EC102.03 and 102.05 Spring 2015 Instructions: MIDTERM EXAM I March 26, 2015 NAME: ID #: You have 80 minutes to complete the exam. There will be no extensions. The exam consists of 40 multiple choice questions. Each multiple choice question is worth 1 point for a total of 40 points. Use a pencil to mark your answers on the answer sheet. Make sure you write your name and ID number on the answer sheet as well. Please mark the group of your test on the answer sheet under Test Form. No calculators, dictionaries or formula sheets are allowed. The use of cell phones is strictly prohibited. Make sure your cell phone is turned off and inside your bag. Do NOT use your cell phone even for timekeeping purposes. This is a closed books/notes exam. Choose only one answer for each question. 2 wrong answers will take away one correct answer. There is absolutely no talking during the exam. The proctors will NOT answer any questions. There are 9 pages in this exam booklet. 1
1. The principle of diminishing returns to capital implies that a country that lost much of its capital during a war will A) never catch up with countries that never go to war. B) experience a higher growth rate than before the war. C) grow more slowly than its enemy during the war. D) keep it from being permanently rich. 2. Because of diminishing returns, an economy can continue to increase real GDP per hour worked only if A) there is technological change. B) there continue to be decreases in capital per hour worked. C) there are decreases in human capital. D) the per-worker production function shifts downward. 3. Which of the following would encourage economic growth through increases in the capital stock? A) a decrease in the government deficit B) an increase in household savings C) a change from an income tax to a consumption tax D) all of the above 4. Which of the following would lead to an increase in household saving? A) a temporary decline in the household s current income. B) an expected decline in the household s future income C) lower interest rates D) none of the above. 5. Which of the following equations represents national saving in a closed economy? A) Y - I G - NX B) Y - I C C) Y - C - G D) G + C Y 6. Within the Keynesian model, if an economy operates below full employment, A) a reduction in wage rates and resource prices will soon restore full employment equilibrium. B) a reduction in the real interest rate will soon restore full-employment equilibrium. C) an increase in the real interest rate will soon restore full-employment equilibrium. D) the economy may remain below full employment for a long time unless aggregate demand increases. 2
7. Consider a simple economy: MPC = 0.75, income = $400 billion, and aggregate consumption spending = $400 billion. Autonomous consumption is: A) 0 B) 100 billion C) 300 billion D) 200 billion 8. Pre-Keynesian economists (often called classical economists) believed that a free market, capitalist economy would A) automatically provide for the full employment of resources because prices are flexible. B) provide for maximum aggregate income as long as there was government intervention. C) suffer prolonged periods of recessions and depressions. D) be inherently unstable because of fluctuating aggregate demand. 9. Suppose that the marginal propensity to consume is 0.4, then the multiplier will be: A) 2.5 B) 1.33 C) 1.66 D) 4 10. If actual prices are higher than expected prices and wages are sticky: A) Labor is relatively expensive, so output goes down B) Labor is relatively cheap, so output goes up C) Labor is relatively expensive, so output goes up D) Labor is relatively cheap, so output goes down 11. Which of these accurately describes the Misperceptions Theory of the upward sloping short run aggregate supply curve? A) Firms negotiate labor contracts infrequently based on their expectations of prices, and may adjust their labor usage when realized prices are other than expected. B) Firms incorrectly believe that the relative price of their output has risen when in fact the aggregate price level has risen. C) Firms cannot perfectly process all information about the quality of their labor at every point in time. D) Firms may invest in bad projects because Fed action causes them to incorrectly compute the present value of their investments. 12. Which of the following CANNOT be a reason for a decline in aggregate demand? A) Firms cut their information technology spending B) A sharp decline in stock market C) A decline in government spending D) All of the above is a reason for a decline in aggregate demand 3
13. (Use the table above) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the table show consumption spending (C) and planned investment (Iplanned). The income expenditure equilibrium real GDP is found at. If planned investment fell to $300, the new income expenditure equilibrium real GDP would fall to. A) 3,500; 2,500 B) 3,500; 2,000 C) 3,000; 1,500 D) 4,000; 2,500 14. (Use the table above) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the table show consumption spending (C) and planned investment (Iplanned). If real GDP is $2,500, what is the level of unplanned inventory investment? A) 200 B) 0 C) 2,700 D) -200 15. What would happen in the market for loanable funds if the government were to increase the tax on interest income? A) interest rates would rise B) interest rates would be unaffected C) interest rates would fall D) the change in the interest rate would be ambiguous 16. Goods that go into inventory and are not sold during the current period A) are included in GDP as inventory investment. B) are intermediate goods until sold, hence, are not included in GDP. C) are included in GDP as consumption. D) are included in GDP as inventory investment, but not until the goods are sold. 4
17. 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 D) none of the above 18. Suppose that in a closed economy GDP is equal to 10,000, Taxes are equal to 3,000, Consumption equals 6,000, and Government expenditures equal 1,500. What is national saving? A) 2500 B) 1500 C) 1000 D) 3000 19. 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 D) none of the above. 20. Crowding-out refers to A) how stocks have replaced bonds in the recent decades. B) how consumption has reduced savings rates in the U.S. C) the competition between savers for efficient vehicles. D) the decrease in private investment that occurs when government borrows more. 21. Suppose that 100 identical houses are built and sold for 250,000 TL each this year. Of these 90 are occupied by the owners and the rest is rented out for 10,000 TL each. How would this appear in GDP? A) Investment spending of 25,000,000 TL and consumption spending of 100,000 TL B) Consumption spending of 25,100,000 TL C) Investment spending of 25,000,000 TL and consumption spending of 1,000,000 TL D) Investment spending of 26,000,000 TL 22. The catch-up effect refers to the idea that A) rich countries aid relatively poor countries so as to "catch them up." B) savings will always "catch-up" with investment spending. C) it is easier for a country to grow fast if it starts out relatively poor. D) if investment spending is low, increased saving will help investment to "catch-up." high risk, high profit, and low savings 5
23. When a country saves a larger portion of its GDP, it will have A) more investment, and so have more capital and higher productivity. B) more investment, and so have less capital and higher productivity. C) less investment, and so have more capital and higher productivity. D) less investment, and so have less capital and higher productivity. 24. (Use the figure above) Which of the points in the above graph are possible long-run equilibriums. A) A and D B) A and B C) A and C D) B and D 25. (Use the figure above) Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D 26. When the economy enters a recessionary phase of the business cycle, unemployment tends to A) be unchanged. B) increase. C) decrease. D) change in the same direction as the rate of inflation. 6
27. Ali and Ayşe have each been doing their own housework. Ali decides to hire Ayşe to do his housework, and in turn, Ayşe hires Ali to do her housework. As a result of this change, A) GDP falls. B) GDP is unaffected because housework is not included in GDP. C) GDP is unaffected because the same work is being performed in both cases. D) GDP rises. 28. The supply of loanable funds A) slopes upward because an increase in the interest rate induces people to save more. B) slopes upward because an increase in the interest rate induces people to invest more. C) slopes downward because an increase in the interest rate induces people to save less. D) slopes downward because an increase in the interest rate induces people to invest less. 29. A country has a population of 50 million people, 30 million of whom are adults or of working age. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. The number of people in the labor force in millions is A) 15 B) 20 C) 30 D) 25 30. Intermediate goods are excluded from GDP because A) their inclusion would understate GDP B) the premise of the question is incorrect because intermediate goods are directly included in calculating GDP. C) they represent goods that have never been purchased so they cannot be counted. D) their inclusion would involve double counting production of some goods. 31. Suppose GDP consists of fish and rice, and in 2010, 20 kg. of fish are sold at $4 per kg, and 10 kg. of rice are sold at $2 per kg. If the price of fish was $1 per kg. and the price of rice was $2 per kg. in 2010, the base year, A) nominal 2014 GDP is $100, real 2010 GDP is $40, and the GDP deflator is 40. B) nominal 2014 GDP is $40, real 2010 GDP is $100, and the GDP deflator is 250. C) nominal 2014 GDP is $100, real 2010 GDP is $40, and the GDP deflator is 250. D) nominal 2014 GDP is $40, real 2010 GDP is $100, and the GDP deflator is 40. 7
32. Some people are counted as out of the labor force because they make no serious effort to look for work. However, some of these people may want to work even though they are too discouraged to make serious effort to look for work. If these persons were counted as unemployed instead of out of the labor force, A) both the unemployment rate and labor-force participation rate would be higher. B) the unemployment rate would be higher and the labor-force participation rate would be lower. C) the unemployment rate would be lower and the labor-force participation rate would be higher. D) None of the above are correct. 33. Because of a negative supply shock, in the short run A) Aggregate supply shifts to the left B) Unemployment falls C) Equilibrium real GDP rises D) The price level falls 34. If there are diminishing returns to capital, A) increases in the capital stock eventually decrease output. B) increases in the capital stock increase output by ever smaller amounts. C) capital produces fewer goods as it ages. D) new ideas are not as useful as old ideas. 35. Unlike GDP GNP will include A) Transfers from government to disadvantaged groups B) Incomes of Turkish people living abroad C) The value of intermediate goods produced D) Non-market activities 36. Which of the following would decrease unemployment A) An unemployed person gives up looking for a job B) An employed person takes a second job C) A part-time employee moves to a full-time job D) A full-time employee moves to a part-time job 37. Suppose that CPI was 120 in 2010 and is 240 in 2014. By how much did the consumer prices change on average from 2010 to 2014 A) 120% B) 50% C) 0% D) 100% 8
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. 38. (Use the info given above) Given this consumption function, if this country experienced an increase in income of $10,000, consumption would initially increase by: A) $10,000. B) $200. C) $7,500. D) $7,700. 39. (Use the info given above) What is the income expenditure equilibrium for this country? A) $900 B) $1,100 C) $275 D) $200 40. Which of the following causes substitution bias when calculating CPI? A) The price of bread increases sharply during the period B) The quantity of bread used by households decreases over time relative to the quantities of other goods C) Quality of bread falls over time D) There are new varieties of bread available that did not exist in earlier periods. 9