Principles of Macroeconomics
Fall 2014
Practice Midterm Exam
Multiple Choice: 1pt each.
Consider the following production possibility frontier for Costa Rica:
Fish
10
20
Timber
1. What is the slop of the PPF?
a. 2
b. ½
c. 10
d. 20
e. none of the above
2. If Costa Rica produces 20 units of fish, how many units of timber can it produce?
a. 20
b. 0
c. 10
d. 5
e. none of the above
3. If Costa Rica consumes 2 units of fish, how many units of timber must it consume?
a. 14
b. 15
c. 16
d. 17
e. none of the above
4. Assume there is a new fish stock discovered. How would this effect the PPF?
a. Increase the Y-intercept
b. Increase the X-intercept
c. Increase both the Y-intercept and X-intercept
d. Not enough information
5. How would the production possibility frontier shift if there is immigration from Nicaragua?
a. Increase both the X and Y –intercepts
b. No effect
c. Not enough information to answer
d. Will increase the X-intercept only
e. None of the above
Consider the following figure, which describes the supply and demand of sugar in the U.S. Supply and
demand curves are linear.
S
P
.50
.20
.10
D
20 40
100
160
180
1. What is the value of consumer surplus in autarky?
a. 30
b. 25
c. Not enough information to answer this question
d. 10
e. none of the above
2. What is the value of producer surplus if the U.S. is in autarky?
a. 25
b. 10
c. Not enough information to answer this question
d. 1
e. none of the above
3. What is domestic quantity supplied in autarky?
a. 30
b. 60
c. 100
d. 150
e. none of the above
Q
4. What is domestic quantity demanded in autarky?
a. 200
b. 150
c. 100
d. 60
e. none of the above
5. With free trade, what is the value of imports?
a. 17
b. 160
c. 16
d. None of the above
6. With free trade, what is the volume of imports?
a. 170
b. 150
c. None of the above
d. 200
7. True or False. Because American producers are protected by the tariff, Americans overall are
made better off as a result of the tariff.
a. True
b. False
8. What is the value of government revenue with a tariff of 0.10.
a. 10
b. 12
c. 120
d. None of the above
9. What is consumer surplus with free trade?
a. 162
b. 81
c. 80
d. None of the above
10. How does producer surplus change as a result of the tariff?
a. It increases by 10
b. It decreases by 10
c. It increases by 16
d. None of the above
11. How does welfare change as a result of the tariff?
a. It increases by 4
b. It decreases by 4
c. None of the above
d. It increases by 2
e. It decreases by 2
12. In 2013, your salary is $50,000. In 2014, your salary is $105,000. What was the percent increase
in your salary?
a. 50%
b. 52%
c. 55%
d. None of the above
Consider the following figures.
Costa Rica
Panama
Fish
Fish
20
10
30
Timber
10
Timber
13. Which country has a comparative advantage in producing Timber?
a. Costa Rica
b. Panama
14. What is the opportunity cost of producing Timber in Panama?
a. 2
b. ½
c. none of the above
d. 1
e. 10
15. What is the opportunity cost of producing Fish in Costa Rica?
a. 1/3
b. 3
c. 30
d. 10
e. none of the above
16. Suppose that the terms of trade is 1 Timber for 1 Fish. In trade, how many units of fish does
Costa Rica Produce?
a. 30
b. 10
17.
18.
19.
20.
21.
22.
23.
c. 5
d. 15
e. none of the above
Suppose that trading at a rate of 1 Timber for 1 Fish, Costa Rica consumes 10 Fish. How many
units of Timber does Costa Rica consume?
a. 10
b. 20
c. 30
d. none of the above
e. 15
How many units of Fish do people consume in Panama?
a. 5
b. none of the above
c. 15
d. 20
e. 10
How many units of Timber does Panama Consume?
a. 5
b. 15
c. none of the above
d. 10
e. 20
Assume that prior to trade, Costa Rica consumes 8 fish and 6 timber. What are the gains from
trade in Costa Rica in terms of timber
a. 2
b. 3
c. 4
d. None of the above
Assume that you loan the federal government $1000 by purchasing a treasury bill. The Treasury
bill pays an interest rate of 6%. However, over the subsequent year, inflation is 2%. What is the
real rate of return from the bond?
a. 2%
b. 6%
c. 4%
d. 8%
e. none of the above
Referring to the question above, what is your real rate of return if inflation turns out to be 10%?
a. 4%
b. 0%
c. -4%
d. 16%
e. none of the above
A price floor is a requirement set by the government that the price of a good or service must not
exceed the equilibrium price
a. True
b. False
24. Increasing the price of cotton decreases demand for cotton
a. True
b. False
25. Drought in California reduces output of Grain. What happens in the market for Cereal?
a. Supply increases, causing the price of Cereal to fall
b. Supply decreases, causing the price of Cereal to fall
c. None of the above
d. Demand and supply both increase, causing equilibrium quantity to fall
26. What might happen to the price of beer if marijuana is legalized
a. It increases due to an increase in supply
b. It would decrease due to an increase in supply
c. It would decrease due to a decrease in demand
d. It would decrease due to an increase in demand
Consider the following market for housing in New York City.
Price
S
Maximum Price
D
80
120
Quantity
27. If the local government mandates that the price of rental housing must not exceed the given
“maximum price” they have imposed a price ceiling.
a. True
b. False
28. With the price set at the “maximum price”, what is the size of the shortage?
a. 200
b. 120
c. 80
d. 40
29. Referring to the previous question, who is made better off from rent control
30.
31.
32.
33.
34.
35.
36.
a. All renters
b. Some landlords
c. Renters who can find an apartment
d. None of the above
Referring to the previous question, assume that the equilibrium quantity of housing is 100 and
the equilibrium price is 2000. Assume the “maximum price” is 1000. How much did producer
surplus decrease when the “maximum price” was imposed?
a. 100,000
b. 90,000
c. 80,000
d. None of the above
The U.S. restricts the amount of agricultural products that can be imported into the United
States. The most likely reason for this is:
a. Food produced in foreign countries is of lower quality
b. American farmers pay politicians for protection from competition
c. Americans don’t like to eat food produced in the rest of the world
d. The policy is left over from the past, American farmers don’t need protection from
international competition in order to make profit.
The only difference between a tariff and quota is that with a quota, government revenue is
created. With a tariff, foreign producers that can export to the U.S. gain.
a. True
b. False
Government intervention, such as limiting production by use of a quota, always leads to
inefficient, sub-optimal outcomes.
a. True
b. False
Uber provides efficient and cheap taxiing service. The firm raises and lowers rates of service
depending on the supply of available drivers and the demand of customers. What time of the
year is most likely to experience the highest price?
a. Tuesday, October 28
b. Wednesday, December 24
c. Monday, November 10
d. Monday, May 11
Recently, one industry argued that “Uber’s surge –pricing model is similar to price fixing, and
the car service is creating an unfair marketplace”. Without knowing what is meant by “surge
pricing”, what industry is responsible for making this claim:
a. Coors Brewing Corporation
b. National Rifle Association
c. Baltimore Taxi companies
d. National Football league
According to trade theory, countries should specialize in the production of the good for which
they
a. Can produce with a higher opportunity cost than competitors
b. Have a comparative advantage
37.
38.
39.
40.
c. Have an absolute advantage
d. Can produce more of
GDP stands for
a. Gross Domestic Productivity
b. Gross Domestic Product
c. Gross Development Parity
d. Gross Development Point
GDP is the sum of what 4 expenditures
a. Consumption, Investment, Inflation and Net Exports
b. Government, Inflation and Exports
c. Consumption, Investment, Government, Exports
d. Net exports, Investment, Government, Consumption
GDP consists of the production of all final and intermediate goods and services
a. True
b. False
CPI stands for
a. Consumption, Production and Investment
b. Consumer Price Investment
c. Consumer Patent Index
d. Consumer Price Index
Below is a list of CPI’s for a variety of years
year
1920
1950
1990
2014
CPI
20
24
130
237
41. What is a dollar worth today in terms of 1920 prices?
a. $2.47
b. $6.83
c. none of the above
d. $12.45
e. $23.50
42. If a gallon of gasoline costs $3.78 today, what would it have cost in 1990? In other words, in
terms of 1990 prices, what does a gallon of gasoline cost today?
a. $2.00
b. $2.073
c. $2.083
d. None of the above
43. What was the average annual inflation rate from 1950 to 1990
a. 11.04%
b. 12%
c. 12.04%
d. none of the above
44. Suppose you could buy a movie ticket for $1.00 in 1920 and that today it costs $11.85. Are
movies relatively cheap or expensive today?
a. Cheap
b. Expensive
c. Same price
d. Not enough information given to answer this question
45. How do economists track the rate of inflation in the economy?
a. They monitor price changes of all final goods and services produced
b. They monitor price changes of a set of goods in a so-called consumption “bundle” that
reflects the purchasing decisions of an “average” American.
c. They monitor the price of durable, expensive items like automobiles, airplane tickets
and medical care.
d. They monitor prices changes of a set of goods in a so-called consumption “bundle” that
reflects the purchasing decision of an “average” person living in St. Louis.
There are 100 million people living in an economy. 20 million of those people are under the age of 16.
15 million work less than 3 hours a week and would like to work full time. 30 million people are
employed full time (5 million of which work “under the table”). 8 million people looked for work in the
past, but have since given up on finding a job. 12 million people are not working at all, and are actively
searching for a job.
46. What is the unemployment rate in this economy?
a. None of the above
b. 23%
c. 25%
d. none of the above
e. 21%
47. What is the labor force participation rate?
a. 65%
b. 60%
c. 75%
d. none of he above
e. 25%
48. Assume that an additional 10 million people who were unemployed give up on finding a job.
What is the unemployment rate now?
a. 4%
b. none of the above
c. 4.7%
d. 5%
e. 5.7%
49. Cyclical unemployment results when a person is momentarily between jobs
a. True
b. False
50. Total unemployment is equal to
51.
52.
53.
54.
55.
56.
57.
a. Frictional + Structural
b. Frictional + Structural – Cyclical
c. Cyclical – Structural – Frictional
d. Cyclical + Frictional + Structual
e. None of the above
Why is deflation dangerous?
a. Its not, it makes the value of the dollar increase
b. Because it makes the value of the dollar decrease
c. Because it makes people postpone spending
d. None of the above
e. Because it makes people increase spending
Name one cost of inflation
a. None of the above
b. Investment costs
c. Expectation losses
d. Shoe leather costs
e. It makes us poorer
According to your instructor, the United States produces about as much stuff as France and
Germany, combined.
a. True
b. False
What causes long-run inflation?
a. Decreases in consumer confidence
b. Expectations of deflation
c. None of the above
d. Increases in the money supply
e. Decreases in the money supply
Consumer surplus is
a. The price people pay to consume a good or service
b. The difference in the price people pay to consume a good or service and the maximum
price they are willing to pay, summed over all consumers
c. The area below the demand curve and above the price
d. Both b and c are correct
e. None of the above
Long run economic growth can be achieved by increasing levels of
a. Physical capital
b. Human capital
c. Natural capital
d. None of the above
e. All of the above
The resource curse refers to
a. None of the above
b. The negative relationship between natural resource dependence and economic growth
c. The positive relationship between natural resource dependence and unemployment
d. The negative relationship between natural resource dependence and growth, but it only
exists in poor countries
e. The negative relationship between natural resource dependence and growth, and it
exists in poor and rich countries
58. Reasons for the resource curse that were given in class include which of the following
a. Dutch Disease
b. Government corruption
c. Conflict
d. All of the above
e. None of the above
Consider the following diagram.
Output per Worker
Physical Capital Input
59. The figure above illustrates that
a. As a firm increases its use of physical capital, output per worker increases at an
increasing rate
b. As a firm increases its use of physical capital, output per workers decreases at an
increasing rate
c. There are diminishing returns to labor
d. None of the above
60. A technological breakthrough, such as a vaccine that makes workers more productive will
a. Shift the curve in the diagram up
b. Shift the curve in the diagram down
c. Will not affect the curve in the diagram
d. None of the above
e. There is not enough information to answer this question
61. Economists generally agree that government do which of the following to stimulate long-run
economic growth
a. Invest in public infrastructure
b. Invest in public education
c. Provide property rights
d. All of the above
62. Why are property rights important for economic growth?
a. It provides people with collateral they can use to acquire a loan to invest in a small
business
b. It Provides people with the incentive to work and invest
c. Both a and b
d. Neither a or b
63. Is the following statement correct? “Some countries are poor, but they grow faster than rich
countries, one day they will catch up”.
a. This statement is correct
b. This statement is false, poor countries do not grow more quickly than rich countries
c. The statement is true, but we should still send aid to developing countries
d. This statement is mostly true, with the exception of Latin American, poor countries grow
more quickly than wealthy ones.
64. The U.S. currently produces more carbon dioxide emissions than China.
a. True
b. False
65. There is evidence that as countries become wealthier, they become “cleaner” as well
a. True
b. False
66. What is the current unemployment rate?
a. 8%
b. 2%
c. 1%
d. 5.9%
Short Answer Questions, 10 pts each.
1. Consider the following question, “Was the minimum wage higher today than it was in
1984?”
a. What information do you need to answer this question?
b. What is the 1984 minimum wage in terms of current, 2014 prices?
2. Should we boycott firms that employ child labor? Discuss using a relevant model of supply
and demand. Be sure to label all axis, curves and shifts.
3. Using figures, explain why Coors brewing company may be opposed to marijuana
legalization. Be sure to label all axis, curves and shifts.
4. Discuss America’s sugar policy. Use figures where appropriate.
5. Graph the following two lines:
a. Y = 2x
b. Y = 10 – x
Appropriately label the curves “supply” and “demand”. What is the equilibrium price and
quantity?
Consider the following figure.
U.S. Federal Deficit Relative to GDP
0.06
2001 (Deficit = .012)
0.04
1993 (Deficit = -.038)
0.02
0
-0.02
-0.04
1946
1955
1964
1973
1982
1991
2000
2009
2008 (Deficit = -.032)
2013 (Deficit = -.061)
-0.06
-0.08
-0.1
-0.12
6. Compute the percent change in the deficit (expressed as a share of GDP) for one of the
presidential cycles, 1993-2001, 2001-2008 or 2008-2013 (Obama’s cycle isn’t over yet).