EC 2124 Midterm
Friday, October 18 6-8pm
17 Multiple Choice – 2 marks ea.
7 True and False – 2 marks ea.
8 Short Answer – 34 marks total.
Total = 82 marks
** Allowed a regular calculator **
** Very literal about her answers, if its two marks, need two points **
** Write in short form **
** Presentation questions are all in True/False **
** NO UTI **
** She likes giving E. answers that combine two answers, ELIMINATE incorrect answers first **
** Be sure to know SOLOW ** ex. What curve will shift and what way, maybe why. Some say
“State” meaning no answer needed. Others have ‘explain briefly’.
** Check TRUE/FALSE underline key words (always, must, etc) **
** We do need to know similarities and differences between Solow and Harrod-Domar Model **
** Growth accounting formula, Solow formula, Harrod-Domar, write them down **
** Drawing graphs helps **
--OFFICE HOURS ON THURSDAY, LAST CHANCE FOR QUESTIONS—
All these questions have been on an exam
1. Briefly explain the concepts of “conditional convergence” and “unconditional
convergence”. What does the Solow growth model imply about convergence? What does
the evidence say? (6 marks)
Unconditional Convergence: Poor countries will grow faster than rich and catch up to the rich. (1
Conditional Convergence: Poor countries with the same characteristics will catch up to the rich.
Solow: Says poor countries with the same potential steady-state level of GDP as rich countries
will catch up to the rich or poor countries with the same population growth, savings rates and
depreciation rates will catch up with rich. This is conditional convergence. (2 marks)
The evidence says there is no evidence of unconditional convergence. There is some evidence
of conditional convergence if you group countries by geographical regions, same
characteristics, etc. The gap is basically staying the same, rather than narrowing. (2 marks)
2. What is the Big Mac Index? What is it used for? Explain why we get different numbers
when using the purchasing power parity measure of income.
The Big Mac Index was developed by the Economist magazine to compare prices of Big Macs
around the world in their domestic currency and converted to US dollars using the exchange
rate. (1 mark)
It is used to discuss where currencies are under or overvalued and whether PPP holds. (2
We get different numbers because; (2 marks)
• Prices tend to be lower in developing countries.
• Some good are non-traded, therefore the ER does not reflect this. • There could be trade restrictions impost by the government which could not be reflected
in the ER.
• ER movements can be very volatile.