Second Midterm Exam - I
Binary Choice:
1. Which of the following statements is correct?
a) GDP for a given year only includes the dollar value of those goods produced that year which are also good for us to consume. GDP does not include the value of those goods that are bad for us to consume.
b) If items are produced but not sold during a given year, they are still counted towards that year's GDP.
2. If some unemployed workers become discouraged workers, while other factors remain unchanged, the unemployment rate will:
a) Increase
b) Decrease
3. What is the Consumer Price Index a measure of?
a) Price change
b) Output change
4. Is the following statement true or false? "Changing the base year would never change the inflation rate as measured by the CPI"
a) True
b) False
5. Suppose the GDP deflator for 2001 is greater than the GDP deflator for 2002. If real GDP in 2001 is greater than real GDP in 2002, then what is the relationship between nominal GDP in 2001 and nominal GDP in 2002?
a) Nominal GDP in 2001 is greater than nominal GDP in 2002.
b) Nominal GDP in 2002 is greater than nominal GDP in 2001.
6. The change in the unemployment rate in an economy is likely to be ___________ correlated with the change in the growth of real GDP in this economy.
a) Positively
b) Negatively
7. Suppose investors are particularly optimistic about the future returns on investments. Holding all else equal, what is the effect on the equilibrium interest rate in the market for loanable funds?
a) The equilibrium interest rate will increase.
b) The equilibrium interest rate will fall.
8. Consider the market for loanable funds. The market is initially in equilibrium with the equilibrium interest rate at 6.5% and the equilibrium quantity at $27.9 million. Holding everything else constant, at an interest rate of 7% there would a
a) Shortage of loanable funds.
b) Surplus of loanable funds.
9. Is the following statement true or false? "In a period of rising prices, real GDP grows faster than nominal GDP."
a) True
b) False
10. Suppose China's real GDP per capita grows at a constant annual growth rate. At this rate, it would take China 7 years to double its real GDP per capita. If China's current real GDP per capita is $7,000, what would China's real GDP per capita be next year?
a) $7,700
b) $7,070
Multiple Choices:
Use the following information to answer the next THREE questions:
Suppose there are 49,000 people living in Middleton in 2011. Out of these 49,000 people, 4,000 are either too old or too young to work. Of the remaining individuals, 16,000 are employed full-time and they are satisfied with their job; 10,000 work full-time but are not satisfied with their job; 4,000 work part-time and don't want to work full-time; 5,000 are underemployed; 1,000 are out of work due to the recession and are looking for work; 2,000 don't work but are seeking a job in a labor market in which there exists a binding minimum wage; 2,000 voluntarily quit their jobs and are searching for new jobs; 2,000 are discouraged workers; and the remainder of the population are students, in the military or institutionalized.
11. What is the amount of the labor force in Middleton in 2011?
a) 20,000 people
b) 30,000 people
c) 40,000 people
d) 42,000 people
12. What is the unemployment rate in Middleton in 2011?
a) 11.9%
b) 12.5%
c) 14.3%
d) 20%
13. What is the natural rate of unemployment in Middleton in 2011?
a) 10%
b) 12%
c) 12.5%
d) 15%
14. Which of the following statements is correct? For the base year,
a) Nominal GDP is greater than real GDP.
b) Nominal GDP is equal to real GDP.
c) Nominal GDP is less than real GDP.
d) There is not enough information to answer this question.
15. The following economic activities occur in Country A during a single year: $100,000 worth of cars are produced, but only $50,000 of them are sold to domestic consumers, with the rest being put in inventory; the twenty consumers in the economy purchase a total of $10,000 worth of food and drinks (produced in that year), of which $2,000 are spent on French cheese and German beer; $200,000 worth of replacement computer parts are produced, but only 50% of them are sold to domestic consumers, with the other 50% sold abroad; Country A's government spends $40,000 on road construction; one of the consumers purchases a summer house in Mexico, which costs $5,000.
What is the GDP of country A for that year?
a) $200,000
b) $248,000
c) $300,000
d) $348,000
16. In period 1, country B produces 50 apples each worth $2, 20 pears each worth $3, and 40 oranges each worth $4. Suppose in period 2, all prices in country B triple, while the country produces half as much of each good as it did in period 1. What is the growth in nominal GDP from period 1 to period 2?
a) Nominal GDP does not change from period 1 to period 2.
b) Nominal GDP grows by 20%.
c) Nominal GDP grows by 50%.
d) Nominal GDP grows by 75%.
17. Suppose there is only one labor market in Econland. Suppose the labor demand equation and labor supply equations are given as
Labor Demand: w = 600 - 3*L
Labor Supply: w = 2*L
where w represents the market wage and L represents the quantity of labor in the market. You can calculate that in this market, the equilibrium wage is $240. If a minimum wage of $300 is imposed, what would be the size of the unemployed population in this labor market?
a) There would be no unemployed people in Econland.
b) There would be 50 unemployed people in Econland.
c) There would be 100 unemployed people in Econland.
d) There would be 150 unemployed people in Econland.
18. You are given the following table, which contains information about prices and output in a certain economy in two different years:
|
Year
|
Price of good A
|
Quantity of good A
|
Price of good B
|
Quantity of good B
|
|
1800
|
$20
|
2
|
$10
|
4
|
|
1900
|
$4
|
10
|
$8
|
5
|
What is the relationship between real GDP in 1800 and real GDP in 1900?
a) Real GDP in 1800 is greater than real GDP in 1900 regardless of the base year.
b) Real GDP in 1800 is equal to real GDP in 1900 regardless of the base year.
c) Real GDP in 1800 is less than real GDP in 1900 regardless of the base year.
d) The relationship depends on which year we use as a base year.
19. Which of the following statements is true?
a) As calculated by the income approach, GDP is equal to the sum of all wages, profits, and taxes.
b) GDP in Germany includes all income earned by German citizens in other countries.
c) The value of net exports (NX) is equal to the imports to a given country minus the exports from the same country.
d) Changes in inventories are accounted for in GDP when using the expenditure approach through the value of investment spending.
Use the following information to answer the next THREE questions:
In a closed economy, the following two equations characterize the market for loanable funds:
Investment function (demand): I = 1000 - 500r
Savings function (supply): S = 700 + 1000r
Here, r is the real interest rate expressed as a decimal (e.g. an interest rate of 10% would be 0.1 in the equation), S is savings and I is investment. Initially the government is running a balanced budget.
20. What is the equilibrium real interest rate and quantity of investment in the market?
a) The equilibrium real interest rate is 5% and the equilibrium quantity of investment is $900.
b) The equilibrium real interest rate is 20% and the equilibrium quantity of investment is $900.
c) The equilibrium real interest rate is 15% and the equilibrium quantity of investment is $1200.
d) The equilibrium real interest rate is 25% and the equilibrium quantity of investment is $1200.
21. Now suppose the government switches from running a balanced budget to running a budget deficit and has to finance this deficit by borrowing from the loanable funds market. As a result, the demand for loanable funds changes by $150 at each level of the real interest rate. What is the new equilibrium real interest rate?
a) 20%
b) 25%
c) 30%
d) 50%
22. By how much is private investment spending crowded out as a result of the government deficit?
a) $25
b) $50
c) $75
d) $100
Use the following information to answer the next TWO questions:
The country of Middle Earth produces according to the production function Y = KL.
The labor market in Middle Earth is characterized by the following equations:
Labor Demand: L = 100 - (1/4)*w
Labor Supply: L = w/6
where w represents the market wage and L represents the quantity of labor in the market.
Suppose capital is forever fixed at 5 units in Middle Earth and notice that the equilibrium wage in this market is $240.
23. If the labor market in Middle Earth is at equilibrium, what is the labor productivity at the equilibrium amount of labor?
a) 2 units of output per unit of labor
b) 3 units of output per unit of labor
c) 4 units of output per unit of labor
d) 5 units of output per unit of labor
24. Now suppose a big group of Hobbits from abroad migrate to Middle Earth, increasing the population of the country substantially. As a result, the labor supply in Middle Earth increases by 5 workers at each wage level. What is the new equilibrium level of output produced by Middle Earth?
a) 215 units of output
b) 197.5 units of output
c) 150 units of output
d) 100 units of output
Use the following information to answer the next TWO questions:
The market basket in country C consists of 5 units of good X and 10 units of good Y. In the year 2050, the price of good X is $10 and the price of good Y is $5. In the year 2100, the price of good X is $50 and the price of good Y is $10.
25. What is the CPI in 2100 taking 2050 as the base year (using a scale factor of 100)?
a) 150
b) 350
c) 200
d) 120
26. What is the inflation rate from 2050 to 2100?
a) There is no base year given, so inflation cannot be determined with this information.
b) 250%
c) 150%
d) 50%
27. Ana borrows $500 from Bob, which she repays after one year, plus an additional $50 for the use of Bob's money. Suppose both Ana and Bob expected inflation to be 8% for the year, but the actual inflation rate for the year turned out to be 6%. Which of the following statements is true?
a) Bob benefits from the lower-than-expected inflation rate and the actual real interest rate for the loan is 4%.
b) Ana benefits from the lower-than-expected inflation rate and the actual real interest rate for the loan is 10%.
c) Bob benefits from the lower-than-expected inflation rate and the nominal interest rate for the loan is 4%.
d) Ana benefits from the lower-than-expected inflation rate and the nominal interest rate for the loan is 10%.
28. If the natural rate of unemployment in a given economy increases, then it must be true that:
a) The number of frictionally unemployed people has decreased.
b) The sum of frictionally unemployed and structurally unemployed has increased.
c) The frictional unemployment rate is greater than the structural unemployment rate.
d) The natural rate of unemployment is greater than the cyclical rate of unemployment.
Use the following information to answer the next TWO questions:
The production function of Serbia is given by: Y = (2/3)(K)1/2(L)1/2. For all periods, K is fixed at 81 units. Here, Y is real GDP, K is units of capital, and L is units of labor.
29. Suppose you also know that the marginal product of labor (MPL) in period 2 is equal to 2 and that in period 2, Serbia has 4 units of labor. How many units of labor does Serbia have in period 1?
a) 9 units of labor
b) 1/4 units of labor
c) 1/9 units of labor
d) 1 unit of labor
30. Now suppose that the population of Serbia increases drastically from period 1 to period 2, so that in period 2, Serbia has four times as many units of labor as it did in period 1. What is the percentage change in real GDP from period 1 to period 2?
Hint: you do not need to use the answer from the previous question nor the information in the previous question to answer this problem: you do need to use the preliminary information.
a) 20%
b) 25%
c) 75%
d) 100%