Principles of Macroeconomics
Summer 2002
Practice Exam 1
1. Opportunity cost can best be defined as the
a. money cost of a good or service.
b. money cost plus interest on money borrowed to buy a good or service.
c. cost of the resources used to produce a good or service.
d. value of the best alternative forgone when the alternative at hand is chosen.
2. The statement "Resources employed in producing X are better suited to making Y" is another
way of saying:
a. resources are specialized.
b. resources are scarce.
c. resources are used inefficiently.
d. resources are unproductive.
e. resources have no opportunity cost.
3. Generally, the more an economy invests this year in capital goods,
a. the more consumption goods and/or capital goods it can produce next year.
b. the more consumption goods only it can produce next year.
c. the more capital goods only it can produce next year.
d. the more consumption goods it can produce this year.
4. In Figure 5-4, an increase in population will change demand from
a. D1 to D2
b. D2 to D1
c. D3 to D2
d. D3 to D1
5. A shift in the demand curve occurs when
a. suppliers place more goods on the market.
b. the price of a good rises.
c. consumers want to buy more or less than before at a given price.
d. the price of the good falls.
6. A shift in the supply curve of bicycles resulting from higher steel prices will lead to
a. higher prices of bicycles.
b. lower prices of bicycles.
c. a shift in the demand curve for bicycles.
d. larger output of bicycles.
e. no change in the price of bicycles.
7. Real GDP
a. will always change when prices change.
b. is also called nominal GDP.
c. measures GDP minus depreciation of capital.
d. is nominal GDP adjusted for changes in the price level
8. A good produced in 2000 and held in inventory until it is sold in 2001 would be included in
which measure of GDP?
a. 2001 GDP
b. both 2000 and 2001 GDP
c. 2000 GDP
d. half the value in 2000 and half the value in 2001
9. General Motors Corporation (a U.S.-based firm) produces a Cadillac vehicle in Germany, and
sells it in the United States. In which country's GDP is it included?
a. The United States because GM is a U.S. company.
b. The United States because it was sold there.
c. Germany because it was produced there.
d. Germany and the United States
10. Which of the following would tend to increase the value of officially measured GDP?
a. decriminalization of drugs such as marijuana and cocaine
b. decriminalization of prostitution
c. decriminalization of gambling on basketball and football
d. all of the above
11. One major effect of the Great Depression was
a. it reaffirmed everyone's faith that capitalism was a self-correcting system.
b. it encouraged voters to limit the role of government.
c. the creation of the rational expectations school of economic theory.
d. a decreased faith in the ability of economies to automatically correct major problems.
12. Stagflation can be defined as a combination of ___________.
a. economic migration and inflation
b. economic aggregation and deflation
c. economic stagnation and inflation
d. economic aggregation and inflation
13. Technological change can shift the aggregate supply curve outward. If at the same time, the
government is increasing spending, the most likely outcome of these two factors is
a. an increase in the price level.
b.. an increase in real GDP.
c. a decrease in the price level
d. a decrease in real GDP.
14. The term frictional unemployment refers to persons who are
a. out of work due to technological change.
b. out of work due to strikes or lockouts.
c. out of work and have given up looking for work.
d. out of work for a short period.
15. Richard loses his job at the railroad due to a downturn in general business conditions. He is
experiencing
a. structural unemployment.
b. cyclical unemployment.
c. seasonal unemployment.
d. frictional unemployment.
16. Full employment is defined by most economists as the minimization of
a. cyclical unemployment.
b. frictional unemployment.
c. seasonal unemployment.
d. structural unemployment.
17. Inflation affects borrowers and lenders differently. After signing a contract with a fixed nominal
interest rate, it can be expected that
a. borrowers will hope that prices fall.
b. lenders will hope that prices rise.
c. lenders will hope that the purchasing power of money will fall.
d. borrowers will hope that prices rise.
18. When comparing the costs of inflation to society, it is important to distinguish between
a. low versus high rates of inflation.
b. expected versus unexpected inflation.
c. high price levels and low price levels.
d. real versus nominal inflation.
19. Aggregate demand is defined as
a. the total spending of all consumers, business firms, government agencies, and
foreigners on final goods and services produced in the United States.
b. the total spending by all consumers, business firms, government agencies, and
foreigners in the United States.
c. the total spending consumers, businesses, government agencies, and foreigners wish to
make in one year.
d. the total spending of consumers, businesses, and government agencies on final output.
20. The Marginal Propensity to Consume (MPC) is defined as the
a. change in DI over the change in C.
b. change in income over the change in disposable income.
c. change in C over the change in DI.
d. change in total income over the change in net income.
21. If Shaquille, an NBA center, earns $10 million dollars per year but has no money in the bank
(because he spends all of his income on free throw lessons), has
a. a high income and high wealth.
b. a low income and high wealth.
c. a high income and low wealth.
d. a low income and low wealth.
22. GDP can be calculated by the value-added approach, which
a. is useful in avoiding double counting.
b. includes only the value-added portion from the sale of goods and services.
c. includes the revenue a firm receives from selling a product minus the amount paid for
goods purchased from other firms.
d. All of the above are correct.
23. The most difficult to measure determinant of investment spending is
a. business confidence.
b. real interest rates.
c. aggregate demand.
d. foreign exchange rates
24. Under what conditions are business firms most likely to increase investment expenditures?
a. Firms have plenty of capacity to expand output.
b. Firms are reducing sales and need new activity.
c. Firms are uncertain about the economic future.
d. Firms have little or no spare capacity.
25. Which of the following should cause U.S. net exports to increase?
a. a recession in the United States
b. a recession in Europe
c. high inflation in Canada
d. an increase in U.S. prices
Free response
1. Which factors will cause the consumption function to shift? Describe the direction of the shifts
of the consumption function caused by those factors. Which factors do not cause the function to
shift?
2. Which of the following items are included in GDP? For those items not included, explain why
they are not included in GDP.
a. Jane buys newly issued shares of stock in Dotcom.com Incorporated.
b. Levi buys a new pair of jeans at a local department store.
c. Wyatt has his mustache trimmed at his hair salon.
d. Rachel buys an antique chest at a junk shop.
e. George makes his own pasta sauce in his apartment.
f. Julie grows her own herbs on her apartment balcony.
g. Michael travels to Austria and buys wine and cheese
Answer Key:
1
2
3
4
5
6
7
8
9
10
11
12
13
D
A
A
A
C
A
D
C
C
D
D
C
B
14
15
16
17
18
19
20
21
22
23
24
25
D
B
A
D
B
A
C
C
D
A
D
A
Abridged Answers for Free Response:
1.
Factors that cause the consumption function to shift:
Changes in wealth:
increased wealth = upward shift of the consumption function
Changes in the price level:
increase in the price level = downward shift of the consumption function
Changes in expected future income:
If consumers believe that they will have a high income in the funture, they will
spend more of their current income, thus causing an upward shift in the
consumption function.
The only factor that will not shift the consumption function is disposable income. When disposable
income changes, you move along the consumption function.
2.
a. Not included. Nothing has been produced.
b. Included.
c. Included.
d. Not included. Produced in a previous year.
e. Not included. Does not pass through an organized market.
f. Not included. Dose not pass through an organized market.
g. Maybe. If he flew on an American airline, then it would be counted in US GDP. The wine and
cheese would only be counted in the GDP of Austria.