Name (Please print) Assigned Seat. ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2011 Prof. Bill Even FORM 1.

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1 Name (Please print) Assigned Seat ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2011 Prof. Bill Even FORM 1 Directions 1. Fill in your scantron with your unique id and form number. Doing this properly is worth the equivalent of one question. 2. There are 50 multiple choice questions. 3. Your grade is determined entirely upon the answers listed on your scantron. You will not receive your scantron back. Be sure to record your answers on your exam so that you will be able to check your answers once the key is posted. 5. You may use a calculator. Cell phones or other devices that may be used to store text are not allowed. 6. You have until the end of the period to finish the exam. Additional time may be purchased at a price of 5 percentage points per minute. 7. Academic dishonesty is a serious offense. In the event I find someone behaving in a dishonest manner, I will ask that the maximum penalty allowed by the university be imposed. 1

2 1) Gross domestic product (GDP) measures the A) market value of final goods and services produced in the economy in a given time period. B) number of final goods and services produced in the economy in a given time period. C) number of final goods and services sold in the economy in a given time period. D) market value of old and new final goods and services sold in the economy in a given time period. 2) In the nation of Nirvana, depreciation is $22 billion, GDP is $260.4 billion, and national income is $215.2 billion. Net domestic product is A) $215.2 billion. B) smaller than national income. C) $238.4 billion. D) $445.2 billion. 3) Intermediate goods are excluded from GDP because A) their inclusion would understate GDP B) the premise of the question is incorrect because intermediate goods are directly included in calculating GDP. C) their inclusion would involve double counting production of some goods. D) they represent goods that have never been purchased so they cannot be counted. 4) The expenditure approach measures GDP by adding A) compensation of employees, rental income, corporate profits, net interest, proprietorsʹ income, indirect taxes paid, and depreciation and subtracting subsidies paid by the government. B) compensation of employees, rental income, corporate profits, net interest, proprietorsʹ income, subsidies paid by the government, indirect taxes paid, and depreciation. C) compensation of employees, rental income, corporate profits, net interest, and proprietorsʹ income. D) consumption expenditure, gross private domestic investment, net exports of goods and services, and government expenditure on goods and services. 5) In the expenditure approach to GDP, the largest component is A) gross private domestic investment. B) personal consumption expenditures. C) government expenditure on goods and services. D) net exports. 6) Gross private domestic investment is all purchases of newly produced business capital goods and buildings A) plus purchases of capital goods produced in previous years to replace any depreciated capital goods. B) plus fixed investment minus inventory investment. C) plus the change in business inventories plus residential construction. D) minus the change in business inventories. 7) Transfer payments A) refer to payments made by the government that are not made to purchase a good or service. B) are included in the government expenditure category in gross domestic product. C) refer to all payments made to households by governments. D) are made by households to firms in exchange for goods and services. 2

3 8) The five categories of income used in the income approach to the measurement of GDP are A) employee compensation, consumption, rental income, corporate profits, and proprietorʹs income. B) employee compensation, saving, rental income, corporate profits, and investment. C) consumption, saving, rental income, corporate profits, and investment. D) employee compensation, net interest, rental income, corporate profits, and proprietorʹs income. 9) Real GDP can be criticized as a measure of economic welfare because it A) does not take account of the degradation of environmental quality. B) does not include leisure time available to a society. C) does not include the value of products produced in the household. D) All of the above answers are correct. 10) Suppose that inventories rose during This means that A) sales of final goods and services in 2010 exceeded production of final goods and services in B) production of final goods and services in 2010 exceeded sales of final goods and services in C) GDP in 2010 will be understated. D) Both A and C. 11) In the computation of GDP, social security payments count as A) transfer payments and are included in GDP. B) government expenditure on goods and services and are not included in GDP. C) transfer payments and are not included in GDP. D) government expenditure on goods and services and are included in GDP. 12) Which of the following statements is true? A) real GDP grows faster than nominal GDP if there is inflation. B) compared to changes in nominal GDP per capita, changes in real GDP per capita provide a better measure of changes in the standard of living. C) the same base year prices are always used when calculating nominal GDP for any given year. D) none of the above are true. 13)Which of the following is the best definition of potential gross domestic product? A) the value of total production B) the value of total production when the economyʹs resources are fully employed C) the value of total production that grows at 2 percent per year D) None of the above is correct. 14) The four parts of the business cycle occur in the following order: A) recession, trough, peak, expansion. B) expansion, trough, recession, peak. C) recession, trough, expansion, peak. D) expansion, trough, peak, recession. 3

4 15) Which of the following would lead GDP to overstate the growth in the standard of living? A) more restaurant workers under-report tip income B) more people begin to eat at restaurants instead of cooking at home C) utilities switch to solar energy and less pollution is created D) all of the above 16) Which of the following statements about the comparison between GDP in China and in the United States is correct? A) Chinaʹs GDP per person in dollars is higher using purchasing power parity exchange rates rather than the actual exchange rate. B) Using the actual exchange rate to value Chinaʹs GDP in dollars shows that Chinaʹs GDP per person exceeds the GDP per person in the United States. C) Using purchasing power parity exchange rates to value Chinaʹs GDP in dollars shows that Chinaʹs GDP per person exceeds the GDP per person in the United States. D) None of the above. To answer the next 2 questions, refer to the data below drawn from the Bureau of Labor Statistics for January January 2011 Data (all numbers are in 1000s) Employed 139,323 Unemployed 13,863 Civilian Noninstitutional population 238,704 17)Based on the above, the civilian labor force participation rate is: A) 64.2% B) 58.4% C) 73.1% D) there is insufficient information to compute the civilian labor force participation rate 18) Based on the above information, the unemployment rate in January 2011 was: A) 9.3% B) 9.0% C) 10.0% D) none of the above 19) Which of the following could cause the labor force participation rate and unemployment rate to both fall? A) 500,000 unemployed workers quit looking for work without finding a job. B) 100,000 college students who were previously not employed or looking for work find a job after graduation. C) 500,000 workers decide to retire and their jobs are eliminated. D) all of the above. 4

5 20) If the number of discouraged workers increases, the unemployment rate will and the labor force participation rate will. A) not change; fall. B) fall; fall. C) rise; fall D) not change; not change. 21) During an expansion, the labor force participation rate tends to than the employment population ratio. A) fall more B) rise more C) rise less D) fall less 22) Suppose that a large group of dock workers lose their jobs because the shipyards begin using new technology that reduces the number of workers required to unload ships. What type of unemployment are these former dock workers experiencing? A) frictional unemployment. B) discouraged unemployment. C) structural unemployment. D) cyclical unemployment. 23) The economy is at full employment when A) there are no unemployed workers. B) all unemployment is frictional or structural. C) all unemployment is cyclical. D) there are fewer unemployed workers than available jobs. 24) Which of the following would be most likely to lead to an increase in the frictional rate of unemployment? A) an increase in the generosity of unemployment insurance since this would be likely to cause workers to remain unemployed longer between jobs. B) an increase in the rate of technological innovation since this means that a larger number of workers will see their jobs become obsolete. C) a recession since this causes an increase in the number of workers who are laid off until the economy expands again. D) both a and b. 5

6 CPI basket quantity 2003 price 2009 price Bread 3 loaves $1 per loaf $1.50 per loaf Gasoline 20 gallons $2.00 per gallon $2.50 per gallon Fruit 3 pounds $3 per pound $2.00 per pound 25) If 2009 is the reference base period, what is the price index for the CPI basket of goods for 2003 in the above table? A)81.0 B) C) D) none of the above. 26) Using 1983 as the base year, the CPI in December 2010 was 220. This means that $1 in 1983 would buy as much as in December A). $1.20 B) $2.20 C) $3.20 D) none of the above. 27) Using 1983 as the base year, the CPI in December 2010 was 220. This means that the average annual rate of inflation over this 27 year period was A) 2.7% B) 3.0% C) 3.3% D) 4.2% 28) Suppose that between 2010 and 2011, real wages (measured in 1983 dollars) rise from $10 to $11 and nominal wages rise from $20 to $24. Based on this information, we can conclude that: A). prices in 2010 were twice as high as those in 1983 B) prices in 2011 were 2.18 times as high as those in C) the inflation rate between 2010 and 2011 was 9.1% D) all of the above. 29) Because of the biases in calculating the CPI, the measured inflation rate A) exceeds the actual growth in the cost of living by about 1 percent per year. B) is about 1 percent less than the actual growth in the cost of living. C) is less accurate for old than young people. D) is more accurate for old than young people. 6

7 30) If the bias in construction of the CPI was eliminated A) government transfer payments would rise at a faster rate B) government tax revenue would rise at a faster rate C) the government budget deficit would grow D) all of the above 31) Suppose that borrowers and lenders both expect inflation to be 3%. If inflation turns out to be 5% after the loan agreements are made, A) the lenders win and the borrowers lose B) the lenders lose and the borrowers win C) both the lenders and the borrowers win D) both the lenders and the borrowers lose 32) Suppose that real GDP doubles in 14 years. This suggests that the growth in real GDP must have been approximately: A) 4% B) 5% C) 6% D) 7% 33) Suppose that between 2000 and 2010 the CPI grows from 180 to 220 and the nominal wage rises from $20 to $26. This means that the real wage over the period would have A) increased by 5.2% B) decreased by 5.2% C) increased by 6.4% D) decreased by 6.4% 34) The curvature of the production function shows that as employment increases, the productivity of labor A) remains constant. B)remains positive and increases. C) decreases and becomes negative. D) remains positive but decreases. 35) Suppose that the U.S. makes the Social Security system less generous and people respond by retiring later. This should cause real wages to and potential GDP to. A). fall; fall. B) fall; rise. C). rise; fall. D). rise; rise. 7

8 36) Suppose that workers become more skilled and the marginal product of labor increases for any given level of employment. Given the effects on the labor market and the aggregate production function, we should expect that employment will and real GDP per capita will. A) rise; rise B) fall; rise C) fall; fall D) rise; fall 37)If capital per hour of labor grows by 6 percent a year and labor productivity grows by 3 percent a year, the one third rule says that the growth in labor productivity can be divided so that technological change accounted for percentage points and capital growth accounted for percentage points. A) 2; 1 B) 1; 2 C) 3; 0 D) 0; 3 38) Classical economists believed that A) if the standard of living rose above the subsistence level, population growth would eventually push the standard of living back to the subsistence level B) if the standard of living fell below the subsistence level, population growth would eventually push the standard of living back to the subsistence level C) the standard of living would rise above the subsistence level eventually because of technological improvements. D) all of the above 39) Suppose the United States spends more on foreign goods and services than foreigners spend on U.S. goods and services and the United States sells no foreign assets. Then the A) rest of the world may or may not finance the U.S. trade deficit. B) United States must borrow an amount equal to imports minus exports. C) United States must borrow an amount equal to national saving. D) United States must borrow an amount equal to consumption expenditure plus investment. 40) The real interest rate equals A) the nominal interest rate divided by the inflation rate B) the nominal interest rate minus the inflation rate C) the nominal interest rate minus the depreciation rate D) the nominal interest rate plus the inflation rate 41) During the most recession in the U.S., saving and investment. A) rose; rose B) rose; fell C) fell; rose D) fell; fell 8

9 42) Which of the following would lead to an increase in household saving? A) a temporary decline in the household s current income. B) an expected decline in the household s future income C) lower interest rates D) none of the above. 43) If households become more optimistic about their future income growth, we should see A) a decrease in the demand for loanable funds and lower real interest rates B) an increase in the demand for loanable funds and higher real interest rates C) an increase in the supply of loanable funds and lower real interest rates D) a decrease in the supply of loanable funds and higher real interest rates 44) In the U.S. market for loanable funds, the supply comes from A) only saving and the government budget surplus B) only the government budget surplus and loans from foreign countries C) only saving D) saving, the government budget surplus and lending from foreign countries. 45) If the government has a budget surplus and the surplus grows larger, then assuming there is no Ricardo Barro effect, we should expect to see: A) lower real interest rates and increased investment B) lower real interest rates and decreased investment C) higher real interest rates and increased investment D) higher real interest rates and decreased investment 46) According to the Ricardo-Barro effect, A) government budget deficits increase householdsʹ expected future disposable income. B) taxpayers fail to foresee that government deficits imply higher future taxes. C) households increase their personal saving when governments run larger budget deficits. D) government deficits raise the real interest rate. 47) Assuming there is a Ricardo Barro effect, a larger government budget deficit will: A) have no effect on real interest rates or private investment B) have no effect on private saving C) have no effect on household consumption D) all of the above. 48) If there is a technological innovation that creates many new profitable investment opportunities, we should expect: A) real interest rates will rise as loan demand increases. B) real interest rates will fall as loan supply increases. C) household saving will fall as loan supply decreases. D) none of the above. 9

10 49) If U.S. net exports are negative, A) other countries make loans to the United States so that the United States can pay for some of the goods it purchases from other countries. B) the United States borrows from other countries to pay for some of the goods the United States purchases from them. C) the United States sells some of the assets it owns in other countries to pay for some of the goods it sells to other countries. D) other countries borrow from the United States to pay for some of the goods they purchase from the United States. 50) According to the evidence presented in class, A) China and Japan are ranked first and second in terms of the amount of U.S. debt held. B) Foreign countries hold more than $4 trillion of U.S. government debt C) The U.S. federal government ran a deficit of over $1 trillion in D) All of the above. 10

11 Eco202, Midterm 1, Spring 2011 form 1 form 2 form 3 form 4 1 a a c c 2 c d d c 3 c b a d 4 d c c a 5 b d c c 6 c a d d 7 a c a b 8 d c d d 9 d d b a 10 b b b b 11 c c b c 12 b b c b 13 b b b c 14 c c c b 15 b a c c 16 a b a a 17 a c a b 18 b a b a 19 a b b b 20 b c c c 21 c a b a 22 c b a b 23 b b a b 24 a a b a 25 d b d b 26 b b a a 27 b d d d 28 d a b d 29 a d b b 30 b b d d 31 b b b b 32 b b c c 33 c d b b 34 d b b b 35 b c b b 36 a b b b 37 b b a a 38 a b a a 39 b a b b 40 b b b a 41 b a b a 42 b a a c 43 d c b b 44 d a a b 45 a a c b

12 46 c b a a 47 a a a a 48 a d d d 49 a d d d 50 d d d d

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