Korea University Principles of Macroeconomics ECON203(04) Spring Mock Midterm Prof. Kuk Mo Jung

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1 ECON203(04) Spring 2016 Mock Midterm Prof. Kuk Mo Jung PLEASE PUT YOUR NAME and ID# now There are 30 multiple-choice questions (Part I) worth 60 points and two multi-part written response problems worth 40 points total (Part II). You have 120 minutes to complete this exam. Name: ID Number: Part I (60 pts) Part II Q1 (24 pts) Part II Q2 (16 pts) Total

2 Mock Midterm Prof. Kuk Mo Jung Spring 2016 PART I: MULTIPLE CHOICE (30 questions, worth 2 points each) Please write the best answer in the left side of each question. 1. Economics is the study of a. production methods. b. how society manages its scarce resources. c. how households decide who performs which tasks. d. the interaction of business and government. 2. Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources. 3. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is a. the $24 she earns working. b. the $24 minus the enjoyment she would have received from watching the video. c. the enjoyment she would have received had she watched the video. d. nothing, since she would have received less than $24 of enjoyment from the video. 4. Suppose Henan University increases the cost of permits to park your car in a campus parking lot. a. The cost of the parking permit is not part of the opportunity cost of attending college, if you would not have to pay for parking otherwise. b. The cost of the parking permit is part of the opportunity cost of attending college, if you would not have to pay for parking otherwise. c. Only half of the cost of the parking permit is part of the opportunity cost of attending college. d. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances. 5. Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000 restoring the car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $12,000. Stan should a. complete the repairs and sell the car for $12,000. b. sell the car now for $9, 000. c. never try such an expensive project again. d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it. 6. Differences in living standards across countries is primarily attributable to differences in countries' a. productivity. b. population growth rates. c. existence of democratically-elected institutions. d. taxes. 7. With respect to how economists study the economy, which of the following statements is most accurate? a. Economists study the past, but they do not try to predict the future. b. Economists use rules of thumb to predict the future. c. Economists devise theories, collect data, and analyze the data to test the theories. d. Economists use controlled experiments in much the same way that natural scientists do.

3 Midterm Exam Prof. Kuk Mo Jung Spring Which of the following statements about models is correct? a. The more details a model includes, the better the model, regardless of the research question. b. Models assume away details not relevant to the research question at hand. c. Models cannot be used to explain how the economy functions. d. Models cannot be used to make predictions with respect to a given research question. 9. Which economic model is used to examine combinations of goods and services the economy is able to produce with given resources? a. The circular flow model. b. The demand and supply model. c. The gains from trade model. d. The production possibilities model. 10. Consider a market with many firms that identical goods and with no barriers to entry. This is known as a. Monopolistic competition. b. Monopoly c. Oligopoly d. Perfect competition. 11. A student earns $200 for working at a campus coffee shop. This $200 is a. income earned by households in the market for factors of production. b. expenditure earned by households in the market for goods and services. c. a flow of an output from households to firms. d. Both a) and c) 12. A microeconomist as opposed to a macroeconomist is most likely to study a. the effect of borrowing by the federal government on the inflation rate. b. the effect of rising oil prices on employment in the airline industry. c. changes in the nation s unemployment rate over short periods of time. d. alternative policies to promote higher living standards throughout the nation. 13. One way to characterize the difference between positive statements and normative statements is as follows: a. Positive statements tend to reflect optimism about the economy and its future, whereas normative statements tend to reflect pessimism about the economy and its future. b. Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on how things ought to be. c. Positive statements involve advice on policy matters, whereas normative statements are supported by scientific theory and observation. d. Economists outside of government tend to make normative statements, whereas governmentemployed economists tend to make positive statements. 14. In mid-2009, the U.S. Department of Agriculture announced it would increase the import quota on sugar, thereby limiting the amount of sugar that may be imported into the U.S. from abroad. Which of the following statements is true regarding this change in policy? a. U.S. consumers will enjoy lower prices for sugar. b. U.S. sugar producers will be harmed by the quota. c. Foreign sugar producers favor the quota. d. None of the above.

4 Midterm Exam Prof. Kuk Mo Jung Spring Efficiency wages a. lead to an increase in frictional unemployment because they imply lower wages for workers searching for jobs b. are wages that employers pay to workers as a result of union collective bargaining c. lead to higher worker turnover and lower benefits for employed workers d. create a surplus of labor because firms pay higher wages to workers to reward higher effort 16. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000, of whom 1,800 work 6 hours a day to make 270,000 final goods. a. Country A has higher productivity and higher real GDP per person than country B. b. Country A has lower productivity and lower real GDP per person than country B. c. Country A has higher productivity, but lower real GDP per person than country B. d. Country B has lower productivity, but higher real GDP per person than country B. 17. Workland has a population of 10,000, of whom 7,000 work 8 hours a day to produce a total of 224,000 final goods. Laborland has a population of 5,000, of whom 3,000 work 7 hours a day to produce a total of 105,000 final goods. a. Workland has higher productivity and higher real GDP per person than Laborland. b. Workland has higher productivity but lower real GDP per person than Laborland. c. Workland has lower productivity but higher real GDP per person than Laborland. d. Workland has lower productivity and lower real GDP per person than Laborland. 18. We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have identical characteristics except that a. the credit risk associated with Bond A is lower than the credit risk associated with Bond B. b. Bond A was issued by the Apple corporation and Bond B was issued by the city of Houston. c. Bond A has a term of 20 years and Bond B has a term of 2 years. d. All of the above are correct. 19. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that a. Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation. b. Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York. c. Bond A has a term of 20 years and Bond B has a term of 1 year. d. All of the above are correct. 20. Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. The future value of the $350 after 4 years is a. $ b. $ c. $ d. $ Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if a. X > 1, b. X > 1, c. X > 1, d. X > 1,

5 Midterm Exam Prof. Kuk Mo Jung Srping 2016 K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). 22. Refer to Figure above. The curve becomes flatter as the amount of capital per worker increases because of a. increasing returns to capital. b. increasing returns to labor. c. diminishing returns to capital. d. diminishing returns to labor. 23. Refer to Figure above. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher level of productivity. b. In the long run, a higher saving rate leads to a higher level of income. c. In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth rate of income. d. All of the above are correct. 24. Refer to Figure above. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher growth rate of productivity. b. In the long run, a higher saving rate leads to a higher growth rate of income. c. Returns to capital become increasingly smaller as the amount of capital per worker increases. d. All of the above are correct. 25. Refer to Figure above. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2011, then it will definitely remain at point A in 2012 if, between 2011 and 2012, a. the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural resources, and technology all double as well. b. the quantity of physical capital doubles; human capital, natural resources, and technology all double as well; and the number of workers remains constant. c. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology all double as well. d. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant.

6 Midterm Exam Prof. Kuk Mo Jung Spring 2016 Table 1 below lists annual consumer price index and inflation rates for a country over the period Assume the year 2005 is used as the base year. Year 26. Refer to Table 1. What belongs in space C? a. 120% b. 25% c. 8.7% d. 12% 27. Refer to Table 1. What belongs in space D? a. 12% b. 154% c. 40% d. 15% 28. Refer to Table 1. What belongs in space A? a. 14 b. 150 c. 144 d Refer to Table 1. What belongs in space E? a. 60% b. 6% c. 3.9% d. 6.7% Consumer Price Index B C D 2009 A 10% E Inflation Rate 30. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia s inflation rate in 2006? a. 4 percent b. 11 percent c percent d percent

7 Midterm Exam Prof. Kuk Mo Jung Spring 2016 PART II WRITTEN RESPONSE The Market for Loanable Funds (24 points) 1. Draw and label a graph showing equilibrium in the market for loanable funds below. (3 points) 2. Explain why the demand for loanable funds slopes downward and why the supply of loanable funds slopes upward. (6 points) 3. The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise. Yet we also suppose that higher interest rates lead to lower investment. How can these two conclusions be reconciled? (6 points)

8 4. Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if the government budget goes from a deficit to a surplus. (9 points)

9 Midterm Exam Prof. Kuk Mo Jung Spring 2016 Production and Growth (16 points) 5. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use these numbers to compute the percentage increase in real GDP per person from 1993 to (4 points) Year Real GDP (2009 prices) Population 1993 $9,510,800 million million 2012 $15,470,700 million million 6. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and the standard of living mean. Make a list of things that determine labor productivity. (4 points)

10 7. What is a production function? Write an equation for a typical production function, and explain what each of the terms represents. (4 points) 8. What is the difference between human capital and technology? (4 points)

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