ETP Economics Midterm Examination
Winter Term of 2007
1.Over time people have come to rely more on market-produced goods and less on goods that they produce for
themselves. For example people eat at restaurants relatively more and prepare their own meals at home
relatively less. By itself this change would
a. make GDP fall over time.
b. not make any change in GDP over time.
c. make GDP rise over time.
d. change GDP, but in an uncertain direction.
Use the following table to answer the next questions.
GDP
$110
Income Earned by Citizens Abroad
$5
Income Foreigners Earn here
$15
Depreciation
$4
Retained earnings
$5
2.GNP (Gross National Product) for this economy is
a.
b.
c.
d.
$96.
$100.
$105.
$110.
3.NNP for this economy is
a. $100.
b. $96.
c. $90.
d. $88.
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4.A German citizen buys an automobile produced in the United States by a Japanese company. As a result,
a. U.S. net exports increase, U.S. GNP and GDP are unaffected, Japanese GNP increases, German net
exports decrease, and German GNP and GDP are unaffected.
b. U.S. net exports, GNP, and GDP increase, Japanese GDP increases, German net exports decrease, and
German GDP is unaffected.
c. U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and
German GDP and GNP are unaffected.
d. U.S. net exports, GNP, and GDP are unaffected, Japanese GNP increases, German net exports decrease,
and German GDP and GNP fall.
5.If the U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2003,
and $30,000 in retirement benefits in 2004
a. each payment will be included in GDP as government purchases for the respective years.
b. the 2003 payment is included in 2003 GDP as government purchases, but the 2004 payment is not
included in 2004 GDP.
c. the 2003 payment is included in 2003 GDP as government purchases, and the 2004 payment is included
in 2004 GDP as government transfer payments.
d. the 2003 payment is included in 2003 GDP as government purchases, and the 2004 payment is
allocated to previous years' GDP according to the amount of work performed each year.
6.Suppose GDP consists of wheat and rice. In 2002, 20 bushels of wheat are sold at $4 per bushel, and 10
bushels of rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the price of rice was
$1 per bushel in 2001, the base year, nominal 2002 GDP is
a. $100, real 2002 GDP is $50, and the GDP deflator is 50.
b. $50, real 2002 GDP is $100, and the GDP deflator is 200.
c. $100, real 2002 GDP is $50, and the GDP deflator is 200.
d. $40, real 2002 GDP is $100, and the GDP deflator is 50.
7.The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it sells all 25 cars.
a. The value of increased inventory will be counted as part of GDP in 2003, but the value of the cars sold
in 2004 will not cause GDP to increase.
b. The value of the increased inventory will not affect 2003 GDP, but will be included in 2004 GDP.
c. The value of the increased inventory will be counted as 2003 GDP and the value of the cars sold in
2004 will increase 2004 GDP.
d. None of the above are correct.
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8.The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts and 2
pants. In 2001 bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each and pants cost
$10.00 per pair. In 2002 bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each and
pants cost $12.00 per pair. What was the inflation rate, as measured by the CPI, for Aquilonia between
2001 and 2002?
a. 30 percent
b. 24.4 percent
c. 21.6 percent
d. It is impossible to determine without knowing the base year.
9.An inflation rate calculated using the CPI shows the rate of change of
a.
b.
c.
d.
all prices.
the prices of all final goods and services.
the prices of all consumer goods.
the prices of some consumer goods.
10.In US consumer spending, medical expenditures make up 6% of total consumption. If the cost of medical
care increases by 50 percent, then, other things the same, the CPI is likely to increase by about
a. 3 percent.
b. 6 percent.
c. 9 percent.
d. 18 percent.
11.When the quality of a good deteriorates the purchasing power of the dollar
a. increases, so the CPI overstates the change in the cost of living if the quality change is not accounted
for.
b. increases, so the CPI understates the change in the cost of living if the quality change is not accounted
for.
c. decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted
for.
d. decreases, so the CPI understates the change in the cost of living if the quality change is not accounted
for.
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12.By itself a reduction in the price of large tractors imported into the United States from Russia will
a. make the GDP deflator decrease and the consumer price index to increase.
b. make the GDP deflator increase, but the consumer price index is unchanged.
c. will increase both the GDP deflator and the consumer price index.
d. will not change either the GDP deflator or the consumer price index.
13.Ingrid takes a university teaching job as an assistant professor in 1974 at a salary of $10,000. By 2003, she
has been promoted to full professor, with a salary of $50,000. If the price index in 1974 is 50, and the
price index in 2003 is 180, what is Ingrid’s 2003 salary in 1974 dollars?
a. $13,889
b. $18,000
c. $26,000
d. $36,000
14.Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the
loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him
than he could before he loaned Elwood the $5,000. From this we can conclude that the rate of inflation
during the year was
a. 2.5 percent.
b. 6 percent.
c.
8 percent.
d. 14 percent.
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15.Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If in the next 100 years
it doubles every 25 years, then a century from now U.S. real GDP per person will be
a.
b.
c.
d.
4 times higher than it is now.
8 times higher than it is now.
12 times higher than it is now.
16 times higher than it is now.
16.In 2002, Freedonia had a population of 2,700 and real GDP of about 11,610,000. In 2001 it had a population
of 2,500 and real GDP of about 10,000,000. What was the approximate growth rate of real GDP per
person in Freedonia between 2001 and 2002?
a.
b.
c.
d.
7.5 percent
12.5 percent
20.5 percent
35.5 percent
17.If an economy with constant returns to scale were to double its physical capital stock, its available natural
resources, and its human capital, but leave the size of the labor force the same,
a. its ouput would stay the same and so would its productivity.
b. its output and productivity would increase, but less than double.
c. its ouput and productivity would increase by more than double.
d. None of the above are correct.
18.Real GDP per person is $21,000 in Aquilonia, $15,000 in Nemedia and $6,000 in Shem. Saving per person
is $2,000 in all three countries. Other things equal, we would expect that
a. all three countries will grow at the same rate.
b. Aquilonia will grow the fastest.
c. Nemedia will grow the fastest.
d. Shem will grow the fastest.
19.Suppose U.S.-based Intel builds and operates a new chip factory in Mexico. Future production from such an
investment would
a. increase Mexico's GDP more than it would increase Mexico's GNP.
b. increase Mexico's GNP more than it would increase Mexico's GDP.
c. not affect Mexico's GNP, but would increase Mexico's GDP.
d. have no affect on either Mexico’s GDP or GNP.
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20.The President of a developing country proposes that his country needs to help domestic firms by imposing
trade restrictions.
a. These are outward-oriented policies and most economists believe they would have beneficial effects on
growth.
b. These are outward-oriented policies and most economists believe they would have adverse effects on
growth.
c. These are inward-oriented policies and most economists believe they would have beneficial effects on
growth.
d. These are inward-oriented policies and most economists believe they would have adverse effects on
growth.
21.If Microsoft sells a bond they are
a. borrowing directly from the public.
b. borrowing indirectly from the public.
c. lending directly to the public.
d. lending indirectly to the public.
22.Suppose that the government finds a major defect in one of a company’s products and demands that they
take it off the market. We would expect that the
a.
b.
c.
d.
supply of the stock and the price will both rise.
supply of the stock and the price will both fall.
demand for the stock and the price will both rise.
demand for the stock and the price will both fall.
23.Queen City Sausage stock is selling at $40 per share, it has retained earnings of $2.00 per share and
dividends of $.50 per share. What is the price-earnings ratio and what is the dividend yield?
a. 20, 1.25 percent
b. 20, 6.25 percent
c. 16, 1.25 percent
d. None of the above are correct.
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24.Suppose that in a closed economy GDP is 10,000, consumption is 6,500, and taxes are 2,000. What value of
Government expenditures would make national savings equal to 1000 and at that value would the
government have a deficit or surplus?
a. 2,500,deficit
b. 2,500, surplus
c. 1,000, deficit
d. 1,000, surplus
25.Henry buys a bond issued by Ralston Purina, which uses the funds to buy new machinery for one of its
factories.
a.
b.
c.
d.
Henry and Ralston Purina are both investing.
Henry and Ralston Purina are both saving.
Henry is investing; Ralston Purina is saving.
Henry is saving; Ralston Purina is investing.
26.If there is surplus of loanable funds, then
a. the supply for loanable funds shifts right and the demand shifts left.
b. the supply for loanable funds shifts left and the demand shifts right.
c. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded
decreases as the interest rate rises to equilibrium.
d. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded
increases as the interest rate falls to equilibrium.
27.Interest rates and investment rise. Which of the following could explain these changes?
a. the government runs a larger deficit
b. the government institutes an investment tax credit
c. the government replaces the income tax with a consumption tax
d. None of the above are correct.
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28.An increase in the budget deficit would cause a
a. shortage of loanable funds at the original interest rate, which would lead to falling interest rates.
b. surplus of loanable funds at the original interest rate, which would lead to rising interest rates.
c. shortage of loanable funds at the original interest rate, which would lead to rising interest rates.
d. surplus of loanable funds at the original interest rate, which would lead to falling interest rates.
29.Other things the same, if the government increases transfer payments to households, then
a. investment will rise.
b. the rate of interest will rise.
c. public saving will rise.
d. the market for loanable funds will be unaffected.
30.What would happen in the market for loanable funds if the government were to decrease the tax on interest
income?
a. There would be an increase in the amount of loanable funds borrowed.
b. There would be a reduction in the amount of loanable funds borrowed.
c. There would be no change in the amount of loanable funds borrowed.
d. The change in loanable funds borrowed would be ambiguous.
31A firm has three different investment options, each costing $10 million. Option A will generate $12 million in
revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years.
Option C will generate $18 million in revenue at the end of three years. Which option should the firm
choose?
a. Option A
b. Option B
c. Option C
d. The answer depends on the rate of interest.
32.As the interest rate rises, the present value of future revenues from investment projects
a. rise, so investment spending rises.
b. fall, so investment spending rises.
c. rise, so investment spending falls.
d. fall, so investment spending falls.
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33.If a person is risk averse, then as wealth increases, total utility of wealth
a. increases at an increasing rate
b. increases at a decreasing rate
c. decreases at an increasing rate
d. decreases at a decreasing rate
34.Ross thinks that if Acme Corporation has high revenues, then Zenith Corporation will have low revenues,
and that if Acme Corporation has low revenues, Zenith Corporation will have high revenues. He buys
stock in both corporations.
a. He has reduced idiosyncratic risk but not aggregate risk.
b. He has reduced aggregate risk, but not idiosyncratic risk.
c. He had reduce both idiosyncratic risk and aggregate risk.
d. He has reduced neither idiosyncratic risk nor aggregate risk.
35.In 2000 in the United Kingdom, the adult population was about 46.5 million, the labor force participation
rate was 63.5 percent, and the unemployment rate was 5.8 percent. What was the number of people
employed and the number of people unemployed?
a. about 29.5 million and 2.7 million.
b. about 29.5 million and 1.7 million.
c. about 27.8 million and 2.7 million.
d. about 27.8 million and 1.7 million.
36.Rick loses his job and immediately begins looking for another. Ceteris paribus, the unemployment rate
a. increases, and the labor-force participation rate decreases.
b. increases, and the labor-force participation rate is unaffected.
c. is unaffected, and the labor-force participation rate increases.
d. decreases, and the labor-force participation rate is unaffected.
37.Merideth is looking for work as a computer programmer. Although her prospects are good she hasn’t yet
taken a job. Julie is looking for work in a steel mill, but there aren’t many job ads for steel workers and
every time she shows up for an interview, there are many more people than openings.
a. Meredith and Julie are both frictionally unemployed.
b. Meredith and Julie are both structurally unemployed.
c. Meredith is frictionally unemployed, and Julie is structurally unemployed.
d. Meredith is structurally unemployed, and Julie is frictionally unemployed.
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38.The minimum wage
a. creates frictional unemployment. Firms paying wages above equilibrium to attract a better pool of
candidates create structural unemployment.
b. creates structural unemployment. Firms paying wages above equilibrium to attract a better pool of
candidates create frictional unemployment.
c. and firms paying wages above equilibrium to attract a better pool of candidates both create structural
unemployment.
d. and firms paying wages above equilibrium to attract a better pool of candidates both create frictional
unemployment.
39.Suppose that in some country neither textile workers nor shoemakers are unionized. If textile workers
unionize and so are able to raise their wages, then
a. the demand for shoemakers will rise, and their wages will rise.
b. the demand for shoemakers will fall, and their wages will fall.
c. the supply of shoemakers will rise, and their wages will fall.
d. the supply of shoemakers will fall, and their wages will rise.
40.An increase in the world price of oil would create a sectoral shift that would likely
a. decrease unemployment, and the decrease would be greater in a country with unemployment insurance
than in one without.
b. decrease unemployment, but the decrease would be smaller in a country with unemployment insurance
than in one without.
c. increase unemployment, and the increase would be greater in a country with unemployment insurance
than in one without.
d. increase unemployment, but the increase would be smaller in a country with unemployment insurance
than in one without.
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