Question 1
(a) List the four phases of the business cycle (10pts.)
(b) During periods of economic expansion, do economies typically experience inflation or
deflation? (5pts.)
Question 5
(a) Below is the familiar circular-flow diagram of the macroeconomy. What does this
diagram show? You do not need to make reference to every single feature in this
diagram. Just state the basic idea but be clear in your answer (10pts).
(b) Assume that the average annual household income in the U.S. is $53,000 and that the
average income tax rate is 20%. Assume also that, on average, each U.S. household
receives $6,000 in government transfers. What is the average household disposable
income in the U.S.? Clearly show all your calculations (15pts).
(c) Based on what you know about the circular flow diagram, the amount of money the
government spends on goods and services and government transfers must equal the sum
of which flows of funds into the government? (10 pts)
(d) Show the equation used to calculate GDP, and define all the variables within this
equation (10pts.)
Question 4
Imagine there are only two economies in world: Germany and Greece. These two economies
produce many different types of goods and services, some of which are traded between them.
Suppose that the value of goods Greece imports from Germany is worth $1 billion, and suppose
that the value of goods Greece exports to Germany is worth is worth $0.30 billion. Is Greece
running a trade surplus or a trade deficit? Of how much? Clearly explain how you arrived at your
answer. You may draw a simple diagram if it that helps (10pts. This question is a “gift”
question ).
Question 5
(a) For my favorite imaginary country of Economia, the table below shows the price and
quantity of goods produced and in Years 1 and 2. It also shows the Economia’s nominal
and real GDP for Year 1. Calculate this country’s nominal and real GDP for Year 2,
using Year 1 as the base year. Show all calculations clearly (20pts.)
Price and Quantity of Goods Year 1 Year 2
Quantity of pizzas (millions) 1,000 800
Price of a pizza $20 $25
Quantity of burgers (millions) 1,000 800
Price of a burger $10 $12.50
GDP (billions of $) $30,000
Real GDP (billions of $) $30,000
(b) Over this 1-year period (from Year1 to Year2), has Economia’s aggregate output
increased, decreased or stayed the same? Explain (10pts).