ECO202: PRINCIPLES OF MACROECONOMICS
FIRST MIDTERM EXAM
SPRING 2014
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 1 question.
2. There are 46 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 or access the internet 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
1.
a.
b.
c.
d.
Which of the following equals the expenditure side of GDP?
consumption + government purchases + saving + taxes.
consumption + investment + government purchases + net exports.
consumption + investment + government purchases + net imports
wages + rent + interest + profits + indirect business taxes.
2) Gross domestic product
a) includes all the goods and none of the services produced in an economy in a given
time period.
b) measures the value of the aggregate production of goods and services in a country
during a given time period.
c) measures the value of labor payments generated in an economy in a given time
period.
d) is generally less than federal expenditure in any time period.
3. Which of the following would cause the growth in real GDP to understate the
improvement in the standard of living over time?
a. if the average person increases hours worked over time.
b. if the environment is improving over time.
c. if the population grows over time
d. all of the above.
Suppose that an economy produces only apples and oranges and the prices and
quantities of each are given in the table below.
Year
2010
2012
Price of
oranges
2
3
Quantity of
Oranges
400
800
Price of apples
2
4
Quantity of
Apples
800
1200
4. Assuming that 2012 is the base year, real GDP in 2010 is _____ and nominal GDP
in 2010 is _____.
a. $2,400; more $2,400
b. $4,000; more than $4,000
c.
$2,400 less than $2,400
d. $4,000 less than $4,000
e. none of the above.
5. Assuming that 2012 is the base year, the GDP deflator (rounded to the nearest
integer) is ____ in 2010 and _____ in 2012.
a. 60; 100
b. 100; 60
c. 100; 167
d. 167; 100
2
To answer the next 5 questions, refer to the information for the U.S. economy provided
below:
Year
Year
Nominal
GDP
GDP
deflator
(in
(2009
billions
base
of $)
year)
2000 10,289.7 81.2
U.S.
Population
(in 1000s)
Civilians
Employed
(in 1000s)
Civilian
Labor
Force
(in 1000s)
280,976
Civilian
Noninstitutionalized
Working Age
Population
(in 1000s)
211,410
136,559
142,267
2011 15,533.8 102.3
310,952
238,704
139,471
153,463
2012 16,244.6 104.3
313,169
242,269
140,896
153,644
2013 16,803.0 106.1
315,379
244,995
143,384
155,699
6. The unemployment rate in 2013 was:
a. 6.8%
b. 7.9.%
c. 8.9%
d. 9.5%
7. In 2013, the labor force participation rate in 2013 was ____ and the employmentpopulation ratio was _____.
a. 63.6%; 58.5%
b. 63.6%; 45.5%
c. 49.4%; 45.5% d. 49.4%; 58.5%
8. In 2013, real GDP (in 2009 dollars) was
a. 16.8 trillion
b. 15.8 trillion
c. 17.8 trillion
d. it is impossible to determine without more information.
9. The average annual rate of growth in real GDP per capita between 2000 and 2013
was
a. 0.3%
b. 0.6%
c. 0.8%
d. 1.2%
10. If prices are rising over time and the level of production in the economy is fixed,
nominal GDP will
a. rise but real GDP will fall
b. rise but real GDP will be unchanged
c. be unchanged but real GDP will fall
d. none of the above
3
11. As the economy strengthens, some “discouraged workers” reenter the labor
market and begin searching for jobs. Assuming that none of them initially find jobs, this
would cause the unemployment rate to ___, the labor force participation rate to ____,
and the employment-population ratio to ____.
a. rise; rise; fall
b. not change; rise; fall
c. rise; not change; not change
d. none of the above
12. During expansions, the labor force participation rate tends to
a. rise, but not by as much as the employment-population ratio.
b. rise by more than the employment-population ratio.
c. fall whereas the employment-population ratio rises.
d. none of the above.
13. Suppose that over the next year your nominal wage (in 2000 dollars) rises from
$10 to $12 and the CPI rises from 120 to 130. Based on this, your real wage ___.
a. fell by more than 5%
b. fell by less than 5%
c. rose by less than 15%
d. rose by more than 15%
14. Between 2000 and 2013, the CPI rose from 169.3 to 231.3. This implies that $1 in
2000 would buy as much as ____ in 2013.
a. $2.31
b. $1.69
c. $1.37
d. none of the above
15. Between 2000 and 2013, the CPI rose from 169.3 to 231.3. This implies that the
average annual rate of inflation over the period was:
a. 1.9%
b. 2.4%
c. 3.2%
d. 3.7%
4
16. The “traditional” CPI has several known biases that cause it to be a poor measure
of the true growth in the cost of living. If these biases were removed in a new version
of the CPI, the estimated growth in real wages would be ____ and the estimated rate of
inflation would be _____.
a. lower; lower
b. lower; higher.
c. higher; higher
d. higher; lower
17. It is well known that the growth in the CPI is a biased measure of the true growth in
the cost of living. As noted in one of the assigned readings, there are proposals to
eliminate some of this bias by switching to the “chained CPI”: If the switch to the
chained CPI is approved, this would _____ future growth in federal income tax
revenues and _____ future growth in the federal budget deficit
a. decrease; increase
b. decrease; decrease
c. increase; increase
d. increase; decrease
18. If the unemployment rate is currently above the natural rate of unemployment,
GDP must be ___ potential GDP and the economy is _____ full employment.
a. above; above.
b. above; below.
c. below; below.
d. below; above.
19. When the unemployment rate matches the natural unemployment rate,
a. there is no structural or cyclical unemployment.
b. there is no cyclical unemployment
c. there is no frictional cyclical unemployment.
d. there is no frictional or structural unemployment.
5
20. If a worker loses her job because her company has permanently outsourced the
work to another country and shut down the factory, this worker would be experiencing:
a. frictional unemployment
b. structural unemployment
c. cyclical unemployment
d. natural unemployment
21. If a student graduates from college and is searching for a job, this worker would be
experiencing:
a. frictional unemployment
b. structural unemployment
c. cyclical unemployment
d. natural unemployment
22. If everyone expects inflation of 5% over the next year and inflation actually turns
out to be 3%,
a. lenders would win and borrowers would lose.
b. borrowers would win and lenders would lose.
c. both lenders and borrowers would win.
d. both lenders and borrowers would lose.
23. Suppose that the capital stock is $6,200 billion at the beginning of 2012 and $6,400
billion at the end of 2012. This implies that
a. gross investment is $200 billion
b. net investment exceed depreciation by $200 billion
c. gross investment exceeded depreciation by $200 billion
d. none of the above.
24. Suppose that a household has wealth of $200,000 at the beginning of the year.
Over the year, their wealth grows to $220,000. If the household experienced capital
losses of $10,00 during the year, we can conclude that,
a. household saving during the year was $10,000
b. household saving during the year was $30,000
c. investment during the year was $10,000
d. investment during the year was $30,000
6
To answer the next 2 questions, refer to the diagram below.
LS
15
LD
PF
300
billion
30 billion
25. Based on the above diagram, if the real wage is currently $10, there will be
a. downward pressure on real wages since there is a surplus in the labor market.
b. downward pressure on real wages since there is a shortage in the labor market.
c. upward pressure on real wages since there is a surplus in the labor market.
d. upward pressure on real wages since there is a shortage in the labor market
26. Based on the diagram above, if the economy is at full employment, the marginal
product of labor will be ____ and productivity will be ____.
a. 15; 10
b. 10; 15
c. less than 10; less than 10
d. none of the above
7
27. Suppose there is a natural disaster that wipes out a considerable fraction of the
economy’s capital stock. Based on the classical model of the economy, this would
cause labor productivity to ____ and potential GDP to ____.
a. fall; fall
b. fall; not change.
c. rise; fall.
d. none of the above
28. Which of the following would simultaneously decrease the real wage and increase
potential GDP?
a. if more capital is added
b. if better technology is added
c. if the population grows
d. all of the above.
29. When wages rise, workers will increase the number of hours worked
a. always if they are rational
b. if the income effect is greater than the substitution effect
c. if the substitution effect is greater than the income effect
d. only if they are irrational
30. Consider the market for loanable funds. Which of the following would lead to
increased investment and higher interest rates?
a. a decrease in household saving.
b. if business becomes more optimistic about future sales and profits
c. a higher tax on corporate profits
d. none of the above.
31. If businesses discover that many of them with perfect credit ratings are unable to
get a loan at the current interest rate, this suggests that the interest rate is (above,
below) the equilibrium interest rate and that there is a (shortage, surplus) of loans.
a. above; shortage.
b. above; surplus.
c. below; shortage.
d. below; surplus.
8
32. Assuming no Ricardo-Barro effect, an increase in the government budget deficit
should cause:
a. higher interest rates and more investment.
b. higher interest rates and less saving
c. lower interest rates and less investment.
d. none of the above
33. The Ricardo-Barro effect is that an increase in the government budget deficit by $1
billion will
a. increase household saving in the economy by $1 billion and have no effect on
investment
b. increase household saving in the economy by $1 billion and reduce investment by
$1 billion.
c. decrease household saving in the economy by $1 billion and reduce investment
d. decrease household saving in the economy by $1 billion and have no effect on
investment
34). If the nominal interest rate is 5% and the real interest rate is 2%, a lender will
____ in terms of purchasing power over a year if she lends at these terms.
a. lose 3%
b. lose 2%
c. gain 2%
d. gain 3%
35. Which of the following would lead to lower interest rates?
a. households receive news that makes them believe that their incomes will fall in the
future.
b. the value of household wealth increases due to an unexpected increase in the value
of their stock holdings.
c. a technological innovation occurs resulting in a large increase in capital purchases
by business.
d. none of the above.
36. Suppose that the government announces a cut in the personal income tax rate.
Based on the permanent income hypothesis, the tax cut should lead to _______ in
consumption if the tax cut will be temporary than if it will be permanent
a. larger increase
b. larger decrease
c. smaller increase
d. smaller decrease
9
37. If the federal government increases the amount of time that firms must use to claim
depreciation expense for purchases of new equipment, this should cause:
a. higher interest rates and less investment.
b. higher interest rates and more investment.
c. lower interest rates and less investment.
d. lower interest rates and more investment.
38. If a country is a net borrower from the rest of the world, the country
a. must have a government budget deficit.
b. must have a government budget surplus.
c. must import more than it exports
d. must export more than it imports
39. Some U.S. politicians claim that China manipulates its currency. The argument is
that China has pursued policies to make the dollar (cheap, expensive) relative to the
Chinese currency and this has caused the U.S. to import (more, less) from China than it
exports to China.
a. expensive; more
b. expensive; less
c. cheap; more
d. cheap; less
40. Some Chinese politicians claim that the trade imbalance between the U.S. and
China is not due to manipulation of its exchange rate. Rather, the trade imbalance is
due to the fact that
a. the U.S. runs large government budget deficits
b. U.S. households have low savings rates
c. the Chinese have high savings rates
d. all of the above.
41. Suppose that Cambodia has a government budget surplus and its imports exceeds
its exports. This implies that Cambodia must have
a. saving greater than investment
b. saving less than investment
c. interest rates that are above equilibrium
d. interest rates that are below equilibrium
42. Suppose that GDP=500; personal consumption expenditure=400, private
saving=50, government purchases of goods and services=50, imports=20 and
exports=30. Gross private domestic investment must be:
a. 20
b. 30
c. 40
d. none of the above
10
43. Suppose that the U.S. reduces its government budget deficit and there is no
change in imports or exports. This would necessitate either:
a. an increase in saving or investment.
b. an increase in saving or a decrease in investment.
c. a decrease in saving or an increase in investment.
d. a decrease in saving or investment.
44. According to one of the assigned readings for class,
a. during the 4th quarter of 2013, U.S. consumers increased borrowing at an unusually
rapid rate.
b. mortgage debt is the largest component of household debt in the U.S.
c. student loan debt is the second largest compenent of household debt in the U.S.
d. all of the above
e. only a and b
45. According to the research article discussed in class, economic growth over the
next 30 years is expected to be slower than the historical average for the U.S. because:
a. hours worked per capita will fall in the future
b. educational attainment in the U.S. will not grow as rapidly as it has in the past
c. the ratio of debt to GDP will grow and will likely lead to higher tax rates
d. all of the above
46. According to assigned readings in class, the Federal Reserve
a. had been buying $65 billion of government bonds monthly and has recently
increased its monthly purchases.
b. previously indicated that it may start cutting interest rates when the unemployment
rate falls below 6.5%.
c. recently hinted that it may consider factors other than the unemployment rate in
deciding when to change interest rates.
d. all of the above.
11
Answers
1
b
24
b
2
b
25
d
3
b
26
a
4
d
27
a
5
a
28
c
6
b
29
c
7
a
30
b
8
b
31
c
9
c
32
d
10
b
33
a
11
d
34
c
12
a
35
a
13
c
36
c
14
c
37
c
15
b
38
c
16
d
39
a
17
d
40
d
18
c
41
b
19
b
42
c
20
b
43
c
21
a
44
d
22
a
45
d
23
c
46
c
12