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Exam 2 Review handout

The document is a review guide for Exam 2 of an Economics course, covering various topics such as labor market classifications, unemployment and labor force participation rates, inflation calculations, aggregate expenditure functions, and consumption behavior. It includes specific questions and scenarios for students to analyze and calculate economic indicators. Additionally, it addresses the impact of aggregate expenditure on GDP and the role of inventories in economic fluctuations.

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2 views

Exam 2 Review handout

The document is a review guide for Exam 2 of an Economics course, covering various topics such as labor market classifications, unemployment and labor force participation rates, inflation calculations, aggregate expenditure functions, and consumption behavior. It includes specific questions and scenarios for students to analyze and calculate economic indicators. Additionally, it addresses the impact of aggregate expenditure on GDP and the role of inventories in economic fluctuations.

Uploaded by

hoangbaohan.tran001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Exam 2 Review

Econ 102, Spring 2025

1. Consider an economy with six people. Rosa works full-time for pay. Robin works one shift per
week at a fast-food restaurant and is not looking for more hours. Wendy is retired. Andrea does
not work for pay but has been sending out resumes to try and find a job. Bob has given up
looking for work after months of not finding anything. Lucas is 3 years old. (Variation on
Problem Set 4, Question 12).

a. Classify the labor market status of each person in this economy (employed, unemployed, out
of the population, underemployed, etc.). If a person falls into more than one category, list all
categories.

Rosa:

Robin:

Wendy:

Andrea:

Bob:

Lucas:

b. What is the unemployment rate?

c. What is the labor force participation rate?

d. What is the U-6 measure of unemployment?

e. What is U-6 if Robin wishes she could get more hours?

f. Are the unemployment rates/U-6 rates in this question big or small relative to real-world
numbers for the United States?

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2. Use the following table of CPI data for the U.S. to calculate inflation in 2021. Give your
answer in percent terms to one decimal place.

Year CPI
2019 255.652
2020 258.851
2021 270.971
2022 292.613

3. Consider an economy in which households consume 90, regardless of their income, and an
additional 75 cents of each additional dollar of income earned. Firms invest 50. [1]

a. Write an expression for aggregate expenditure as a function of income.

b. Set up a Keynesian cross graph that shows this aggregate expenditure function and
equilibrium GDP. Then add a line showing what happens to GDP if autonomous consumption
rises by 30. You don’t have to count out boxes on graph paper; just set up a graph that
includes the main features of each line. Solve for equilibrium GDP both before and after
autonomous consumption increases & label your graph completely.

c. How would your graph in (b) look if investment had instead risen to 80?

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4. What happens to GDP when aggregate expenditure in the economy is greater than production?
Why? Make sure your answer touches on the role of inventories. (~1-2 sentences).

5. Consider an economy in which consumption behaves according to the following equation:

C=125+0.95 Y
a. Based on this equation to describe consumption behavior in this economy in words (~1-2
sentences).

b. What is the savings function in this economy?

c. Now say that consumption depends on disposable income (Yd), which is income after taxes
and after transfers (like unemployment benefits or stimulus checks):
C=125+0.9 Y d
where:
Y d =Y −Taxes+ transfers

Say that taxes are equal to zero and transfers are equal to 50. Investment is 20. Write an
expression for aggregate expenditure in this economy.

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6. Consider an economy with a population of 350 people. Of these 350 people, 70 are under age
16, 190 are employed in paid work, and 80 are adults who are not doing paid work or looking for
work because they are doing full-time family care, are retired or disabled, or in school. The rest
are unemployed. There is no military, and no one is institutionalized. (Problem Set 4, Question
11)

a. What is the unemployment rate? Write your answer in percent terms, to one decimal place.

b. What is the labor force participation rate?

c. If this economy included individuals in the military, what would their labor market status be?

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