ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2014 Prof. Bill Even FORM 3. Directions

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1 ECO202: PRINCIPLES OF MACROECONOMICS FIRST MIDTERM EXAM SPRING 2014 Prof. Bill Even FORM 3 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 46 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 or access the internet 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 To answer the next 5 questions, refer to the information for the U.S. economy provided below: Year Year Nominal GDP (in billions of $) GDP deflator (2009 base year) U.S. Population (in 1000s) Civilian Noninstitutionalized Working Age Population (in 1000s) Civilians Employed (in 1000s) Civilian Labor Force (in 1000s) , , , , , , , , , , , , , , , , , , , , The unemployment rate in 2013 was: a. 6.8% b. 7.9.% c. 8.9% d. 9.5% 2. In 2013, the labor force participation rate in 2013 was and the employmentpopulation ratio was. a. 63.6%; 58.5% b. 63.6%; 45.5% c. 49.4%; 45.5% d. 49.4%; 58.5% 3. In 2013, real GDP (in 2009 dollars) was a trillion b trillion c trillion d. it is impossible to determine without more information. 4. The average annual rate of growth in real GDP per capita between 2000 and 2013 was a. 0.3% b. 0.6% c. 0.8% d. 1.2% 5. If prices are rising over time and the level of production in the economy is fixed, nominal GDP will a. rise but real GDP will fall b. rise but real GDP will be unchanged c. be unchanged but real GDP will fall 2

3 6. Gross domestic product a) includes all the goods and none of the services produced in an economy in a given time period. b) measures the value of the aggregate production of goods and services in a country during a given time period. c) measures the value of labor payments generated in an economy in a given time period. d) is generally less than federal expenditure in any time period. 7. Which of the following equals the expenditure side of GDP? a. consumption + government purchases + saving + taxes. b. consumption + investment + government purchases + net exports. c. consumption + investment + government purchases + net imports d. wages + rent + interest + profits + indirect business taxes. 8. 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 improving over time. c. if the population grows over time d. all of the above. 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 Quantity of Oranges Price of apples Quantity of Apples Assuming that 2012 is the base year, the GDP deflator (rounded to the nearest integer) is in 2010 and in a. 60; 100 b. 100; 60 c. 100; 167 d. 167; Assuming that 2012 is the base year, real GDP in 2010 is and nominal GDP in 2010 is. a. $2,400; more $2,400 b. $4,000; more than $4,000 c. $2,400 less than $2,400 d. $4,000 less than $4,000 e. none of the above. 3

4 11. If the unemployment rate is currently above the natural rate of unemployment, GDP must be potential GDP and the economy is full employment. a. above; above. b. above; below. c. below; below. d. below; above. 12. When the unemployment rate matches the natural unemployment rate, a. there is no structural or cyclical unemployment. b. there is no cyclical unemployment c. there is no frictional cyclical unemployment. d. there is no frictional or structural unemployment. 13. The traditional CPI has several known biases that cause it to be a poor measure of the true growth in the cost of living. If these biases were removed in a new version of the CPI, the estimated growth in real wages would be and the estimated rate of inflation would be. a. lower; lower b. lower; higher. c. higher; higher d. higher; lower 14. 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 federal income tax revenues and future growth in the federal budget deficit a. decrease; increase b. decrease; decrease c. increase; increase d. increase; decrease 4

5 15. Suppose that over the next year your nominal wage (in 2000 dollars) rises from $10 to $12 and the CPI rises from 120 to 130. Based on this, your real wage. a. fell by more than 5% b. fell by less than 5% c. rose by less than 15% d. rose by more than 15% 16. Between 2000 and 2013, the CPI rose from to This implies that $1 in 2000 would buy as much as in a. $2.31 b. $1.69 c. $ Between 2000 and 2013, the CPI rose from to This implies that the average annual rate of inflation over the period was: a. 1.9% b. 2.4% c. 3.2% d. 3.7% 18. As the economy strengthens, some discouraged workers reenter the labor market and begin searching for jobs. Assuming that none of them initially find jobs, this would cause the unemployment rate to, the labor force participation rate to, and the employment-population ratio to. a. rise; rise; fall b. not change; rise; fall c. rise; not change; not change 19. During expansions, the labor force participation rate tends to a. rise, but not by as much as the employment-population ratio. b. rise by more than the employment-population ratio. c. fall whereas the employment-population ratio rises.. 5

6 To answer the next 2 questions, refer to the diagram below. LS 15 LD 300 billion PF 30 billion 20. Based on the above diagram, if the real wage is currently $10, 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 21. Based on the diagram above, if the economy is at full employment, the marginal product of labor will be and productivity will be. a. 15; 10 b. 10; 15 c. less than 10; less than 10 6

7 22. When wages rise, workers will increase the number of hours worked a. always if they are rational b. if the income effect is greater than the substitution effect c. if the substitution effect is greater than the income effect d. only if they are irrational 23. 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. if business becomes more optimistic about future sales and profits c. a higher tax on corporate profits. 24. Suppose there is a natural disaster that wipes out a considerable fraction of the economy s capital stock. Based on the classical model of the economy, this would cause labor productivity to and potential GDP to. a. fall; fall b. fall; not change. c. rise; fall. 25. Which of the following would simultaneously decrease the real wage and increase potential GDP? a. if more capital is added b. if better technology is added c. if the population grows d. all of the above. 26. If businesses discover that many of them with perfect credit ratings are unable to get a loan at the current interest rate, this suggests 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. 7

8 27. Suppose that the capital stock is $6,200 billion at the beginning of 2012 and $6,400 billion at the end of This implies that a. gross investment is $200 billion b. net investment exceed depreciation by $200 billion c. gross investment exceeded depreciation by $200 billion. 28. Suppose that a household has wealth of $200,000 at the beginning of the year. Over the year, their wealth grows to $220,000. If the household experienced capital losses of $10,00 during the year, we can conclude that, a. household saving during the year was $10,000 b. household saving during the year was $30,000 c. investment during the year was $10,000 d. investment during the year was $30, If a worker loses her job because her company has permanently outsourced the work to another country and shut down the factory, this worker would be experiencing: a. frictional unemployment b. structural unemployment c. cyclical unemployment d. natural unemployment 30. If a student graduates from college and is searching for a job, this worker would be experiencing: a. frictional unemployment b. structural unemployment c. cyclical unemployment d. natural unemployment 31. If everyone expects inflation of 5% over the next year and inflation actually turns out to be 3%, a. lenders would win and borrowers would lose. b. borrowers would win and lenders would lose. c. both lenders and borrowers would win. d. both lenders and borrowers would lose. 8

9 32. Some U.S. politicians claim that China manipulates its currency. The argument is that China has pursued policies to make the dollar (cheap, expensive) relative to the Chinese currency and this has caused the U.S. to import (more, less) from China than it exports to China. a. expensive; more b. expensive; less c. cheap; more d. cheap; less 33. If the federal government increases the amount of time that firms must use to claim depreciation expense 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. 34. 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 35. 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. the U.S. runs large government budget deficits b. U.S. households have low savings rates c. the Chinese have high savings rates d. all of the above. 36. Suppose that Cambodia has a government budget surplus and its imports exceed its exports. This implies that Cambodia must have a. saving greater than investment b. saving less than investment c. interest rates that are above equilibrium d. interest rates that are below equilbirum 37. Suppose that GDP=500; personal consumption expenditure=400, private saving=50, government purchases of goods and services=50, imports=20 and exports=30. Gross private domestic investment must be: a. 20 b. 30 c. 40 9

10 38. If the nominal interest rate is 5% and the real interest rate is 2%, a lender will in terms of purchasing power over a year if she lends at these terms. a. lose 3% b. lose 2% c. gain 2% d. gain 3% 39. Assuming no Ricardo-Barro effect, an increase in the government budget deficit should cause: a. higher interest rates and more investment. b. higher interest rates and less saving c. lower interest rates and less investment. 40. The Ricardo-Barro effect is that an increase in the government budget deficit by $1 billion will a. increase household saving in the economy by $1 billion and have no effect on investment b. increase household saving in the economy by $1 billion and reduce investment by $1 billion. c. decrease household saving in the economy by $1 billion and reduce investment d. decrease household saving in the economy by $1 billion and have no effect on investment 41. Which of the following would lead to lower interest rates? a. households receive news that makes them believe that their incomes will fall in the future. b. the value of household wealth increases due to an unexpected increase in the value of their stock holdings. c. a technological innovation occurs resulting in a large increase in capital purchases by business Suppose that the government announces a cut in the personal income tax rate. Based on the permanent income hypothesis, the tax cut should lead to in consumption if the tax cut will be temporary than if it will be permanent a. larger increase b. larger decrease c. smaller increase d. smaller decrease 10

11 43. According to the research article discussed in class, economic growth over the next 30 years is expected to be slower than the historical average for the U.S. because: a. hours worked per capita will fall in the future b. educational attainment in the U.S. will not grow as rapidly as it has in the past c. the ratio of debt to GDP will grow and will likely lead to higher tax rates d. all of the above 44. According to assigned readings in class, the Federal Reserve a. had been buying $65 billion of government bonds monthly and has recently increased its monthly purchases. b. previously indicated that it may start cutting interest rates when the unemployment rate falls below 6.5%. c. recently hinted that it may consider factors other than the unemployment rate in deciding when to change interest rates. d. all of the above. 45. Suppose that the U.S. reduces its government budget deficit and there is no change in imports or exports. This would necessitate either: a. an increase in saving or investment. b. an increase in saving or a decrease in investment. c. a decrease in saving or an increase in investment. d. a decrease in saving or investment. 46. According to one of the assigned readings for class, a. during the 4 th quarter of 2013, U.S. consumers increased borrowing at an unusually rapid rate. b. mortgage debt is the largest component of household debt in the U.S. c. student loan debt is the second largest compenent of household debt in the U.S. d. all of the above e. only a and b 11