Principles of Economics II:
Name:
Class B
ST. Number:
Oct. 10, 2007 mid-term Exam.
True/False (T/F) Indicate whether the sentence or statement is true or false.
2 points each with -2 points of penalty for wild guess
1
2
3
4
5
6
7
8
9
10
F
T
F
T
T
T
F
T
F
T
Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.
3 points each with -1 points of penalty for wild guess
1
2
3
4
5
6
7
8
9
10
C
B
C
C
D
D
C
C
C
D
11
12
13
14
15
16
17
18
19
20
B
A
D
B
B
D
B
A
A
C
Short Answer
2 points each
A
Write down the four determinants of productivity that will in turn determine the economic growth.
1. (
Physical
) ( Capital
)
2.
(
Human
)(
Capital
)
3.
(
Natural
)(
Resources
)
4.
(
Technological
)(
Progress
)
B
Consumption
government purchases
national saving
investment
$(
$(
$(
$(
6 ) trillion
1.3 ) trillion
0.7 ) trillion
0.7 ) trillion
GDP = C+I+G = 6 + 0.7 + 1.3 = 8
S = (Y-T-C) +(T-G) = (8-1.5-C) + (1.5-G) = 0.5 + 0.2 = 0.7
8 - 1.5 - C = 0.5, C = 6
1.5 - G = 0.2, G = 1.3
C
Provide words that fits the description. .
1.
(
discouraged
)(
workers
)
2.
(
frictional
)(
unemployment
)
3.
(
fundamental
)(
Analysis
)
4.
(
random
)(
walk
)
5.
(
informational
)(
efficiency
)
6.
(
risk
)(
aversion
)
7.
(
crowding
)(
out
)
8.
(
indexation
)
9.
(
bond
)
inflation
)
10. (
D
a. gross domestic product
b. net national income
c. national income
d. personal income
e. disposable personal income
$ ( 400
$ ( 350
$ ( 320
$ ( 220
$ ( 150
)
)
)
)
)
a. GDP $400
b. NNP = GDP –- depreciation = $400−$50 = $350.
c. National income = NNP −sales taxes = $350 −$30 = $320.
d. Personal income = national income −retained earnings = $320 −$100 = 220.
e. Disposable personal income = personal income −.personal income tax =
$220 −$70 =$150.
True/False
Indicate whether the sentence or statement is true or false.
____
1. According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in
price one year are more likely to increase than decrease in the next year.
____
2. If someone in Korea buys a surfboard produced in Australia, that purchase would not change Korean GDP.
____
3. International data on the history of real GDP growth rates shows that over the last 100 years or so, rich
countries got richer and poor countries got poorer.
____
4. Henry Ford paid his workers $5 a day in 1914 when the CPI was 10. Today with the price index at 177. The $5 a day is
worth $88.50 now.
____
5. The unemployment rate is defined as the percentage of the labor force that is unemployed. The labor force
participation rate is the percentage of the adult population that is either employed or unemployed.
____
6. If your company opens and operates a branch in a foreign country, you will be engaging in foreign direct
investment.
____
7. One reason that governments may find it useful to sponsor universities and basic research is that to a large
extent knowledge is generally a private good.
____
8. When the government budget deficit rises, national saving is reduced, interest rates rise, and investment falls.
____
9. The higher the interest rate is, the greater the present value of a future payment will be.
____ 10. Firms might offer efficiency wages in order to attract a better pool of applicants.
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____
____
____
____
1. Suppose that Congress were to institute an investment tax credit. What would happen in the market for
loanable funds?
a. The demand for loanable funds would shift left.
b. The supply of loanable funds would shift left.
c. The demand for loanable funds would shift right.
d. The supply of loanable funds would shift right.
2. You are expecting to receive $1,000 at some time in the future. Which of the following would unambiguously
decrease the present value of this future payment?
a. Interest rates rise and you get the payment sooner.
b. Interest rates rise and you have to wait longer for the payment.
c. Interest rates fall and you get the payment sooner.
d. Interest rates fall and you have to wait longer to get the payment.
3. When a country removes trade barriers and imports toys and exports farm machinery,
a. its growth slows.
b. its productivity decreases.
c. it is essentially transforming farm machinery into toys.
d. its economic well-being decreases while that of the country that sells toys increases.
4. Which of the following statements is correct?
a. The value of all intermediate goods and final goods is included in GDP.
b. The value of intermediate goods is included in GDP only if those goods were produced in
the previous year.
____
____
____
____
____
c. The value of intermediate goods is included in GDP only if those goods are added to
firms` inventories to be used or sold at a later date.
d. The value of intermediate goods is never included in GDP.
5. Which of the following items is counted as part of government purchases?
a. The federal government pays the salary of a Navy officer.
b. The state of Nevada pays a private firm to repair a Nevada state highway.
c. The city of Las Vegas, Nevada pays a private firm to collect garbage in that city.
d. All of the above are correct.
6. Collective bargaining refers to
a. the process by which the government sets exemptions from the minimum wage law.
b. setting the same wage for all employees to prevent jealousy among workers.
c. firms colluding to set the wages of employees in order to keep them below equilibrium.
d. the process by which unions and firms agree on the terms of employment.
7. If the market for day care workers is in equilibrium at $5.00 per hour as shown in this diagram, a minimum
wage of $8.00 per hour will
a. increase unemployment by 300 workers.
b. increase unemployment by 500 workers.
c. increase unemployment by 600 workers.
d. None of the above is correct.
8. Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a
population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What
happened to the real GDP per person?
a. It more than doubled.
b. It increased, but it less than doubled.
c. It was unchanged.
d. It decreased.
9. The basket of goods in the consumer price index changes
a. occasionally, as does the group of goods used to compute the GDP deflator.
b. automatically, as does the group of goods used to compute the GDP deflator.
c. occasionally, whereas the group of goods used to compute the GDP deflator changes
automatically.
____ 10.
____ 11.
____ 12.
____ 13.
d. automatically, whereas the group of goods used to compute the GDP deflator changes
occasionally.
Jack is a full-time unpaid homemaker not currently searching for other work. Jill is a full-time student who is
not looking for a job. Who does the BLS count in the labor force?
a. only Jack
b. only Jill
c. both Jack and Jill
d. neither Jack nor Jill
Which entity within the U.S. government is responsible for computing and reporting the consumer price
index?
a. the Department of Commerce
b. the Department of Labor
c. the General Accounting Office
d. the Council of Economic Advisers
Which of the following is not correct?
a. Countries that have had higher output growth per person have typically done so without
higher productivity growth.
b. A country's standard of living and its productivity are closely related.
c. Productivity refers to output produced per hour of work.
d. Increases in productivity can be used to increase output or leisure.
The natural rate of unemployment
a. is a constant.
b. is the desirable rate of unemployment.
c. cannot be altered by economic policy.
d. None of the above is correct.
Table 23-3
Year
2006
2007
2008
Price of
Sandwiches
$4.00
$5.00
$6.00
Prices and Quantities
Quantity of
Sandwiches
100
120
150
Price of
Magazines
$2.00
$2.50
$3.50
____ 14. Refer to Table 23-3. Using 2006 as the base year, for 2007,
a. real GDP is $880 and the GDP deflator is 80.
b. real GDP is $880 and the GDP deflator is 125.
c. real GDP is $950 and the GDP deflator is 95.
d. real GDP is $950 and the GDP deflator is 116.
____ 15. Cyclical unemployment is closely associated with
a. long-term economic growth.
b. short-run ups and downs of the economy.
c. fluctuations in the natural rate of unemployment.
d. changes in the minimum wage.
____ 16. If a U.S. citizen buys a television made in Korea by a Korean firm,
a. U.S. net exports decrease and U.S. GDP decreases.
b. U.S. net exports are unaffected and U.S. GDP decreases.
c. U.S. net exports are unaffected and U.S. GDP is unaffected.
Quantity of
Magazines
180
200
200
d. U.S. net exports decrease and U.S. GDP is unaffected.
____ 17. What basket of goods is used to construct the CPI?
a. a random sample of all goods and services produced in the economy
b. the goods and services that are typically bought by consumers as determined by
government surveys
c. only food, clothing, transportation, entertainment, and education
d. the least expensive and the most expensive goods and services in each major category of
consumer expenditures
____ 18. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which
of the following statements is correct?
a. Only Ralph`s payments are included in GDP.
b. Ralph`s payments as well as the estimated value of Mike`s mowing services are included
in GDP.
c. Neither Ralph`s payments nor the estimated value of Mike's mowing services is included
in GDP.
d. Ralph`s payments are definitely included in GDP, while the estimated value of Mike`s
mowing services is included in GDP only if Mike voluntarily provides his estimate of that
value to the government.
____ 19. In Figure 26-1 which of the following would show the effects of the government going from a budget deficit
to a surplus?
a. a move from a to b
b. a move from a to d
c. a move from c to a
d. a move from c to b
____ 20. Suppose that in some state the adult population is 4 million, the labor-force participation rate is 75%, and
that .25 million people are unemployed. What is the unemployment rate to the nearest tenth?
a. 6.3%
b. 7.7%
c. 8.3%
d. 9.1%
Short Answers
A
Write down the four determinants of productivity that will in turn determine the economic growth.
1. (
)(
)
2.
3.
4.
(
(
(
)(
)(
)(
)
)
)
B
Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion.
Assuming this economy is closed, calculate consumption, government purchases, national saving, and investment.
Consumption
government purchases
national saving
investment
(
(
(
(
) $trillion
) $trillion
) $trillion
) $trillion
C
Provide words that fits the description.
1. (
)(
): Individuals who would like to work but have given up looking for a job
2. (
)(
): Unemployment that results because it takes time for workers to search for the
job that best suit their tastes and skills
3. (
)(
): A study of a company’s accounting statements and future prospects to
determine its value.
4. (
)(
): the path of a variable whose changes are not possible to predict.
5. (
)(
): the description of asset prices that rationally reflect all available information
6. (
)(
): a dislike of uncertainty
7. (
)(
): a decrease in investment that results from government borrowing
8. (
) : the automatic correction of a dollar amount for the effects of inflation by law or contract.
9. (
) : a certificate of indebtedness that specifies the obligation of the borrower to the holder of it.
10. (
) : the percentage change in the price index from the preceding period
D
One day, Barry the barber, Inc., collects $400 for haircut. Over this day, his equipment depreciates in value by $50. Of the
remaining $350, Barry sends $30 to the government in sales taxes and takes home $220 in wages, and retains $100 in his
business to add new equipment in the future. From the $220 that Barry takes home, he pays $70 in income taxes. Based on
this information, compute Barry's contribution to the following measures of income.
a. gross domestic product
b. net national income
c. national income
d. personal income
e. disposable personal income