ECON 2002.01 Midterm 1 old exams

product meat . potatoes Q 2013 . 100 . 200 P 2013 . 10 . 2 Q 2018 120 180 P 2018 12 3 37) Assume the market basket for the consumer price index has two products—meat and potatoes—with the following values in 2013 and 2018 for price and quantity: What is the Consumer Price Index for 2018, using 2013 for the base year basket of goods?

(12x100+3x200)/(10x100+2x200)x100=128.57

year . nominal GDP . real GDP 2017 . 14078 . 13254 2018 . 14441 . 13312 32) Consider the above data on nominal GDP and real GDP (values are in billions of dollars): What is the inflation rate from 2017 to 2018?

(14078/13254) X 100 = 106.22 (14441/13312)X100= 108.48 (108.48-106.22)/106.22 X 100=2.13%

Year CPI 1996 157 1197 161 1998 163 38) Consider the above values of the consumer price index for 1996, 1997, and 1998: What was the inflation rate from 1996 to 1997?

(161-157)/157x100= 2.55%

33) Give two reasons why GDP does not reflect total production in an economy.

- doesn't count household production -illegal activity -under the table or informal economy

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 180 to 200. What is the real interest rate you are paying?

-6.1%

Suppose that the data in the table above reflect the price levels in the economy. Given that data, we can say that the cost of living rose by what percentage between 2012 and 2013? year . CPI 2012 . 100 2013 . 113

13%

year 2016 . 2018 oranges . 1800 . 2000 price . .90 . 1.0 shirts 110 . 110 price . 30 . 35 Consider the data shown above for Vicuna, a country that produces only two products: oranges and shirts. 31) Calculate real GDP for Vicuna for 2016 using 2018 as the base year.

1800 x 1 + 110 x 35 1800 + 3850 =5650

a car that is produced in 2018 is not sold until 2019. according to the definition of GDP, in which years GDP should it be counted. 2018 2019 half of the sales will count as part of 2018 GDP and half will count as part of 2019 GDP the production cost will count as part of 2018 GDP while the sales price will count as part of 2019 GDP

2018

1) Which of the following transactions would be included in the official calculation of GDP? A) A student buys a used textbook at the bookstore. B) Firestone sells $2 million worth of tires to General Motors. C) You wash and wax your father's car as a favor to him. D) You buy a new iPod. E) You illegally download music off the Internet to put on your new iPod.

D) You buy a new iPod.

10) Which of the following policies would reduce frictional unemployment? A) a decrease in the minimum wage B) a job retraining program C) implementing an unemployment insurance policy D) building an online job database that helps workers find jobs

D) building an online job database that helps workers find jobs

20) A policy that offers parents a tax reduction based on how much they are saving for their children's college education should ________ the equilibrium level of loanable funds and ________ the rate of long-term growth. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase

D) increase; increase

25) Policies to promote growth by increasing saving and investment work through A) decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. B) increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital. C) increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital. D) increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

D) increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

8) The percent increase in the CPI from one year to the next is a measure of the A) GDP deflator. B) unemployment rate. C) real interest rate. D) inflation rate.

D) inflation rate.

22) A decrease in the price level will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) move the economy up along a stationary aggregate demand curve. D) move the economy down along a stationary aggregate demand curve.

D) move the economy down along a stationary aggregate demand curve.

26) A decrease in the price level will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) move the economy up along a stationary aggregate demand curve. D) move the economy down along a stationary aggregate demand curve.

D) move the economy down along a stationary aggregate demand curve.

17) Long-run economic growth requires all of the following except A) technological change. B) increases in capital per hour worked. C) government provision of secure property rights. D) political instability.

D) political instability.

12) The best measure of the standard of living is A) nominal GDP. B) real GDP. C) nominal GDP per capita. D) real GDP per capita.

D) real GDP per capita.

Name three policies that could positively contribute to a country's economic growth.

Investments in education Investments in public health Improved infrastructure Reduction in corruption

9 . 12 . 13 product Q P . Q . P . Q . P MP3 . 40 .250 45 . 200 . 50 . 150 Tacos .2000 2 .2200 2.25 . 2300 2.4 coats . 300 . 50 . 310 . 52 . 350 . 55 Using 2009 as the base year, calculate the GDP deflator for 2013. Show your work.

Nominal 2013/real 2013 *100 = 93.27

Consider the following data for a closed economy: a. Y = $12 trillion b. C = $8 trillion c. I= $3 trillion d. TR = $2 trillion e. T = $3 trillion Use the data provided to calculate the level of private saving in this economy.

Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Plugging in the appropriate numbers for private saving, private saving = Y + TR - C - T = $12t + $2t - $8t - $3t = $3 trillion.

Fill in the missing values in the table of data collected in the household survey for November, 2009. The working-age population, employment, unemployment, and labor force are measured in thousands. Show your work. working age population: 235900 employment: unemployment: unemployment rate: 9.4% labor force: Labor force participation rate: 65.5%

employment: 139991 unemployment:14524 labor force:154515

36) Describe a policy that could help to decrease structural unemployment.

training or educational grants

35) Define the natural rate of unemployment. What does it consist of?

unemployment rate at full employment or potential output frictional and structural

3) Which of the following is likely to increase measured GDP? A) A greater number of women decide to stay at home and provide day care for their children under age 5. B) Marijuana becomes legal to grow and sell. C) Tax rates increase and more people attempt to underreport their income for tax purposes. D) More people decide to do their own lawn maintenance and give up using a professional service.

B) Marijuana becomes legal to grow and sell.

Between 2017 and 2018, if an economy's exports rise by $8 billion and its imports fall by $8 billion, by how much will GDP change between the two years, all else equal? A) Net exports will increase GDP by $8 billion. B) The increase in exports is offset by the decrease in imports, so there is no change in net exports and no effect on GDP. C) Net exports will increase GDP by $16 billion. D) Net exports will decrease GDP by $8 billion.

C) Net exports will increase GDP by $16 billion.

7) When an economy is at its natural rate of unemployment, which of the following will be true? A) The unemployment rate will be 0%. B) The labor force participation rate will be 100%. C) The unemployment rate will be greater than 0%. D) Only structural unemployment as a result of technological change will exist in the economy.

C) The unemployment rate will be greater than 0%.

12) If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then A) changes in the CPI accurately reflect the true rate of inflation. B) changes in the CPI understate the true rate of inflation. C) changes in the CPI overstate the true rate of inflation. D) changes in the CPI are unrelated to the true rate of inflation.

C) changes in the CPI overstate the true rate of inflation.

8) If you have trouble finding a job because of a slowdown in the overall economy, we would say that you are A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed.

C) cyclically unemployed.

3) Legalizing all forms of illegal activities A) reduces GDP and the size of the underground economy. B) reduces GDP and increases the size of the underground economy. C) increases GDP and reduces the size of the underground economy. D) increases GDP and increases the size of the underground economy.

C) increases GDP and reduces the size of the underground economy.

29) Stagflation occurs when A) inflation rises and GDP rises. B) inflation falls and GDP rises. C) inflation rises and GDP falls. D) inflation falls and GDP falls.

C) inflation rises and GDP falls.

14) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid? A) 17 percent B) 10 percent C) 7 percent D) 3 percent

D) 3 percent

25) Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise? A) SRAS shifted to the right by more than LRAS. B) AD shifted to the right by more than SRAS. C) AD shifted to the right by less than SRAS. D) SRAS and AD do not shift.

D) SRAS and AD do not shift.

5) The value of what a U.S.-owned McDonald's produces in South Korea is included in the U.S. ________ and the South Korean ________. A) GDP; GDP B) GNP; GDP C) GDP; GNP D) GNP; GNP

B) GNP; GDP

16) If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita? A) 4.7% B) 10.5% C) 15% D) 21%

A) 4.7%

19) Which of the following is consistent with the graph depicted above? (shift in supply to right) A) The government begins running a budget surplus. B) An expected recession decreases the profitability of new investment. C) An increase in government spending crowds out private expenditures. D) Technological change increases the profitability of new investment.

A) The government begins running a budget surplus.

10) When prices are rising, which of the following will be true? A) The real interest rate will be lower than the nominal interest rate. B) The real interest rate will be negative. C) The real interest rate will be higher than the nominal interest rate. D) The nominal interest rate will be negative.

A) The real interest rate will be lower than the nominal interest rate.

13) If consumers decide to be more frugal and save more out of their income, then this will cause A) a shift in the supply curve for loanable funds to the right. B) a shift in the supply curve for loanable funds to the left. C) a movement to the right along the supply curve for loanable funds. D) a movement to the left along the supply curve for loanable funds.

A) a shift in the supply curve for loanable funds to the right.

17) Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real GDP per hour worked by $500. If capital per hour worked increases further to $25,000, by how much would you expect real GDP per hour worked to increase if there are diminishing returns? A) by less than $500 B) by exactly $500 C) by more than $500 but less than $5,000 D) by more than $5,000 but less than $20,000

A) by less than $500

19) Lack of investment in strong education and health care systems A) causes a deterioration in human capital and a decline in labor productivity. B) causes a decline in physical capital and a decline in labor productivity. C) increases human capital and cause a decline in labor productivity. D) causes a deterioration in human capital and an increase in physical capital.

A) causes a deterioration in human capital and a decline in labor productivity.

24) Lack of investment in strong education and health care systems A) causes a deterioration in human capital and a decline in labor productivity. B) causes a decline in physical capital and a decline in labor productivity. C) increases human capital and cause a decline in labor productivity. D) causes a deterioration in human capital and an increase in physical capital.

A) causes a deterioration in human capital and a decline in labor productivity.

18) Which of the following explains the ability of the U.S. economy to avoid diminishing marginal returns and experience accelerating growth in the early to mid-20th century? A) continuing technological change B) immigration C) additions of a greater amount of capital of the same quality D) a decrease in the quality of labor

A) continuing technological change

23) Which of the following explains the ability of the U.S. economy to avoid diminishing marginal returns and experience accelerating growth in the early to mid-20th century? A) continuing technological change B) immigration C) additions of a greater amount of capital of the same quality D) a decrease in the quality of labor

A) continuing technological change

22) When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing A) diminishing returns. B) negative returns. C) accelerating returns. D) decreasing production.

A) diminishing returns.

13) If your nominal wage rises more slowly than the price level, we can say your real wage has ________ and the purchasing power of a dollar has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen

A) fallen; fallen

9) If your nominal wage rises more slowly than the price level, we can say your real wage has ________ and the purchasing power of a dollar has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen

A) fallen; fallen

11) Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy? A) growth in capital per hour accompanied by technological change B) increases in labor force participation rates as workers who are out of the labor force pursue rising wages C) a shift of workers in the economy from the agricultural sector to the nonagricultural sector D) an influx of immigrant labor into an economy without any accompanying technological change

A) growth in capital per hour accompanied by technological change

21) Increasing the growth rate of GDP per capita and sustaining this growth rate in an economy can A) increase infant mortality. B) increase standards of living. C) increase the level of poverty. D) lower life expectancy.

A) increase infant mortality.

15) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) increase; decrease B) decrease; increase C) decrease; decrease further D) increase; increase further

A) increase; decrease

30) In the dynamic aggregated demand and aggregate supply model, if AD shifts further than AS A) inflation occurs. B) deflation occurs. C) stagflation occurs. D) disinflation occurs.

A) inflation occurs.

18) In a closed economy, public saving plus private saving is equal to A) investment. B) taxes minus transfers. C) the budget surplus. D) the budget deficit.

A) investment.

20) During the expansion phase of the business cycle A) production increases. B) employment decreases. C) income decreases. D) unemployment increases.

A) production increases.

4) To examine how the total production of an economy has changed over time, it would be better to examine A) real GDP. B) nominal GDP. C) GDP at current prices. D) the GDP deflator.

A) real GDP.

28) In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result, this should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve.

A) shift the short-run aggregate supply curve to the left.

21) The basic aggregate demand and aggregate supply curve model helps explain ________ fluctuations in real GDP and the price level. A) short-term B) long-term C) both short-term and long-term D) unrelated

A) short-term

24) A negative supply shock in the short run causes A) the aggregate supply curve to shift to the left. B) the price level to fall. C) unemployment to fall. D) equilibrium real GDP to rise.

A) the aggregate supply curve to shift to the left.

27) Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) the economy will move up along the long-run aggregate supply curve. D) the economy will move down along the long-run aggregate supply curve.

A) the long-run aggregate supply curve will shift to the right.

2) The circular flow diagram shows that A) the value of total income is equal to the total value of expenditures on final goods and services. B) firms pay households wages, and households receive transfer payments from firms. C) households spend all their income on goods and services. D) GDP will be less than the total value of expenditures on final goods and services in the economy.

A) the value of total income is equal to the total value of expenditures on final goods and services.

7) Jack lost his job six months ago, and he's been actively looking for a new job ever since. The Bureau of Labor Statistics would classify Jack as A) unemployed. B) out of the labor force. C) a discouraged worker. D) all of the above.

A) unemployed.

4) Which of the following could cause nominal GDP to decrease, but real GDP to increase? A) The price level rises and the quantity of final goods and services produced rises. B) The price level falls and the quantity of final goods and services produced rises. C) The price level rises and the quantity of final goods and services produced falls. D) The price level falls and the quantity of final goods and services produced falls.

B) The price level falls and the quantity of final goods and services produced rises.

6) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness? A) inflation B) discouraged workers C) people employed in the underground economy D) unemployed persons falsely report themselves to be actively looking for a job

B) discouraged workers

23) Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve.

B) shift the short-run aggregate supply curve to the right.

9) We say that the economy is at full employment if the unemployment rate is equal to A) zero. B) the natural rate of unemployment. C) the amount of cyclical unemployment. D) the sum of frictional and cyclical unemployment. E) the sum of structural and cyclical unemployment.

B) the natural rate of unemployment.

11) Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn $35,000/year in your first job in 2018. You know that average prices have risen steadily since 1961. You earn A) 5 times as much as your grandfather in terms of real income. B) more than 5 times as much as your grandfather in terms of real income. C) less than 5 times as much as your grandfather in terms of real income. D) less than 5 times as much as your grandfather in terms of nominal income.

C) less than 5 times as much as your grandfather in terms of real income.

14) In a closed economy, which of the following components of GDP is not included? A) investment B) government spending C) net exports D) consumption

C) net exports

6) Suppose the labor force stays constant, and the working-age population stays constant, but a greater number of persons who were unemployed become employed. The labor force participation rate will A) increase. B) decrease. C) remain constant. D) not change in a way that can be predicted.

C) remain constant.

16) In the long run, ________ differences in economic growth rates result in ________ differences in GDP per capita. A) large; small B) large; no C) small; large D) small; no

C) small; large

5) Gross national product of the United States is defined as A) the value of final goods and services produced within the United States. B) the value of final goods and services produced outside of the United States. C) the value of final goods and services produced by residents of the United States even if the production takes place outside of the United States. D) the value of final goods and services produced within the United States, by United States residents.

C) the value of final goods and services produced by residents of the United States even if the production takes place outside of the United States.

15) If an economy experiences deflation, the real interest rate A) will be less than the nominal interest rate. B) will be negative when the nominal interest rate is positive. C) will be greater than the nominal interest rate. D) will be equal to the deflation rate, so long as the nominal interest rate is positive.

C) will be greater than the nominal interest rate.

What is the name for what occurs in the economy when it faces a supply shock? (Combination of effect on inflation and unemployment.)

Stagflation

The growth rate of real GDP in the United States rises from 4.2% to 4.4%. Explain and calculate how this increase in the growth rate of real GDP affects the number of years it will take for real GDP to double.

The "Rule of 70" states that the number of years it takes for GDP to double is equal to 70 divided by the growth rate of real GDP. Given this formula, at a growth rate of 4.2%, it will take 70/4.2 = 16.67 years for GDP to double. If the growth rate increases by two-tenths of a percent (to 4.4%), the number of years it will take for GDP to double will decrease to 70/4.4 = 15.9 years.

9 . 12 . 13 product Q P . Q . P . Q . P MP3 . 40 .250 45 . 200 . 50 . 150 Tacos .2000 2 .2200 2.25 . 2300 2.4 coats . 300 . 50 . 310 . 52 . 350 . 55 Using 2009 as the base year, calculate real GDP for 2013.

Using 2009 price and 2013 quantity: 34,600

9 . 12 . 13 product Q P . Q . P . Q . P MP3 . 40 .250 45 . 200 . 50 . 150 Tacos .2000 2 .2200 2.25 . 2300 2.4 coats . 300 . 50 . 310 . 52 . 350 . 55 Using 2009 as the base year, calculate nominal GDP for 2013.

Using 2013 quantity and price: 32,270

Explain and show graphically how a decrease in government spending affects the equilibrium interest rate and equilibrium quantity of loanable funds in the market for loanable funds.

When government spending decreases, government saving (T - G - TR) rises. This increase in government saving shifts the supply curve for loanable funds to the right, decreasing the equilibrium interest rate and increasing the equilibrium quantity of loanable funds, as shown below.