IAS 107 Midterm 1 Multiple Choice
109. The unemployment rate in the United States since 1952 has: A)never been close to zero. B)gravitated toward a steady-state rate of zero. C)remained constant from year to year. D)equaled the natural rate of unemployment in every year.
A
91. If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______. A)positive; positive B)positive; negative C)negative; negative D)negative; positive
A
92. In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow. A)deficit; negative B)surplus; negative C)deficit; positive D)surplus; positive
A
11. When a firm sells a product out of inventory, investment expenditures ______ and consumption expenditures ______. A)increase; decrease B)decrease; increase C)decrease; remain unchanged D)remain unchanged; increase
B.
13. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If four apples were produced in 2002 and five in 2009, whereas three oranges were produced in 2002 and four in 2009, then real GDP (in 2002 prices) in 2009 was: A)$5. B)$6.50. C)$9.50. D)$11.
B.
17. The largest component of national income is: A)corporate profits. B)compensation of employees. C)proprietors' income. D)net interest.
B.
19. The number of households interviewed in the monthly employment survey of the U.S. Bureau of Labor Statistics is approximately: A)6,000. B)60,000. C)600,000. D)6 million.
B.
21. The labor-force participation rate is the percentage of the: A)adult population that is employed. B)adult population that is in the labor force. C)labor force that is employed. D)labor force that is unemployed.
B.
22. If an increasing proportion of the adult population is retired, then the labor force participation rate: A)will increase. B)will decrease. C)will remain constant. D)may increase, decrease, or remain constant.
B.
23. The employment statistics computed from the establishment survey do NOT include: A)workers with two jobs. B)the self-employed. C)workers on firms' payrolls. D)part-time workers on firms' payrolls.
B.
24. A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage: A) does not change GDP. B)decreases GDP by $60,000. C)increases GDP by $60,000. D)increases GDP by more than $60,000.
B.
30. The production function feature called "constant returns to scale" means that if we: A) multiply capital by z1 and labor by z2, we multiply output by z3. B) increase capital and labor by 10 percent each, we increase output by 10 percent. C) increase capital and labor by 5 percent each, we increase output by 10 percent. D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.
B.
31. The marginal product of labor is: A)output divided by labor input. B)additional output produced when one additional unit of labor is added. C)additional output produced when one additional unit of labor and one additional unit of capital are added. D)value of additional output when one dollar's worth of additional labor is added.
B.
33. The real wage is the return to labor measured in: A)dollars. B)units of output. C)units of labor. D)units of capital.
B.
96. In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow. A)deficit; negative B)surplus; positive C)deficit; positive D)surplus; negative
A
34.The marginal product of capital is: A)output divided by capital input. B)additional output produced when one additional unit of capital is added. C)additional output produced when one additional unit of capital and one additional unit of labor are added. D)value of additional output when one dollar's worth of additional capital is added.
B.
35. The real wage will increase if: A)the supply of labor increases. B)the productivity of labor increases. C)the price of output decreases. D)the supply of capital decreases.
B.
38. If the production function describing an economy is Y = 100 K0.25L0.75, then the share of output going to labor: A)is 25 percent. B)is 75 percent. C)depends on the quantities of labor and capital. D)depends on the state of technology.
B.
40. Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. A)positively; positively B)positively; negatively C)negatively; negatively D)negatively; positively
B.
41. If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals: A)2,500. B)2,800. C)3,500. D)4,200.
B.
43. If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings: A)decreases by 0.85 unit. B)decreases by 0.15 unit. C)increases by 0.15 unit. D)increases by 0.85 unit.
B.
49. In a closed economy, private saving equals: A)Y - C - G. B)Y - T - C. C)Y - I - C. D)Y - T.
B.
5.Endogenous variables are: A)fixed at the moment they enter the model. B)determined within the model. C)the inputs of the model. D)from outside the model.
B.
51. If income is 4,800, consumption is 3,500, government spending is 1,000, and tax revenues are 800, private saving is: A)300. B)500. C)1,000 D)1,300.
B.
54. In the classical model with fixed income, if households want to save more than firms want to invest, then: A)the interest rate rises. B)the interest rate falls. C)output increases. D)output falls.
B.
56. Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is: A)2 percent. B)5 percent. C)10 percent. D)20 percent.
B.
58. The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving: A)rises by $100 billion. B)rises by $60 billion. C)falls by $60 billion. D)falls by $100 billion.
B.
59. Open-market operations are: A)Commerce Department efforts to open foreign markets to international trade. B)Federal Reserve purchases and sales of government bonds. C)Securities and Exchange Commission rules requiring open disclosure of market trades. D)Treasury Department purchases and sales of the U.S. gold stock.
B.
62. To reduce the money supply, the Federal Reserve: A)buys government bonds. B)sells government bonds. C)creates demand deposits. D)destroys demand deposits.
B.
66. Real money balances equal the: A)sum of coin, currency, and balances in checking accounts. B)amount of money expressed in terms of the quantity of goods and services it can purchase. C)number of dollars used as a medium of exchange. D)quantity of money created by the Federal Reserve.
B.
12. Assume that a tire company sells four tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is: A)$20,000. B)$20,000 less the automobile company's profit on the car. C)$20,900. D)$20,900 less the profits of all three companies on the items that they sold.
A.
14.If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009? A)$12 trillion B)$12.5 trillion C)$15 trillion D)$18.75 trillion
A.
15. The investment component of GDP includes all of the following except: A)purchases of corporate stock. B)spending on new plants and equipment. C)purchases of new housing by households. D)changes in business inventories.
A.
16. In 2007 in the United States, the approximate percentage of GDP that was spent on consumption was approximately: A)67 percent. B)50 percent. C)31 percent. D)16 percent.
A.
28. In the long run, the level of national income in an economy is determined by its: A)factors of production and production function. B)real and nominal interest rate. C)government budget surplus or deficit. D)rate of economic and accounting profit.
A.
29. Unlike the real world, the classical model with fixed output assumes that: A)all factors of production are fully utilized. B)all capital is fully utilized but some labor is unemployed. C)all labor is fully employed but some capital lies idle. D)some capital lies idle and some labor is unemployed.
A.
37. If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is: A)50. B)100. C)200. D)1,000.
A.
39. In a Cobb-Douglas production function the marginal product of capital will increase if: A)the quantity of labor increases. B)the quantity of capital increases. C)labor's share of output increases. D)average capital productivity decreases.
A.
4. Exogenous variables are: A) fixed at the moment they enter the model. B) determined within the model. C) the outputs of the model. D)explained by the model.
A.
52. The supply of loanable funds is equivalent to: A)national saving. B)private saving. C)public saving. D)investment.
A.
69. If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then: A)the price level is proportional to the money supply. B)real GDP is proportional to the money supply. C)the price level is fixed. D)nominal GDP is fixed.
A.
70. According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be: A)increasing. B)decreasing. C)7 percent. D)constant.
A.
75. The opportunity cost of holding money is the: A)nominal interest rate. B)real interest rate. C)rate of inflation. D)prevailing Treasury bill rate.
A.
8. GDP is all of the following except the total: A)expenditure of everyone in the economy. B)income of everyone in the economy. C)expenditure on the economy's output of goods and services. D)output of the economy.
A.
80. The monetary base consists of: A)currency held by the public, plus reserves held by banks. B)all outstanding currency, plus reserves held by banks. C)all outstanding currency, plus demand deposits. D)all bank reserves.
A.
9. The total income of everyone in the economy is exactly equal to the total: A) expenditure on the economy's output of goods and services. B) consumption expenditures of everyone in the economy. C) expenditures of all businesses in the economy. D) government expenditures.
A.
67. Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the rate of inflation in this country? A)3 percent B)7 percent C)10 percent D)13 percent
B.
68.The quantity theory of money assumes that: A)income is constant. B)velocity is constant. C)prices are constant. D)the money supply is constant.
B.
71 .If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must: A)increase by 2 percent. B)increase by 1 percent. C)remain constant. D)decrease by 1 percent.
B.
76. To end a hyperinflation, a government trying to reduce its reliance on seigniorage would: A)print more money. B)raise taxes and cut spending. C)lower taxes and increase spending. D)lower interest rates.
B.
82. The money supply will decrease if the: A)monetary base increases. B)currency-deposit ratio increases. C)discount rate decreases. D)reserve-deposit ratio decreases.
B.
102. If the real exchange rate of a country decreases, then net exports will _____. A)be positive B)be negative C)increase D)decrease
C
104. In a small open economy, if the world interest rate increases then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant. A)decrease; decrease B)decrease; increase C)increase; decrease D)increase; increase
C
110. The natural rate of unemployment in the United States since 1950 has averaged between ______ and ______ percent. A)0; 1 B)1; 3 C)5; 6 D)10; 15
C
112. If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is: A)1 percent. B)9 percent. C)10 percent. D)about 11 percent.
C
113. Any policy aimed at lowering the natural rate of unemployment must either ______ the rate of job separation or ______ the rate of job finding. A)reduce; reduce B)increase; increase C)reduce; increase D)increase; reduce
C
86. The value of banks owners' equity is called bank: A)deposits. B)reserves. C)capital. D)liquidity.
C
87. The quantity theory of money assumes that the demand for real money balances: A)depends on both the interest rate and income. B)depends only on the interest rate. C)is proportional to income. D)is proportional to the interest rate.
C
89. If net capital outflow is positive, then: A)exports must be positive. B)exports must be negative. C)the trade balance must be positive. D)the trade balance must be negative.
C
93. A "small" economy is one in which the: A)level of output is fixed. B)price level is fixed. C)domestic interest rate equals the world interest rate. D)domestic saving is less than domestic investment.
C
95.In a country with a small open economy, the real interest rate will always be: A)above the world real interest rate. B)below the world real interest rate. C)equal to the world real interest rate. D)equal to the world nominal interest rate.
C
46. The government spending component of GDP includes all of the following except: A)federal spending on goods. B)state and local spending on goods. C)federal spending on transfer payments. D)federal spending on services.
C.
48. National saving refers to: A)disposable income minus consumption. B)taxes minus government spending. C)income minus consumption minus government spending. D)income minus investment.
C.
57.Assume that the production function is Cobb-Douglas with parameter alpha = 0.3. If factors are paid their marginal products, capital and labor, respectively, receive the shares of income: A)0.3 and 0.3. B)0.7 and 0.7. C)0.3 and 0.7. D)0.7 and 0.3.
C.
63. Demand deposits are funds held in: A)currency. B)certificates of deposit. C)checking accounts. D)money markets.
C.
73. The ex ante real interest rate is equal to the nominal interest rate: A)minus the inflation rate. B)plus the inflation rate. C)minus the expected inflation rate D)plus the expected inflation rate.
C.
79. Assets of banks include: A)money market mutual funds. B)currency in the hands of the public. C)loans to customers. D)demand deposits.
C.
81. The money supply will increase if the: A)currency-deposit ratio increases. B)reserve-deposit ratio increases. C)monetary base increases. D)discount rate increases.
C.
84. The interest rate charged on loans by the Federal Reserve to banks is called the: A)federal funds rate. B)prime rate. C)discount rate. D)Treasury bill rate.
C.
103. In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate: A)rises and net exports fall. B)rises and net exports rise. C)falls and net exports fall. D)falls and net exports rise.
D
105. A depreciation of the real exchange rate in a small open economy could be the result of: A)a domestic tax cut. B)an increase in government spending. C)an increase in the world interest rate. D)the expiration of an investment tax-credit provision.
D
106. If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall: A)0 percent. B)8 percent. C)10 percent. D)12 percent.
D
107. The currencies of countries with high inflation rates relative to the United States have tended to ______, and the currencies of countries with low inflation rates relative to the United States have tended to ______. A)appreciate; appreciate B)appreciate; depreciate C)depreciate; depreciate D)depreciate; appreciate
D
108. If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost: A)2 pesos. B)5 pesos. C)10 pesos. D)20 pesos.
D
88. The value of net exports is also the value of: A)net investment. B)net saving. C)national saving. D)the excess of national saving over domestic investment.
D
90. Net capital outflow is equal to: A)national saving minus the trade balance. B)domestic investment plus the trade balance. C)domestic investment minus national saving. D)national saving minus domestic investment.
D
94. The world interest rate: A)is equal to the domestic interest rate. B)makes domestic saving equal to domestic investment. C)is the interest rate charged on loans by the World Bank. D)is the interest rate prevailing in world financial markets.
D
99. The adoption of an investment tax credit in a small open economy is likely to lead to: A)no change in either domestic investment or domestic saving in the small open economy. B)an increase in both domestic investment and domestic saving in the small open economy. C)an increase in domestic saving but no change in domestic investment in the small open economy. D)an increase in domestic investment but no change in domestic saving in the small open economy.
D
20.The labor force equals the: A)adult population. B)number of employed individuals. C)number of unemployed individuals. D)number of employed and unemployed individuals.
D.
32. The property of diminishing marginal product means that, after a point, when additional quantities of: A)a factor are added, output diminishes. B)both labor and capital are added, output diminishes. C)both labor and capital are added, the marginal product of labor diminishes. D)a factor are added when another factor remains fixed, the marginal product of that factor diminishes.
D.
36. What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale? A)the relative quantity of labor to capital B)the interest rate C)the ratio of public saving to private saving D)the marginal productivity of labor relative to the marginal productivity of capital
D.
45. When economists speak of "the" interest rate, they mean: A) the rate on 90-day Treasury bills. B)the rate on 30-year government bonds. C)the "prime" rate on loans. D)no particular interest rate, since it is assumed that various interest rates tend to move up and down together.
D.
47. In the classical model with fixed output, the supply and demand for goods and services are balanced by: A)government spending. B)taxes. C)fiscal policy. D)the interest rate.
D.
50. Public saving is: A)income minus consumption minus government spending. B)disposable income minus consumption. C)disposable income minus government spending. D)government revenue minus government spending.
D.
53.The demand for loanable funds is equivalent to: A)national saving. B)private saving. C)public saving. D)investment.
D.
55. In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on ______, the amount of investment spending depends on ______, and the amount of government spending is determined ______. A)the interest rate; disposable income; by tax revenue B)the real wage; the real rental price of capital; by factor prices C)labor's share of output; capital's share of output; by the interest rate D)disposable income; the interest rate; exogenously
D.
25. Assume two countries have the same nominal GDP (measured in the same currency using the same accounting rules). Explain at least three reasons why you cannot assume that citizens in each country enjoy approximately the same level of economic well-being.
Some possible, but not all, explanations include:a. different price levels in the two countries would result in different amounts of real GDP, i.e., different quantities of goods and services available in each country;b. different-sized populations could result in different quantities of goods and services available per person in each country;c. different levels of nonmarket production in the two countries would alter the quantity of goods and services available in each country;d. different amounts of leisure time available (not captured in nominal GDP figures) would cause economic well-being to differ in the two countries;e. different distributions of income in the two countries could alter the quantity of goods and services available to the typical citizen in each country;f. different quantities of both positive and negative externalities associated with producing GDP, such as pollution and congestion, which are not measured in GDP, would cause the different levels of eocnomic well-being between the two countries.
42. If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by: A)0.15 unit. B)0.5 unit. C)0.85 unit. D)1 unit.
C.
44. Investment goods as measured in the GDP are purchased by: A)business firms alone. B)households alone. C)business firms and households. D)business firms, households, and governments.
C.
100. The real exchange rate: A)measures how many Japanese yen one really gets for a U.S. dollar. B)is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level. C)is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level. D)is the price of a domestic car divided by the price of a foreign car.
B
101. If the number of dollars per yen rises, this is called a(n): A)appreciation of the dollar. B)appreciation of the yen. C)increase in the terms of trade. D)decrease in the terms of trade.
B
111. In a steady state: A)no hiring or firings are occurring. B)the number of people finding jobs equals the number of people losing jobs. C)the number of people finding jobs exceeds the number of people losing jobs. D)the number of people losing jobs exceeds the number of people finding jobs.
B
97. In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade ______ and ______ net capital outflow. A)deficit; negative B)surplus; positive C)deficit; positive D)surplus; negative
B
98.Starting from trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____. A)increase; increase B)increase; decrease C)increase, not change D)decrease; increase
B
10. When a firm sells a product out of inventory, GDP: A)increases. B)decreases. C)is not changed. D)increases or decreases, depending on the year the product was produced.
C.
114. Frictional unemployment is unemployment caused by: A)wage rigidity. B)minimum-wage legislation. C)the time it takes workers to search for a job. D)clashes between the motives of insiders and outsiders.
C.
18. The CPI is determined by computing: A)an average of prices of all goods and services. B) The price of a basket of goods and services that changes every year, relative to the same basket in a base year. C)the price of a fixed basket of goods and services, relative to the price of the same basket in a base year. D)nominal GDP relative to real GDP.
C.
6. In the relationship expressed in functional form, Y = G(K, L), Y stands for real GDP, K stands for the amount of capital in the economy, and L stands for the amount of labor in the economy. In this case G( ): A)is the growth rate of real GDP when the amount of capital and labor in the economy is fixed. B)indicates that the variables inside the parenthesis are endogenous variables in the model. C)is the symbol that stands for government input into the production process. D)is the function telling how the variables in the parenthesis determine real GDP.
D.
64. All of the following assets are included in M1 except: A)currency. B)demand deposits. C)traveler's checks. D)money market deposit accounts.
D.
65. Credit card balances are included in: A)M1 only. B)M2 only. C)both M1 and M2. D)neither M1 nor M2.
D.
7. The assumption of continuous market clearing means that: A) sellers can sell all that they want at the going price. B) buyers can buy all that they want at the going price. C) in any given month, buyers can buy all that they want and sellers can sell all that they want at the going price. D) at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price.
D.
72. The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: A)money supply is constant. B)velocity is constant. C)inflation rate is constant. D)real interest rate is constant.
D.
74. The ex post real interest rate will be greater than the ex ante real interest rate when the: A)rate of inflation is increasing. B)rate of inflation is decreasing. C)actual rate of inflation is greater than the expected rate of inflation. D)actual rate of inflation is less than the expected rate of inflation.
D.
78. Bank reserves equal: A)gold kept in bank vaults. B)gold kept at the central bank. C)currency plus demand deposits. D)deposits that banks have received but have not lent out.
D.
83. When the Fed makes an open-market sale, it: A)increases the money multiplier (m). B)increases the currency-deposit ratio (cr). C)increases the monetary base (B). D)decreases the monetary base (B).
D.
85.Excess reserves are reserves that banks keep: A)in their vaults. B)at the central bank. C)to meet legal reserve requirements. D)above the legally required amount.
D.
26.Explain which expenditure category of GDP changes and the direction of the change that results for each transaction described. a.A domestic business purchases a domestically produced computer to use in a business office. b.A domestic business produces a computer that is sold to a foreign company. c.The federal government purchases a domestically produced computer to use in a court house. d.A domestic household purchases a domestically produced computer to use in a home.e.A domestic household purchases a computer produced in a foreign country to use in a home.
a. Investment spending increases by the price of the computer. b. Exports (and net exports) increase by the price of the computer.c. Government spending increases by the price of the computer.d. Consumption spending increases by the price of the computer.e. Consumption spending increases by the price of the computer, but imports also increase by the price of the computer, so that net exports decrease by the price of the computer and there will be no net change in GDP.
