Douglas, Spring 2008 February 21, 2008 PLEDGE: I have neither given nor received unauthorized help on this exam.

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1 , Spring 2008 February 21, 2008 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Midterm 1 1. What will happen to the equilibrium price of hamburgers if the population of consumers increases, the price of pizzas rises, and the wages of beef packing workers increase? a. Price will stay exactly the same. b. Price will rise. c. Price will fall. d. The price change will be ambiguous. 2. Suppose that in a closed economy GDP is $11 trillion, consumption is $7 trillion, taxes are $3 trillion and the government runs a surplus of $1 trillion. What are private saving and national saving (S)? a. $4 trillion and $1 trillion b. $4 trillion and $5 trillion c. $1 trillion and $2 trillion d. $1 trillion and $3 trillion 3. If you buy a meal at your favorite restaurant instead of preparing your meal at home, probably a. neither GDP nor consumption is affected. b. GDP will be higher, but consumption spending will be unchanged. c. GDP will be unchanged, but consumption spending will be higher. d. both GDP and consumption spending will be higher. 4. The CPI is a measure of the overall cost of a. inputs purchased by a typical producer. b. goods and services bought by a typical consumer. c. goods and services produced in the economy. d. stocks on the New York Stock Exchange. 5. Which of the following best illustrates the human capital of a survivor stranded on an island? a. The fishing poles she has produced. b. The invention of a better fishing lure. c. The fresh fruit and fish on and around the island. d. Her previous training in a survival course. 6. The average amount of goods and services produced from each hour of a worker's time is called a. per capita GDP b. per capita GNP c. productivity d. human capital 7. In a simple circular-flow diagram total income and total expenditure are a. never equal because total income always exceeds total expenditure. b. seldom equal because of the ongoing changes in an economy s unemployment rate. c. equal only when one dollar is spent on goods for every dollar that is spent on services. d. always equal because every transaction has a buyer and a seller. 8. In a given year an economy has consumption of $3,000, investment of $2,000, government purchases of $1,500, exports of $500, imports of $600, taxes of $1200, transfer payments of $400, and depreciation of $300. This economy s GDP is a. $6,400. b. $5200. c. $6,600. d. $8,900. 3

2 9. A transfer payment is a payment made by a. consumers, but not in exchange for a tangible product. b. firms, but not in exchange for capital equipment. c. foreigners, but not in exchange for a domestically-produced good or service. d. government, but not in exchange for a currently produced good or service. 10. Other things being constant, when a company issues more shares of its stock, the a. supply of the stock is greater and thus the price will fall. b. supply of the stock is less and thus the price will rise. c. demand for the stock is greater and thus the price will rise. d. demand for the stock is less and thus the price will fall. 11. Mavis Corporation has a COLA agreement with its workers to index their wages to the CPI, so as to keep their real wages constant. Mavis paid its workers $10.00 an hour in If the CPI rose from 200 in 2006 to 208 in 2007, what did Mavis pay its workers in 2007? a. $ b. $9.62. c. $ d. $ In 2007, U.S. GDP was almost a. $6 trillion. b. $14 trillion. c. $24 trillion. d. $44 trillion. 13. The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide not to build the factory. If interest rates fall after the meeting a. the present value of the proposed factory rises, and investing in it is more attractive. b. the present value of the proposed factory rises, and investing in it is even less attractive. c. the present value of the proposed factory falls, and investing in it is more attractive. d. the present value of the proposed factory falls, and investing in it is even less attractive. 14. Suppose that the price of dairy products doubles in a given year, but the prices of all other consumer items rose only 10%. This is likely to create what kind of problem for CPI calculation? a. substitution bias b. introduction of new goods bias c. unmeasured quality change bias d. income bias 15. It is often claimed that mutual funds have two advantages over purchasing stocks and bonds directly: 1) They allow people with small amounts of money to diversify. 2) They allow ordinary people to take advantage of the stock-picking skills of professional money managers to increase the returns they earn on their savings. a. Economists strongly agree with both claims. b. Economists are skeptical of both claims. c. Economists are skeptical of the first claim, but strongly agree with the second. d. Economists strongly agree with the first claim, but are skeptical of the second. 16. A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result, a. U.S. investment and GDP increase, but German GDP is unaffected. b. U.S. investment and German GDP increase, but U.S. GDP is unaffected. c. U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods. d. U.S. investment, U.S. GDP, and German GDP all increase. 2

3 17. Ceteris paribus, a country that increases its saving rate increases a. its future productivity and future real GDP. b. neither its future productivity nor future real GDP. c. its future productivity, but not its future real GDP. d. its future real GDP, but not its future productivity. 18. If you put $300 into an account paying 2 percent interest compounded yearly, what will be the value of this account in two years? a. $310 b. $312 c. $ d. $ For the purpose of calculating GDP, investment is spending on a. stocks, bonds, and other financial assets. b. real estate and financial assets. c. capital equipment, inventories, and structures, including new residential housing. d. capital equipment, inventories, and structures, excluding new residential housing. 20. If Congress reduced the tax rate on interest income, ceteris paribus,equilibrium investment a. would increase and the equilibrium interest rate would decrease. b. would decrease and the equilibrium interest rate would increase. c. and the equilibrium interest rate would both increase. d. and the equilibrium interest rate would both decrease. Table 24-2 Year Price of pork Price of corn 2005 $20 $ $25 $ Refer to Table Suppose the basket of goods in the CPI consisted of 3 units of pork and 5 units of corn. What is the consumer price index for 2006 if the base year is 2005? a b c d Index funds a. typically have a higher rate of return and higher costs than managed mutual funds. b. typically have a higher rate of return and lower costs than managed mutual funds. c. typically have a lower rate of return and higher costs than managed mutual funds. d. typically have a lower rate of return and lower costs than managed mutual funds. 23. Which of the following events could NOT shift the supply curve for motor oil to the left? a. The price of gasoline rises. b. Wages of oil industry workers rise. c. War breaks out in the Middle East. d. The price of motor oil falls. 24. Which of the following is correct? a. Property rights are required for markets to work. b. Property rights provide an essential incentive for capital accumulation. c. Poorly enforced property rights often contribute to reduced living standards. d. All of the above are correct. 3

4 25. Over the past century in the United States, average income as measured by real GDP per person grew about a. 3.5 percent per year, which implies a doubling about every 35 years. b. 2 percent per year, which implies a doubling about every 35 years. c. 7 percent per year, which implies a doubling about every 10 years. d. 10 percent per year, which implies a doubling about every 7 years. 26. Ceteris paribus, a higher interest rate induces people to a. save more, so the supply of loanable funds slopes upward. b. save less, so the supply of loanable funds slopes downward. c. invest more, so the supply of loanable funds slopes upward. d. invest less, so the supply of loanable funds slopes downward. 27. In calculating the consumer price index, a fixed basket of goods is used. The quantities of the goods in the fixed basket are determined by a. surveying consumers. b. surveying sellers of those goods. c. working backward from the rate of inflation to arrive at imputed values for those quantities. d. arbitrary choices made by federal government employees. 28. According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would a. raise both private and public saving. b. raise private saving and lower public saving. c. lower private saving and raise public saving. d. lower private and public saving. 29. A firm has three different investment options. Option A will give the firm cash flows of $2 million in one year, another $2 million in two years, and another $2 million in three years. Option B will give the firm $3 million in one year, $2 million in two years, and $1 million in three years. Option C will give the firm $6 million in three years, and nothing before. Which of these options has the highest present value? a. Option A b. Option B c. Option C d. The ranking of the options depends on the rate of interest. 30. Which of the following could explain a decrease in equilibrium interest rate and savings? a. The demand for loanable funds shifted right. b. The demand for loanable funds shifted left. c. The supply of loanable funds shifted right. d. The supply of loanable funds shifted left. 4

5 Short Essay Question. Answer all three parts in the space provided. (You may use the back of the page in an emergency, but be sure to indicate if you do). 31. a. Suppose the price of pizza crust rises from $1 per pie to $2 per pie during a certain year, and at the same time the price of an essential piece of dairy farm machinery rises from $100,000 to $125,000. In combination, these events would likely cause the price of mozzarella cheese to (circle one:) [RISE, or FALL, or UNCERTAIN], and the quantity sold of mozzarella cheese to [RISE, or FALL, or UNCERTAIN]. Explain briefly in the space below, using graphs and complete sentences. On your graphs, be sure to LABEL all curves and axes. b. Now suppose that the consumer price index, (and the producer price index) rose from 150 to 300 during the same year as in part a above. Does this new information change your answers to a? Explain very briefly, using a complete sentence. c. When consumers and producers decide how much to buy and sell a good, they care more about the (circle one:) [NOMINAL, or REAL] price of the good. Explain why, using at least one concept from the first two chapters of the text. 5

6 6

7 ID: A Econ 202 Midterm 1 Answer Section MULTIPLE CHOICE 1. ANS: B MSC: Analytical 2. ANS: C MSC: Applicative 3. ANS: D MSC: Interpretive 4. ANS: B MSC: Definitional 5. ANS: D MSC: Interpretive 6. ANS: C MSC: Definitional 7. ANS: D MSC: Interpretive 8. ANS: A MSC: Applicative 9. ANS: D MSC: Definitional 10. ANS: A MSC: Analytical 11. ANS: D MSC: Interpretive 12. ANS: B MSC: Definitional 13. ANS: A MSC: Analytical 14. ANS: A MSC: Interpretive 15. ANS: D MSC: Interpretive 16. ANS: A MSC: Applicative 17. ANS: A MSC: Analytical 18. ANS: C MSC: Applicative 19. ANS: C MSC: Definitional 20. ANS: A MSC: Analytical 21. ANS: D MSC: Applicative 22. ANS: B MSC: Definitional 23. ANS: D MSC: Interpretive 24. ANS: D MSC: Definitional 25. ANS: B MSC: Definitional 26. ANS: A MSC: Definitional 27. ANS: A MSC: Definitional 28. ANS: C MSC: Interpretive 29. ANS: B MSC: Applicative 30. ANS: B MSC: Analytical PROBLEM 31. ANS: a. Pizza crust is a complement to mozzarella cheese, so an increase in its price causes the Demand for Mozzarella to Shift Left, driving P&Q down. An increase in the price of dairy machinery decreases the supply of milk, which increases the price of milk, which is an input into the production of cheese. This will shift the Supply for Mozzarella to the Left, causing P to rise and Q to fall. OVERALL, QUANTITY WILL FALL, and PRICE CHANGE IS UNCERTAIN. b. In real terms, the price of pizza crust stays the same, so demand for mozzarella will not change. In real terms, the price of dairy machinery falls, so supply increases. PRICE WILL FALL, AND QUANTITY WILL INCREASE. c. Real prices matter, because they reflect true opportunity costs. 1

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