ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2015 Prof. Bill Even FORM 1. Directions

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1 ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2015 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 43 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 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

2 1. Which of the following is NOT one of the four components of the expenditure side of GDP? a. consumption b. government transfer payments c. private investment d. all of the above represent a component of the expenditure side of GDP.. 2. 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 worsening over time. c. if people increase the amount of household production over time. Suppose that an economy produces only apples and oranges and the prices and quantities of each are given in the table below. Year Price of oranges Price of apples Quantity of Oranges Quantity of Apples Assuming that 2013 is the base year, real GDP in 2014 is and nominal GDP in 2014 is. a. $4200; $4800 b. $4400; $4600 c. $3800; $ Assuming that 2013 is the base year, the GDP deflator is in 2013 and in 2014 a. 95.6; 100 b. 100; c. 95.6; d. 100; Suppose business inventories rise by $50 billion during This means that during 2014, a. production exceeded sales by $50 billion in 2014 b. sales exceed production by $50 billion in billion c. production exceeded sales by $50 billion in 2013 d. sales exceed production by $50 billion in

3 To answer the next 5 questions, refer to the information for the U.S. economy provided below: Year Nominal GDP (in billions of $) GDP deflator Civilian Noninstitutionalized Working Age Population (in 1000s) Civilian Labor Force Pariticipation Rate Employed (in 1000s) , , , , , , , , , Based on the information provided, the size of the civilian labor force in 2014 was and the number of unemployed workers was. a million; 13.7 million b million; 10.4 million; c million; 10.4 million d million; 13.7 million 7. Based on the information provided, the unemployment rate in 2000 was a. 3.2% b. 4.0% c. 4.7% d. 5.9% 8. Based on the information provided, real GDP grew at an average annual rate of between 2000 and a. 1.3% b. 1.8% c. 2.2% d. 2.4% 9. Based on the information provided, the price level in 2014 is percent higher than it was in a. 33 b. 26 c. 23 d During an economic recession, many workers lose their jobs and begin searching for new jobs. Also, some of the unemployed become discouraged about job prospects and quit searching for jobs. As a result, during recessions, a. the labor force participation falls, but not as much as the employment population ratio b. the labor force participation falls by more than the employment population ratio c. the labor force participation rate and employment population ratio both fall by the same amount d. none of the above 3

4 11. Suppose that 1 million discouraged workers become more optimistic about the labor market and start searching for work. If these 1 million begin searching but haven t yet found jobs, this will cause the unemployment rate to, the labor force participation rate to, and the employment population ratio to. a. rise; rise; rise b. rise; rise; not change c. not change; rise; not change d. none of th above 12. When comparing the standard of living across countries, which of the following would be the best measure? a. GDP per capita after converting to a common currency with actual exchange rates b. GDP per capita after converting to a common currency with purchasing power parity exchange rates c. GDP after converting to a common currency with actual exchange rates d. GDP after converting to a common currency with purchasing power parity exchange rates Use the following information to answer the next 3 questions. Between 1964 and 2014, the consumer price index (base year 1983) rose from 31.0 to Over the same period, average hourly earnings of production and nonsupervisory employees in the U.S. rose from $2.50 to $ Based on the information provided, the average annual rate of inflation between 1964 and 2014 was: a. 2.3% b. 3.2% c. 4.1% d. 5.3% 14. Based on the information provided, to have the same purchasing power as a worker earning the average wage in 2014, a worker in 1983 would need to earn: a. $7.27 b. $8.85 c. $9.23 d. $ Based on the information provided, compared to the average worker in 1964, the average worker in 2014 has purchasing power that is a. 5 percent higher b. 10 percent higher c. 5 percent lower d. 10 percent lower 4

5 16. If the chained alternative to the CPI (the index for personal consumption expenditures) was used to compute the increase in the real wage instead of the CPI, the growth in the real wage over time would be and we would get a accurate estimate of how much the purchasing power of wages changed since the chained index does a better job of measuring the true growth in the cost of living. a. smaller; less b. smaller; more c. larger; less d. larger; more 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 Social Security payments and future growth in federal income tax revenues. a. decrease; increase b. decrease; decrease c. increase; increase d. increase; decrease 18. If the unemployment rate is currently below the natural rate, GDP is currently (above, below) potential GDP and the economy is currently (above, below) full employment. a. above; above. b. above; below. c. below; below. d. below; above. 19. If a worker graduates from high school and begins searching for a job, she would be experiencing: a. expansionary unemployment b. frictional unemployment c. structural unemployment d. cyclical unemployment 20. If inflation turns out to be much higher than everyone had expected, a. both lenders and borrowers would win. b. both lenders and borrowers would lose. c. lenders would win and borrowers would lose. d. borrowers would win and lenders would lose. 5

6 21. Between 2000 and 2010, the U.S. capital stock (in real terms) grew from 33.1 to 40.6 trillion dollars. This implies that over this period, a. gross investment was $7.5 trillion b. gross investment exceeded capital consumption allowance by $7.5 trillion c. net investment exceeded capital consumption allowance by $7.5 trillion d. none of the above 22. The U.S. capital stock will fall over time if: a. net investment is positive, but less than gross investment b. capital consumption allowance exceeds gross investment c. capital consumption allowance is negative d. none of the above 23. Suppose that a person has $100,000 of wealth at the beginning of the calendar year. Over the year, she has income of $80,000, capital losses of $5,000 and saves $8,000. At the end of the year, her wealth will be: a. $108,000 b. $83,000 c. $103,000 d. none of the above 6

7 To answer the next 3 questions, refer to the diagram below. LS 30 LD 500 billion PF 10 billion 24. Based on the above diagram, if the real wage is currently $25, 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 25. Based on the diagram above, if the economy is at full employment, the marginal product of labor will be and productivity will be. a. 50; 30 b. 50; 50 c. 30; 50 d. none of the above 26. Based on the diagram above, if employment in the economy drops, the average product of labor will and the marginal product of labor will. a. rise; rise b. fall; fall c. rise; fall d. fall; rise 7

8 27. Which of the following would simultaneously decrease the real wage and increase potential GDP? a. if Social Security was made more generous. b. if more capital was added c. if better technology was added 28. Which of the following would simultaneously increase the real wage and increase the productivity of labor? a. if workers become more skilled b. if more immigration was allowed c. if taxes on worker s wages were increased 29. Suppose that the U.S. deported 1 million illegal immigrants. Assuming that the deported immigrants had the same skills as the average American, the deportation would cause real wages in the U.S. to and productivity in the U.S. to. a. not change; not change b. not change; fall c. rise; rise 30. When wages rise, the substitution effect will cause workers to work (more, less) hours and the income effect will cause them to work (more; less) hours. a. more; more. b. more; less. c. less; less. d. less; more. 31. Suppose that a firm pays a wage of $10, the price of its product is $3 and the marginal product of another worker is 3 units of output, and the average product is 4 units of output. If this firm hires one more worker, its profits would a. rise by $1. b. fall by $1 c. rise by $2. d. fall by $2. 8

9 32. 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. an investment tax credit that subsidizes the purchase of capital c. a decrease in the government budget deficit. 33. If banks discover that the number of loans requested is far beyond the number of loans that they have available, this is an indication 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. 34. Assuming no Ricardo-Barro effect, an increase in the government budget deficit 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. 35. The Ricardo-Barro effect is that a decrease in the government budget deficit by $1 billion will a. increase household saving in the economy by $1 billion and have no effect on inerest rates. b. increase household saving in the economy by $1 billion and increase interest rates. c. decrease household saving in the economy by $1 billion and increase interest rates. d. decrease household saving in the economy by $1 billion and have no effect on interest rates. 36. Which of the following would lead to increased saving? a. households receive news that makes them believe that their incomes will rise permanently in the future. b. the value of household wealth increases due to an unexpected increase in the value of their stock holdings. c. household income goes up but everyone believes that the increase is only temporary. d. all of the above. 9

10 37. If the federal government increases business tax credits 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 their currency (cheap, expensive) relative to the dollar and this has caused the U.S. to export (more, less) to China than it imports from 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. U.S. households have high savings rates b. the U.S. runs large government budget deficits c. the Chinese have low savings rates d. all of the above. 41. Suppose that the U.S. increases its government budget deficit and there is no change in savings or investment. This would necessitate (more, less) borrowing from foreign countries and a (decrease, increase) in net exports. a. more; decrease b. more; increase c. less; decrease d. less; increase 10

11 42. Suppose that Vietnam has a balanced budget and its savings are greater than investment. This implies that Vietnams imports are (greater, less) than their exports and is (borrowing, lending) internationally. a. greater; borrowing. b. greater; lending. c. less; borrowing d. less; lending. 43. Suppose that personal consumption expenditure=200, private saving=20, government purchases of goods and services=30, net taxes=40, imports=30 and investment=50. What is the value of exports? a. 10 b. 20 c. 30 d