Download Second Exam with answers (1:20

Economics 102
Spring 2012
3/28/2012
Second Midterm
Name _____________________________
TA Name __________________________
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Student ID # _______________________
Version 1
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You have 50 minutes to complete the exam. The exam consists of 10 binary choice and 20 multiple choice
questions. Each binary choice question is worth 2 points, and each multiple choice question is worth 4 points.
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Section
352
354
356
358
353
351
359
361
355
350
Location
SS 6224
Bascom 54
Ingraham 224
Ingraham 116
SS 6310
Ingraham 115
Ingraham 115
Ingraham 115
Sterling 1327
Ingraham 116
Day
Th
Fri
Fri
Fri
Th
Fri
Fri
Fri
Fri
Fri
Time
2:25-3:15 PM
8:50-9:40 AM
9:55-10:45 AM
12:50-12:55 PM
3:30-4:20 PM
11:00-11:50 AM
12:05-12:55 PM
1:20-2:10 PM
9:55-10:45 AM
11:00-11:50 AM
TA
Mark Colas
Mark Colas
Mark Colas
Mark Colas
Andrew Kidd
Andrew Kidd
Andrew Kidd
Andrew Kidd
Zichen Qiu
Zichen Qiu
1
I, __________________________, agree to neither give nor receive any help on this
exam from other students. Furthermore, I understand that use of a calculator on
this exam is an academic misconduct violation.
Signed ______________________________________Date _____________________
I. Binary Choice Questions (10 questions worth 2 points each)
1) GM produces a car at a factory in Mexico and then sells it to Mark at a car dealership
in California. Assume that the only product or service involved in this transaction is the
car. Does this contribute to USA GDP?
a) Yes
b) No
2) Suppose the nominal GDP in 2005 is equal to the nominal GDP in 2006. If the GDP
deflator for 2006 is greater than the GDP deflator for 2005, then which of the following
must be true? Assume that the base year used to calculate real GDP is constant for this
question.
a) The real GDP in 2005 must be greater than the real GDP in 2006.
b) The real GDP in 2006 must be greater than the real GDP in 2005.
2
3) In 2010 Sprite produced 7000 cans of soda and each can of soda had a price of $1.
However, in 2010 Sprite was only able to sell 2000 cans of sodas and the remaining cans
of soda were placed in Sprite’s inventories. What was Sprite’s contribution to GDP in
2010?
a) $2000
b) $7000
4) The consumer price index (CPI) does not account for
a) the introduction of new goods.
b) goods whose prices change.
5) The CPI, based upon a fixed market basket, will overestimate the inflation rate when
a) consumers actually purchase greater quantities of the goods and services than
are in the fixed market basket
b) consumers actually purchase smaller quantities of the goods and services then
are in the fixed market basket.
3
Refer to the following information for the next question.
Qingdao is a beautiful beach city in east China, and the population of Qingdao is
approximately 1,000,000. Of those, 15% are under 16 years of age and 5% are already retired,
and 10% fall into the category “not in the civilian labor force”. Of the remaining people,
there are 20% part-time workers, 20% who are underemployed, and 60% full-time employees.
6) Based on the above information, what is the labor participation rate as a percentage of the
total population?
a) 70%
b) 80%
7) Casabla is a Country which has hyperinflation. Workers in Casabla receive their
paychecks twice a month and must go to the bank to cash their paycheck before they can
immediately use these funds to purchase groceries. A worker in Casabla is trying to
decide if she should go to the bank twice a month to cash each check or take both checks
to the bank at the end of the month in order to save her time and energy. Assume the
worker wants to maximize her purchasing power. What is her optimal number of trips to
the bank given this information?
a) twice per month
b) less than twice per month
4
8) Suppose that Jenny loans Harry $100 that is due at the end of year. Jenny expects the
inflation rate for the year to be 10% and she charges Harry 20% on this loan. Suppose
that the actual rate of inflation for the year is 15%. Given this information, who benefits
from this unanticipated inflation?
a) Jenny
b) Harry
9) Both lenders and borrowers expect inflation to rise by 3% next year. However,
inflation for the year actually only goes up 1%. The real interest rate is
a) lower than anticipated.
b) higher than anticipated.
10) The government runs a deficit during 2010 and finances this deficit by borrowing in
the loanable funds market. In 2011 the government runs a balanced budget. Given this
information and holding everything else constant, in the market for loanable funds the
interest rate in 2010 is
a) Higher than the interest rate in 2011.
b) Lower than the interest rate in 2011.
5
II. Multiple Choice Questions (Twenty questions worth 4 points each)
11) Suppose real GDP in 1990 is $20 million and real GDP in 2000 is $50 million. Also
suppose that the GDP deflator in 1990 is 125 and the GDP deflator in 2000 is 50. What is
the percent change in nominal GDP from 1990 to 2000?
a) No change
b) Rises by 250%
c) Drops by 250%
d) Rises by 50%
Use the following table to answer the next question.
Year
1991
1992
1993
1994
GDP Deflator
92
98
100
104
12) Assume nominal GDP is decreasing every year. Which year must have the highest
real GDP?
a) 1991
b) 1992
c) 1993
d) 1994
6
Refer to the following information for the following two questions.
Assume Country A’s economy consists of only carrots, beets and phones and that the
quantity sold and the price for the three products are given in the following table.
Good
Carrots
Beets
Phones
2005
Quantity
20
3
5
Price/Unit
$3
X
$4
2006
Quantity
5
3
7
Price/Unit
$5
$2
Y
13) Suppose nominal GDP in 2005 is $86. What must be the value of X?
a) $1
b) $2
c) $3
d) $4
14) Suppose that real GDP in 2005 is $121 if we use 2006 as a base year. What is the
value of Y?
a) $1
b) $2
c) $3
d) $4
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15) In 2010, Mark’s Electronics spent $1 million on intermediate goods that were used to
produce final goods, paid out $2 million in wages, paid rent of $3 million dollars, and
paid interest payments worth $4 million. However, 2010 was a bad year for the business,
as Mark’s Electronics had a net loss of $2 million (i.e. profits were negative $2 million).
What was this company’s contribution to GDP in 2010?
a) $10 million
b) $9 million
c) $8 million
d) $7 million
16) Holding everything else constant, an increase in the minimum wage is likely to have
what effect on unemployment?
a) It will increase structural unemployment.
b) It will increase frictional unemployment.
c) It will increase cyclical unemployment.
d) It will decrease frictional unemployment.
8
Refer to the following information for the following question.
Table 1
Category of Expenditure
Personal Consumption Expenditure
Gross Private Domestic Investment
Government Purchases
Net Exports of Goods and Services
Depreciation of capital
Trillions of $
7.5
2.2
2.5
-1.0
0.5
17) Based on the data in Table 1, Gross Domestic Product is:
a) $11.7 trillion
b) $10.7 trillion
c) $11.2 trillion
d) none of the above
9
Refer to the following information for the following two questions.
In Madison’s labor market, we have that labor demand is 3L= 200-W and the labor
supply is L = 0.5W, where L is number of hours worked per week, and W is the real
wage rate per hour of labor. Assume that the price index this year is 2, and the price
index for next year is expected to increase by 150%.
18) If there is no change to the labor market for next year, what will be the equilibrium
nominal wage rate per hour of labor next year? Hint: you will need to calculate the real
wage and the price index in order to then calculate the nominal wage rate.
a) $120
b) $160
c) $240
d) $400
19) Suppose there is an unexpected technology shock at the beginning of the second year
and this alters the demand for labor curve to 3L= 100-W. The labor supply curve does
not change. In addition the expected inflation rate is 100% rather than 150%. Which of
the following statements is true?
a) There will be more hours worked in the second year than in the first year.
b) There will be fewer hours worked in the second year than in the first year.
c) The nominal wage rate will increase in the second year relative to the nominal
wage in the first year.
d) The nominal wage rate will decrease in the second year relative to the nominal
wage in the first year.
10
20) For a country currently producing at full employment, which of the following
statements is true?
a) The frictional unemployment rate is 0%.
b) The cyclical unemployment rate is 0%.
c) The structural unemployment rate is 0%.
d) Answers (a), (b) and (c) are all true statements.
21) If the annual growth rate on a certificate of deposit is 3.5%, how long will it take for
the amount of money invested in the certificate of deposit to quadruple?
a) 20 years
b) 30 years
c) 40 years
d) 50 years
22) The marginal product of labor is
a) the change in output divided by the change in labor.
b) capital divided by labor (K/L).
c) labor divided by capital (L/K).
d) the level of technology.
11
Refer to the following information for the following question.
Suppose the loanable funds market in a closed economy can be described by the
following two equations:
Supply of Loanable Funds Curve: S = 1000 + 100i
Demand for Loanable Funds Curve: I = 2500 - 400i
Here i is the interest rate measured as a percent, I is private investment demand measured
as millions of dollars, and S is household saving measured as millions of dollars. Initially
assume that the government is running a balanced budget where tax revenues are equal to
government spending. Now suppose that the government runs a deficit and this deficit
results in the demand for loanable funds curve shifting to the right. The new equation for
the demand for loanable funds is I’ = 3000 – 400i where I’ includes both private
investment and the deficit. Assume there is no change to the supply curve.
23) Given that tax revenue collected is $400 million, what is the government expenditure
when the government runs this deficit?
a) $300 million
b) $500 million
c) $800 million
d) $900 million
12
Refer to the following information for the following two questions.
Consider an aggregate production function that is parabolic (hill-shaped).
Real GDP
Aggregate production function
GDP2
GDP1
L2
L1
Labor
24) Suppose that the labor market in this economy finds the equilibrium quantity of labor
is L1. Then this economy is
a) Hiring more labor than is optimal.
b) Hiring less labor than is optimal.
c) Exhibiting increasing returns to labor.
d) Exhibiting constant returns to labor
25) Going from (L1, GDP1) to (L2, GDP2)
a) The marginal productivity of labor decreases.
b) The marginal productivity of labor remains constant.
c) The marginal productivity of labor increases.
d) There is not enough information to determine the marginal productivity of
labor.
13
Refer to the following information for the following three questions.
Consider an aggregate production function: Y=30(K)1/2 (L)1/2, where Y is real GDP, K is
the capital stock level, and L is the total number of workers in the economy. The number
of workers is constant and equal to 100.
26) In Economics 101 you studied returns to scale which considers what happens to
output when all inputs (in this case, labor and capital) are increased proportionately.
Recall that constant returns to scale occurs when output increases by the same proportion
as the increase in inputs (e.g., if inputs double, then output doubles); increasing returns to
scale occurs when output increases by more than the proportionate increase in inputs
(e.g., if inputs double, output more than doubles); and decreasing returns to scale occurs
when output increases by less than the proportionate increase in inputs (e.g., if inputs
double, output less than doubles). This aggregate production function exhibits
a) decreasing returns to scale.
b) constant returns to scale.
c) increasing returns to scale.
d) There is not enough information to determine returns to scale for this
production function.
27) In the short-run suppose capital is fixed at 100 units. What is the value of capital
productivity given this information?
a) 30,000 units of output per unit of capital
b) 3,000 units of output per unit of capital
c) 300 units of output per unit of capital
d) 30 units of output per unit of capital
28) Suppose that in the long-run the economy continues to employ 100 workers but the
level of capital stock increases to 144 units. Compared with the short-run situation where
there were 100 workers and 100 units of capital, we know that labor productivity
a) has decreased.
b) has increased.
c) has remained constant.
d) cannot be computed for these two scenarios without more information.
Turn page for last questions
14
Refer to the following information for the following two questions:
Real GDP
Aggregate production function
GDP1
GDP2
L2
Labor
L1
29) Based on this aggregate production function for an economy, which of the following
statements is true?
a) The productivity of labor at L2 is smaller than the productivity of labor at L1.
b) The real GDP per capita at L2 is smaller than the real GDP per capita at L1.
c) The marginal productivity of labor at L2 is greater than the marginal
productivity of labor at L1.
d) The real GDP at L2 is greater than the real GDP at L1.
30) Suppose in this economy there is an increase in education subsidies, so that, more
people are able to attend college and improve their human capital. At the same time
earthquakes destroy several hundred manufacturing facilities in the country. Given these
events, how will the aggregate production function for this economy shift?
a) It will shift up.
b) It will shift down.
c) It will remain the same.
d) We do not know for sure how the aggregate production function for this
economy will shift.
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End
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Answer Key
1b
2a
3b
4a
5b
6a
7a
8b
9b
10a
11a
12a
13b
14c
15d
16a
17c
18d
19b
20b
21c
22a
23d
24a
25c
26b
27d
28b
29c
30d
16