Economics 1012 A : Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Second Midterm Examination October 19, 2007

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1 Economics 1012 A : Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Second Midterm Examination October 19, 2007 ================================================================================ Answer all of the following questions by selecting the most appropriate answer on your bubble sheet. Be sure to read each question carefully. Each question is worth 2 points (100 points total) and will count as 20 per cent of your final course grade. 1. With respect to the unemployment problem, Keynesian economists generally take the position that A) government should guarantee each person a satisfying and high-paying job. B) government should eliminate only frictional unemployment. C) involuntary unemployment can result if wages do not adjust quickly to clearly equate labour demand and supply. D) individuals should be responsible for finding their own jobs. 2. Per capita real output is a A) better measure of personal material consumption than real GDP. B) worse measure of personal material consumption than real GDP. C) better measure of the physical environment than real GDP. D) worse measure of the physical environment than real GDP. 3. Use the following table to calculate the unemployment rate. Select the correct answer from the options below. In millions Population (age 15+) 270 People incapable of working 70 People not looking for work 60 Employed workers 133 A) 3 percent. B) 5 percent. C) 7 percent. D) 9 percent. 4. Inflationary expectations are important because widespread changes in inflationary expectations affect A) the distribution of income. B) relative prices. C) actual inflation. D) unexpected inflation. 5. The business cycle consists of several stages or phases. Which is the accurate sequence? A) Recession, peak, expansion, trough. B) Recession, peak, trough, expansion. C) Recession, expansion, peak, trough. D) Recession, trough, expansion, peak. Page 1

2 6. During the business cycle, an economic expansion occurs A) at the peak of the business cycle. B) at the trough of a business cycle. C) between the peak and trough. D) between the trough and peak. 7. Food and beverages make up about 20 percent of total expenditure. If food and beverage prices rise by 10 percent while the other components of the price index remain constant, how much will the price index rise by? A) 1 percent. B) 2 percent. C) 20 percent. D) 25 percent. 8. Radical economists A) are generally in agreement with Austrian economists. B) believe that individual liberty takes precedence over social equality. C) do not emphasize social problems related to race or class. D) believe that capitalism benefits a small elite at the expense of workers. 9. A cost of inflation is that A) it makes everyone poorer. B) it makes the poor poorer and the rich richer. C) there are no costs of inflation because inflation does not make the society as a whole poorer. D) it reduces the informational content of prices. 10. Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through negotiations the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and layoff their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers' situation? A) Cyclical unemployment. B) Full unemployment. C) Structural unemployment. D) Frictional unemployment. Page 2

3 11. Post-Keynesian macroeconomists A) reject Keynes' ideas about fiscal and monetary policy. B) favour a fixed rate of growth for the money supply. C) believe that government intervention is justified by uncertainty about the macroeconomy. D) believe that laissez-faire is justified by uncertainty about the macroeconomy. 12. If country of 250 million people has a total income of $8 trillion, its per capita income is about A) $ B) $32, C) $ D) $36, Which of the following is NOT a measurement problem with the Consumer Price Index? A) Substitution bias. B) Quality improvement bias. C) Quality decline bias. D) New product bias. 14. Which of the following institutional changes would tend to reduce the target rate of unemployment? A) The greater ease with which families may support unemployed family members. B) Increased number of people reaching the age at which they are more employable. C) The availability of unemployment insurance. D) The increased incidence of two-earner families. 15. In the late 1990s, the economy was experiencing a prolonged expansion and the unemployment rate fell to near 4 percent. Companies had a hard time finding workers. What type of unemployment was declining during this period? A) Cyclical unemployment. B) Full unemployment. C) Structural unemployment. D) Frictional unemployment. 16. Which of the following people would be included as a member of the labour force? A) A full-time college student. B) A recent high school graduate looking for a first job. C) A homemaker contributing 15 hours per week as a volunteer worker in a hospital. D) A retired school teacher collecting a pension. 17. Which of the following problems is not one of the central concerns of macroeconomics? A) Product pricing. B) Growth. C) Business cycles. D) Unemployment. Page 3

4 18. If the CPI in year 2 equals 110 and the CPI in year 3 equals 121, it can be concluded that consumer prices A) rose from year 2 to year 3 by 11. B) rose from year 2 to year 3 by 11%. C) rose from year 2 to year 3 by 10%. D) are the same in year 2 as in the base year. 19. Some people have argued that the dual goals of environmental protection and increasing material consumption by individuals are not necessarily conflicting because spending on the environment creates growth and jobs. This argument A) is correct because jobs are a good thing. B) is incorrect because environmental issues are not as important as material consumption. C) is correct because material consumption is not as important as the environment. D) is incorrect because the environmental projects will use the resources generated from growth, leaving less for increased personal consumption. 20. If the price of housing (which accounts for 40% of total expenditures in the CPI basket), rises by 5% in one year while the prices of all other goods remain constant, by how much will the CPI rise? A) 2 percent. B) 5 percent. C) 10 percent. D) 40 percent. 21. Which of the following is not a part of GDP? A) The value of a homemaker's services. B) The value of a haircut. C) The value of a new car produced and purchased during a year. D) The value of new houses built and sold during a year. Use the following to answer question 22: In billions of dollars Consumption 3,600 Investment 800 Transfer payments 750 Government expenditures 1,000 Exports 650 Imports 450 Net foreign factor income Calculate GNI using the table above. A) 5,570. B) 5,630. C) 6,220. D) 6,250. Page 4

5 23. The largest component of national income is A) interest. B) rents. C) employee compensation. D) profits. 24. If inflation is 10 percent and nominal GDP goes up 20 percent, real GDP goes up approximately A) 1 percent. B) 10 percent. C) 20 percent. D) 30 percent. 25. Which of the following is not a limitation of national income accounting? A) Measurement error. B) The use of real GDP to measure changes in economic activity over time. C) The use of real GDP to measure changes in social welfare over time. D) Misinterpretation of subcategories. 26. The movement of expenditures and factor payments through the economy is called A) net national product. B) national income. C) gross domestic product. D) the circular flow. 27. For the purposes of calculating GDP, gross private domestic investment includes A) the value of new residential construction. B) purchases of stock. C) purchases of new automobiles. D) purchases of government bonds. 28. Value added is calculated by A) subtracting the cost of materials used in production from the value of sales. B) adding the cost of materials used in production to the value of sales. C) subtracting the value of sales from the cost of materials used in production. D) adding the value of output to the value of inputs. 29. If economic activity increases, it follows that economic welfare A) increases as more goods and services become available. B) decreases as more resources are depleted. C) does not change since it does not depend on the level of economic activity. D) may increase, decrease, or remain unchanged, depending on the nature of the increase in economic activity. Page 5

6 30. There are two firms in an economy, Firm A and Firm B. Firm A produces 100 widgets and sells them for $2 apiece. Firm B produces 200 gadgets and sells them for $3 apiece. Firm A sells 30 of its widgets to Firm B and the remainder to consumers. Firm B sells 50 of its gadgets to Firm A and the remainder to consumers. What is GDP in this economy? A) $210. B) $590. C) $600. D) $800. Use the following to answer question 31: In trillions of dollars GDP 5.0 Government purchases 1.0 Transfer payments 0.2 Exports 0.4 Imports 0.5 Net foreign factor income Refer to the table above. What is consumption in this economy? A) $3.6 trillion. B) $3.9 trillion. C) $4.1 trillion. D) There is not sufficient information to compute consumption. 32. Suppose that between 1999 and 2000, real GDP rose by 10%, inflation was 10%, and average product quality increased by 10%. From this we can infer that A) the true increase in real GDP is likely to be less than 10%. B) the true increase in real GDP is likely to be greater than 10%. C) the true increase in real GDP is likely to be 10%. D) real GDP probably did not change. 33. If depreciation does not occur, then A) net domestic product exceeds gross domestic product. B) net domestic product equals gross domestic product. C) net domestic product is less than gross domestic product. D) net domestic product cannot be defined. 34. Canada produces and sells millions of different products. To add them up to a single aggregate number, each good is weighted by its A) cost of production. B) market price. C) utility to consumers. D) contribution to corporate profits. Page 6

7 35. To calculate GDP A) add the quantity of all final goods and services produced in an economy in a year. B) add the quantity of all goods and services sold in an economy in a year. C) weight the output of each final good and service produced in an economy in a year by its price in that year and then add the result. D) weight the output of each good and service produced in an economy in a year by its price in that year and then add the results. 36. According to the multiplier equation, an increase in the marginal propensity to consume A) raises output because it leads to an increase in autonomous expenditure. B) reduces aggregate expenditure because it reduces the multiplier. C) increases output because it increases the multiplier. D) increases aggregate expenditure because it increases autonomous expenditure. 37. In Canada suppose the marginal propensity to consume is 0.8 and the tax rate is 0.25 and all other components of aggregate expenditures are determined outside the model. If the Prime Minister wants to increase income by 500, his advisers would suggest that he increase government spending by A) 50. B) 100. C) 200. D) If an increase in autonomous expenditure of $300 results in an increase in equilibrium income of $900, the multiplier is A) 1/3. B) 3. C) 4. D) The multiplier equals A) the mpc. B) 1 / mpc. C) 1 / (1 - mpc). D) 1 / (mpc - 1). 40. In the expenditures function AE = AE 0 + mpcy, induced expenditures are given by A) AE 0. B) AE 0 + Y. C) mpcy. D) Y. 41. According to the expenditures function, what happens to expenditures as income rises? A) They stay the same. B) They decrease. C) They increase by the same amount as income. D) They increase by less than the increase in income. Page 7

8 42. The aggregate expenditure model A) fully explains fluctuations in equilibrium income. B) explains the link between fluctuations in autonomous expenditure and fluctuations in equilibrium income. C) explains why autonomous expenditures change. D) can be used to determine the desired level of income. 43. The total level of expenditures in an economy equals A) C + I + G + IM. B) C + I + G - IM. C) C + I + G + X. D) C + I + G + X - IM. Use the following to answer questions : 44. Refer to the graph above. If the mpc were to change to.9, equilibrium real income would be A) greater than $600. B) $600. C) less than $600. D) indeterminate. 45. Refer to the graph above. If the mpc were to change to 1/3, equilibrium real income would be A) greater than $600. B) $600. C) less than $600. D) indeterminate. Page 8

9 46. Refer to the graph above. If autonomous expenditures were to change to $300, equilibrium real income would be A) greater than $600. B) $600. C) less than $600. D) indeterminate. 47. Classical economists thought that the Depression in the 1930s lasted so long because A) wage-levels were rigid. B) wages were too low. C) people were unwilling to work. D) inflation was too low. 48. In the aggregate expenditure model if autonomous exports fall by 40 and government spending increases by 20, and the mpc is.5, what happens to the income? A) Income rises by 120. B) Income falls by 120. C) Income rises by 40. D) Income falls by 40. Use the following to answer question 49 : 49. Refer to the graph above. Point A represents A) real income of $3,000 and real production of $3,000. B) real income of $3,000 and real production of $5,000. C) real income of $5,000 and real production of $5,000. D) real income of $5,000 and real production of $3, Aggregate production is the total amount of A) goods produced. B) services produced. C) expenditures. D) goods and services produced. Page 9

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11 Fall 2007 Dr. Mueller Econ 1012A Midterm One Answer Key 1. C 2. A 3. B 4. C 5. D 6. D 7. B 8. D 9. D 10. C 11. C 12. B 13. C 14. B 15. A 16. B 17. A 18. C 19. D 20. A 21. A 22. A 23. C 24. B 25. B 26. D 27. A 28. A 29. D 30. B 31. D 32. B 33. B 34. B 35. C 36. C 37. C 38. B 39. C 40. C 41. D 42. B 43. D 44. A 45. C 46. A 47. A Page 11

12 48. D 49. A 50. D Page 12