Download Midterm 2

SMC Economics 2 - Bruce Brown
Version A - Midterm 2, Fall 2003
NAME_________________________________
- This exam has 40 questions, all of equal weight. Clearly fill in the bubble on your scantron corresponding to the best
answer. No points are deducted for incorrect answers, so each question should be answered.
- Students may: i) write on the exam (it will be returned, but not the scantron).
ii) use an ordinary language dictionary (not electronic or economics dictionary).
iii) ask clarifying questions about definitions or wording of the questions. If the question regards definition
of a term from this course, it will not be answered.
Multiple Choice – mark the best answer on your scantron form
1. When people are unemployed for long periods of time because they do not have skills needed by employers this is:
a. frictional unemployment.
b. seasonal unemployment.
c. cyclical unemployment.
d. structural unemployment.
For the next two questions consider a world with just two goods/services: Food and Shelter consumed.
Consumption:
Prices:
2003
2004
2003
2004
Food
2
4
$2
$2
Shelter
2
0
$2
$3
2. Using a new basket (calculating a Paasche price index) what is inflation between 2003 and 2004?
a) 0%
b) 12.5%
c) 25%
d) 30 %
3. Using an old basket (calculating a Laspeyres price index) what is inflation between 2003 and 2004?
a) 0%
b) 12.5%
c) 25%
d) 30 %
4. The Consumer Price Index (CPI) computes the increase in price of a fixed basket of goods from:
a) the later period, and so measures inflation as higher (than if the basket from an earlier period were used).
b) the later period, and so measures inflation as lower (than if the basket from an earlier period were used).
c) the earlier period, and so measures inflation as higher (than if the basket from a later period were used).
d) the earlier period, and so measures inflation as lower (than if the basket from a later period were used).
5. “The Consumer Price Index (CPI) uses a fixed weight scheme to calculate inflation.” What does this mean?
a) The "basket of goods" used changes, but the weight of the basket remains constant
b) The weight (in pounds, or kilograms) of the goods considered remains the same.
c) The basket of goods remains the same for the two years considered.
d) The combination of goods actually consumed in each of the years considered is used to calculate inflation.
6. Which of the following is a problem in using per capita GDP as a measure of well-being across countries?
a) The amount of non-market production varies across countries.
b) The extent of "black market" activity varies across countries.
c) Output must be measured in a common currency, such as the dollar, and deciding on an exchange rate is difficult.
d) All three of the above.
7. What happens to labor force participation (LFP) and unemployment rate if someone 35 years old who was not working b
but looking for a job dies?
a) unemployment rate and LFP both decrease.
b) unemployment rate and LFP both increase.
c) unemployment rate decreases and LFP increases.
d) unemployment rate increases and LFP decreases.
8. If the CPI changes from 163 in 1998 to 166.6 in 1999, then between these two years inflation is measured as:
a) 16.66 %
b) 3.6%
c) 2.21 %
d) 1.63%
9. Potential GDP
a. is always less than actual GDP, except during a recession.
b. is identical to actual GDP.
c. measures the level of output when the unemployment rate is equal to the “natural rate.”
d. measures the level of output if there were no unemployment (zero percent).
10. What has historically happened during most expansions (=booms)?
a) unemployment has increased inflation decreased
b) unemployment and inflation have decreased
c) unemployment has decreased inflation increased
d) unemployment and inflation have increased
11. Which of the following represents a way in which the CPI differs from the GDP deflator measures of inflation?
a) CPI uses a fixed past basket of goods, while the GDP deflator does not.
b) CPI includes goods purchased by firms, while the GDP deflator does not.
c) CPI includes homes, while the GDP deflator does not.
d) CPI includes changes in the value of leisure time, while the GDP deflator does not.
12. An unexpected increase in inflation (of both wages and prices) will:
a) benefit banks which made long term loans at fixed interest rates and hurt those who borrowed
b) benefit both banks which made long term loans at fixed interest rates and those who borrowed
c) hurt banks which made long term loans at fixed interest rates and benefit those who borrowed
d) hurt both banks which made long term loans at fixed interest rates and those who borrowed
13 Which type of unemployment do economists believe is the result of the efficient working of markets
a) frictional
b) structural
c) cyclical
d) none, all unemployment is inefficient.
14 In 1980 inflation = 10% and nominal interest = 14%. In 1984 inflation was 5% and nominal interest was 10%.
a) in 1980 real interest was 24% and in 1984 it was 15%
b) in 1980 real interest was - 4% and in 1984 it was - 5%
c) in 1980 real interest was 4% and in 1984 it was 5%
d) between 1980 and 1984 the real interest rate fell
15. Gross Domestic Product equals
a. Y = C + I - G + NX.
b. Y = C - I + G + NX.
c. Y = C + I + G + NX.
d. Y = C - I - G - NX.
16. The table above gives the production and prices for a small nation that produces only bread and soda.
The base year is 2003. What is nominal GDP in 2003?
a. $425
b. $320
c. $205
d. $640
17. The table above gives the production and prices for a small nation that produces only bread and soda.
The base year is 2003. What is real GDP in 2003?
a. $300
b. $425
c. $320
d. $240
18. The table above gives the production and prices for a small nation that produces only bread and soda.
The base year is 2003. What is nominal GDP in 2004?
a. $240
b. $320
c. $425
d. $300
19. A person is considered unemployed if the person
a. is without a job.
b. is working less than 40 hours per week.
c. is working without pay.
d. does not have a job and is actively looking for a job.
20. Assume the U.S. population is 275 million. If 210 million people are of working age, 135 million are
employed, and 6 million are unemployed, what is the size of the labor force?
a. 275 million
b. 141 million
c. 135 million
d. 210 million
21. In calculating the unemployment rate, part-time workers are counted as
a. employed.
b. unemployed.
c. not in the labor force.
d. employed if they are part-time workers for non-economic reasons and unemployed if they are involuntary
part-time workers.
22. The largest component in the CPI market basket is
a. medical care.
b. housing.
c. education.
d. food and beverages.
23. All of the following lead to a bias in the CPI EXCEPT
a. new goods bias.
b. index change bias.
c. commodity substitution bias.
d. outlet substitution bias.
24. When comparing the annual inflation rate in the United States based on the CPI with the annual inflation
rate based on the GDP deflator, the data show that the
a. CPI measure tends to exceed the GDP deflator measure.
b. GDP deflator measure tends to exceed the CPI measure.
c. CPI measure and the GDP deflator measure are equal.
d. CPI measure and GDP deflator measure move in opposite directions.
25. Which of the following statements is NOT correct about potential GDP?
a. Actual real GDP equals potential GDP when the economy is at full employment.
b. Real GDP can be less than potential GDP.
c. Real GDP can exceed potential GDP.
d. When real GDP equals potential GDP, it also equals nominal GDP.
26. Which of the following statements is correct?
a. An increase in the price level will shift the aggregate demand curve rightward.
b. An increase in the price level will shift the aggregate demand curve leftward.
c. An increase in the quantity of the money in the economy will shift the aggregate demand curve
rightward.
d. An increase in the interest rate will shift the aggregate demand curve rightward.
27. According to the AS/AD model the
a. aggregate quantity supplied is typically greater than the aggregate quantity demanded, thereby
leading to unemployment.
b. equilibrium is where the AS curve crosses the AD curve but the amount of real GDP at this point is
not always equal to potential GDP.
c. aggregate quantity demanded is typically greater than the aggregate quantity supplied, thereby
leading to inflation.
d. AS curve is always equal to potential GDP.
28. The production function is a relationship between the amount of labor employed and
a. the maximum quantity of real GDP that can be produced.
b. the maximum quantity of nominal GDP that can be produced.
c. the wage rate paid to the workers.
d. all other resources at different levels of employment.
29. In the United States between the 1960s and the 1990s, the productivity of labor increased. This increase
led to
a. an increase in the demand for labor.
b. an increase in the supply of labor.
c. a downward shift of the production function.
d. a decrease in the supply of labor.
30. If we compare the Canadian natural unemployment rate to the U.S. natural unemployment rate, we
find
a. they are essentially the same because we have a lot in common.
b. the Canadian rate is about 3 percentage points higher, possibly the result of higher unemployment
benefits in Canada.
c. the U.S. rate is about 3 percentage points higher, possibly the result of greater job search within a
larger country.
d. the Canadian rate is about 3 percentage points higher, possibly the result of higher unemployment
benefits in the United States.
31. An efficiency wage is designed to
a. induce more work effort.
b. keep the minimum wage from rising.
c. keep the minimum wage from falling.
d. to induce more employment.
32. Efficiency wages are
a. the legal minimum wage a firm can pay a worker.
b. a possible cause of job rationing because they drive wages below their equilibrium level.
c. a possible cause of job rationing because they drive wages above their equilibrium level.
d. a possible cause of job rationing because they force wages to equal their equilibrium level.
33. Depreciation includes the
a. additional value of new capital goods.
b. additional value of new financial capital.
c. decrease in value of physical capital from use.
d. decrease in value of financial capital from use.
34. Net investment equals
a. new capital plus old capital.
b. capital plus depreciation.
c. gross investment minus depreciation.
d. gross investment plus depreciation.
35. The investment demand curve shifts in response to changes in the
a. real interest rate.
b. amount of household savings.
c. level of expected profits.
d. level of past profits.
36. If the real interest rate
a. increases, the saving supply curve shifts rightward.
b. increases, the saving supply curve shifts leftward.
c. decreases, there is a movement along the saving supply curve to a higher quantity of saving.
d. decreases, there is a movement along the supply curve to a lower quantity of saving.
37. I equals investment, S equals saving, G equals government purchases, and NT equals net taxes. Using
these symbols, the formula showing how investment is financed is
a. I = S + (G - NT).
b. I = (S - NT).
c. I = S + (NT - G).
d. I = G + S + NT.
38. If there is no Ricardo-Barro effect, an increase in the government budget surplus will
a. decrease saving supply.
b. increase the real interest rate.
c. decrease the real interest rate.
d. decrease investment.
39. The crowding-out effect is the tendency for
a. lower private saving to decrease private spending like investment.
b. higher government budget deficits to increase total savings.
c. higher government budget deficits to decrease private spending like investment.
d. higher private savings to decrease government budget surpluses.
40. A prediction of the Ricardo-Barro effect is
a. a larger increase in interest rates when the government runs a budget deficit.
b. a larger decrease in interest rates when the government runs a budget surplus.
c. no effect on the real interest rate when the government runs a budget deficit.
d. a larger decrease in investment when the government runs a budget deficit.