rent they gain from this $40 price floor?
ANSWER: New price - Original price = $40 - $15 = $25

Put your short answers here:

10. P = $15 11. Q sold = 240 12. Rent/unit = 13. Gov. Purchase? 14. Rent/unit =
Q = 300 Shortage/Surplus = 210 $20 450 $25
The next two questions refer to various parts of the following table:
P $5 $10 $15 $20 $25 $30 $35 $40
QD 1,000 450 300 250 200 180 150 100
Rev. $4,000
$5,000 $4,500 $4,500 $5,000 $5,000 $5,400 $5,250
Cost $20K $9,000 $6,000 $5,000 $4,000 $3,600 $3,000 $2,000

Profit -$15K -4,5K -1.5K $0 $1,000 $1,800 $2,250 $2,000

P $5 $10 $15 $20 $25 $30 $35 $40

Qd: 1,000 450 300 250 200 180 150 100
Qs: 200 240 300 350 400 450 500 550
Qd-Qs: 800 210 0 -100 -200 -270 -350 -450
Rev $5,000 $4,500 $4,500 $5,000 $5,000 $5,400 $5,250 $4,000
Cost $20,000 $9,000 $6,000 $5,000 $4,000 $3,600 $3,000 $2,000
Profit ($15,000) ($4,500) ($1,500) $0 $1,000 $1,800 $2,250 $2,000
Elast $5,000 ($500) $0 $500 $0 $400 ($150) ($1,250)
i e u i u i e e

15. (4 points) A monopolist faces the above demand curve. The monopolist’s total cost of production is
TC = $20*Q. What is the maximum profit the monopolist could earn at one of the stated prices? (Be sure to
show enough work below or in the table so that we can see how you reached your answer.)

16. (4 points) If the monopolist could get away with selling an extra 10 units at $5 below the monopoly price
without it affecting anything else, how much would this change the firm’s profits?
ANSWER: Increase by $100 because the additional revenue per unit is $30 and the additional cost per unit is
$20, so the additional profit per unit would be $10.

17. (4 points) For the above table, using the Revenue Test, indicate the elasticity of the demand curve for each of
the following price changes. NOTE: Put your answers here.
● For a price change from $5 to $10, the demand curve is elastic.
● For a price change from $10 to $15, the demand curve is unit elastic.
● For a price change from $15 to $20, the demand curve is inelastic..
● For a price change from $20 to $25, the demand curve is unit elastic.

18. (4 points) Famous people are great for making commercials, and it’s also impactful when they say swears
(but they can’t say them in commercials!). So, at a given point of time, they can either be doing a commercial or
saying a swear, but can’t be doing both, hence there’s an opportunity cost to doing either. Consider the following
resources and how they can be combined to form a Production Possibilities Frontier. ("OR" implies either choice
or any linear combination of the two.) Fill out the PPF for these resources, and assume for now that resources
can only do one thing or the other, and not divide their time between the two tasks.
 Outputs: Commercials OR Swears
Resources:
Mahomes 8 8
Travis 10 4
Jason 3 1
Ye 8 4
Taylor 15 30
Put your PPF here:
Commercials AND Swears
44 0
29 ½: 1 30
21 1:1 38
13 2:1 42
3 2.5:1 46
0 3:1 47

19. (4 points) If the resources can divide their time between the two tasks, would the point
(17 Commercials AND 41 Swears) be efficient, inefficient, or unattainable? Briefly explain why.
ANSWER: (21 & 38) is efficient. Tradeoff is 2:1. Losing four Commericals gains us two Swears, so would put
us at (17 & 40), which is efficient. Since (17 & 41) is better than an efficient point, then it is unattainable.
Speaking of commercials…awesome…. https://www.youtube.com/watch?v=PL-5pfIstDU

20. (11 points) Suppose that Northwestern would pay me $10,000 per extra class each year. That’s nice, but
teaching is very annoying, causing me unhappiness worth about $6,000 (This isn’t true! I love teaching!).
Suppose that if I teach one extra class, I would be in the 25% marginal tax bracket, if I teach a second extra class,
I would be in the 35% marginal tax bracket. If I teach a third extra class, I would be in the 45% marginal tax
bracket.
● How many extra classes would I choose to teach? Briefly, why?
Net payoff from first extra class = $10,000*(1-0.25) = $7,500 > $6,000, so I would teach it!
Net payoff from second extra class = $10,000*(1-0.35) = $6,500 > $6,000, so I would teach it!
Net payoff from third extra class = $10,000*(1-0.45) = $5,500 < $6,000, so no thanks, I would not teach that.

● If the marginal tax rates were doubled (50%, 70%, 90%), how many extra classes would I teach? Briefly,
why?
Net payoff from first extra class = $10,000*(1-0.5) = $5,000 < $6,000, so no.

21. (11 points) If there is a negative externality, does the market produce too much or too little? What does too
much or too little even mean in this context? If Adam Smith’s “Invisible Hand” is so great, why would it let us
get the market quantity so wrong? (Accompany your explanation with the appropriate graph.)
ANSWER: With a negative externality, the market produces too much. (2 points)
That is, we have DWL because we are producing where the marginal social cost of producing the extra units is
greater than the marginal social benefits of doing so. (3)
The Invisible Hand fails to stop at the socially optimal level of production because it is profitable to produce
extra units where the Marginal Private Cost < Marginal Willingness to Pay (PMB) < Marginal Social Cost. (3)
Graph (3)
Writing “It is too much because it is beyond the socially optimal quantity” is not a thoughtful answer that
displays an understanding of why the quantity is too much, but rather is a statement of the definition of “too
much.”

On-time bonus? (We will mark this one for you.) Yes: +4. No: + 0. Late: -5.
Long problems: Write in the space provided
22. (11 points) From 1992 until 2021, we never saw the inflation rate go about 4%, then for two years it was
well above 4%. Krugman claimed that it was various factors: messed up supply chains and because Covid made
it harder for people to do their work, which made it more expensive to produce goods. Larry Summers said that
the problem was the economic stimulus provided by increased government spending and cash transfers from
government to augment people’s incomes. Draw two SRAS-AD diagrams to illustrate each view. (Label
everything carefully.)
● In the left box below, draw Krugman’s view, and state what such an inflation would be called.
● In the right box below, illustrate Summers’ simulus view and what such an inflation would be called.

Krugman: SRAS (AS) shifts left Summers: SRAS (AS) shifts right
Name for Krugman’s inflation: Stagflation/Cost push Name for Summers’ inflation: Economic boom/
Demand pull
23. (11 points) There is the Krugman view and the Summers view of what caused the high inflation, and then
there are those who say that both effects were important. What variable could we look at to see which of the
three views is closest to correct? What would that variable do to indicate which theory was best? (Draw graph is
you like.)
ANSWER: If output (or employment) rises (or unemployment falls), then it looks like it is the rightward shift of
AD that dominates.
If output or employment fall (or unemployment rises), then it looks like it was the leftward shift of SRAS (AS)
that dominates.
If the level of output, employment, and unemployment stay about the same, then the two shifts are cancelling
each other out.