Download EC 11 Practice Exam No 2 Instructions. Use a number #2 pencil

EC 11 Practice Exam No 2
Instructions. Use a number #2 pencil; make clean erasures. In many
cases there might be two or more correct answers; be sure to pick the best answer.
Also, ask if there are any questions whatsoever about the interpretation of the
questions. Answer all questions.
1. Currently, the Bureau of Labor Statistics does not include homemakers
in its employment and labor force totals. What would happen to the
unemployment rate and the labor force participation rate if homemakers
were included in these numbers?
(a) Both the unemployment rate and the labor force participation rate
would increase.
(b) The unemployment rate would increase and the labor force participation rate would decrease.
(c) Both the unemployment rate and the labor force participation rate
would increase.
(d) The unemployment rate would decrease and labor force participation rate would increase.
2. If Congress eliminated the unemployment insurance system
(a) the level of frictional unemployment would increase.
(b) the level of frictional unemployment would not change at all.
(c) the level of frictional unemployment would decrease.
(d) the level of frictional unemployment could go up or down.
3. The effect of the minimum wage law on unemployment is
(a) significant since a large percentage of the labor force earns the minimum wage.
(b) insignificant since only a small percentage of the labor force
earns the minimum wage.
(c) to increase cyclical unemployment.
(d) to increase unemployment of more skilled labor.
4. If there is 5% inflation and nominal GDP increases by 8%, real GDP
(a) increases by 3%.
(b) decreases by 3%.
(c) rises by 13%.
(d) rises by 6.5%.
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5. Suppose a country’s real GDP is $50 billion and its population is 100
million. Now suppose that both its population and its real GDP increase
by 10 percent. After these changes, per capita real output will be
(a) $200.
(b) $5000.
(c) $2,000.
(d) $500.
6. In the previous question, suppose growth continues at the same rate of 10
percent in both real GDP and population. How long will it take for GDP
per capita to double?
(a) 70/10 = 7 years.
(b) 10(1+.10) = 11 years.
(c) forever since per capita GDP is not changing.
(d) 70/10-70/10 = 0 years.
7. The Keynesian rule for macroeconomic policy requires that the government run a
(a) deficit when there is unemployment.
(b) surplus when there is unemployment.
(c) surplus when there is inflation along with unemployment.
(d) deficit when there is inflation.
8. The rate of unemployment is the
(a) population divided by the labor force.
(b) number of employed divided by the population.
(c) number of unemployed as a percentage of labor force.
(d) number of unemployed as a percentage of the employed.
9. When an economy is above its potential output, it is operating
(a) on its production possibility curve.
(b) inside its production possibility curve.
(c) outside the production possibility curve.
(d) somewhere but it is impossible to know where without more information.
10. Capacity utilization is defined as
(a) real income divided by nominal income.
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Table 1: Social Accounting Matrix
Firms
Firms
HHolds
profits
wages
Savings
Total
Household
80
Investment
20
20
100
20
100
50
50
100
Total
100
100
50
50
20
Source: made up numbers.
(b) real income divided by capacity output.
(c) real output divided by nominal income.
(d) capacity as percentage of the position on the PPF.
11. The capital stock increases when investment
(a) is greater than zero.
(b) exceeds depreciation.
(c) exceeds the value of the capital stock.
(d) rises above consumption.
12. Normally about how many jobs are created every economic quarter?
(a) 6-8 million and a similar number are destroyed.
(b) 400,000 and a similar number are destroyed.
(c) 2-4 million and lot more are destroyed.
(d) 400,000 but more are destroyed.
13. If the CPI (consumer price index) in 1990 was 82 (1982 is the base period)
and it was 91 in 1991, what is the best estimate of the rate of inflation
from 1990 to 1991?
(a) 8.5%.
(b) 9.4%.
(c) 10.3%.
(d) 11.0%.
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14. Calibrating the Solow model to the SAM of table 1 gives A = 1. The
capital-output ratio is 2 and the rate of depreciation is 3 percent. The
rate of growth of the labor force is 1 percent. The change in the capitallabor ratio is given by
(a) 0.24
(b) 0.25
(c) 0.046
(d) 0.014
15. The value of the steady state level of the capital-labor ratio, k is
(a) 12
(b) 24
(c) 25
(d) 100
16. The Solow model is stable at the steady state because
(a) a small decrease in the capital-labor ratio causes savings to exceed
capital deepening and this causes k to rise.
(b) a small increase in the capital labor ratio causes capital deepening to
exceed savings and this causes k to fall.
(c) both of the above answers are true.
(d) neither answer is true because outside the steady state the Solow
model is not stable.
17. To model global warming in the aggregate demand and supply model we
the
. This causes the aggregate
curve to shift to the .
can
(a) lower, capital stock, supply, right.
(b) raise, wage rate, demand, right.
(c) lower, capital stock, supply, left.
(d) raise, government spending on pollution, demand, right.
18. In the definition of GDP, Y = C +I +G+Nx , we subtract imports because
imports
(a) reduce GDP since imports always substituted for domestic production.
(b) are already counted in C, I and G and thus must deducted
to determine domestic demand and output.
(c) must balance exports in the long run and therefore do not count in
GDP.
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(d) All of the above are correct.
19. Let the share of labor, σ = wL
pX , be 50 percent in an economy. If the
share of labor is constant, use the rules of hats to determine the rate of
inflation, assuming that employment growth is 3 percent, output growth
is 2 percent and nominal wage growth is zero percent. The answer is
(a) 1.
(b) 2.
(c) 3.
(d) -5.
20. In figure 1, with the base level of aggregate demand (ADbase ) as shown,
equilibrium is
(a) 40.
(b) 20.
(c) 30.
(d) cannot be determined without C̄.
21. Now in the same figure 1 raise investment by 10. The equilibrium with
ADchange is
(a) 40.
(b) 20.
(c) 30.
(d) cannot be determined without C̄.
22. Again in figure 1, the multiplier ∆Y /∆I is
(a) 2.5.
(b) 3.0
(c) 2.0
(d) cannot be determined without knowing the marginal propensity to
consume.
23. The capital stock is usually about
(a) 6% of GDP.
(b) varies widely among countries and so there is no rule of thumb.
(c) 150% of GDP.
(d) two to four times GDP.
5
60
Expenditure
ADchange
50
40
ADinitial
30
20
10
45-deg
Income
0
0
10
20
30
40
Figure 1: The Keynesian Model
6
50
60
24. In Commanding Heights Friedrich von Hayek believed that
(a) government was usually responsible for inflation.
(b) inflation hurts citizens by reducing the value of their savings.
(c) government should never spend more than they take in in taxes.
(d) all of the above.
25. Potential output, as modeled in class, is determined by
(a) Q = C + I + G + X − M.
(b) Q = AKβ L(1−β) .
(c) Q = u/X.
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(d) Q = A (KL) .
26. The labor force participation rate is the
(a) labor force divided by the total number of employed.
(b) labor force divided by the population.
(c) labor force times the population.
(d) population over the labor force.
27. Which of the following does not directly affect the rate of unemployment?
(a) The business cycle.
(b) The population’s age structure.
(c) The social and institutional structure.
(d) The price of agricultural goods.
28. Let the multiplier be 2.5 and the full employment level of GDP be 10
trillion. The economy is currently operating at 9.2 trillion. To get to full
employment, government spending should
(a) fall by $8 trillion.
(b) rise by $0.8 trillion.
(c) fall by $320 billion.
(d) rise by $320 billion.
29. Suppose the GDP deflator was 100 in 2001 and 104 in 2002. If nominal
GDP in 2002 was 3 percent greater than in 2001, then the approximate
rate of real GDP growth in 2002 was
(a) -1 percent.
(b) -2 percent.
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Table 2: SAM
Firms
Firms
HH
Savings
?
Total
?
HH
Invest
Total
2
?
3
?
?
?
?
?
(c) 2 percent.
(d) 4 percent.
30. “Comparative statics” means
(a) change in all the variables of a model with respect to a
change in only one parameter.
(b) change in the one variable of the model with respect to a change in
the parameters of a model.
(c) change in the parameters and the effect on the models.
(d) simulating an economic policy.
31. In table 2, C̄ = 1. The multiplier is then
(a) 1.
(b) 1.5.
(c) 2.
(d) cannot be determined without the MPC.
32. In macroeconomics investment refers to
(a) accumulation of financial instruments such as stocks, bonds etc.
(b) accumulation of real goods, such rare books and paintings.
(c) demand for structures, equipment, inventories and residential.
(d) savings.
33. If the multiplier had a value of 4 in 1929, then how much must the change
in autonomous expenditure to cause the decline in table 3?
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Table 3: The Great Depression
Year
Consump
-tion
Invest
-ment
Net
Exports
Real
GDP
Unemp
Rate
1929
1933
661
541
91.3
17.0
-9.4
-10.2
865
636
3.2
24.9
billions of 1929 dollars
(a) -20
(b) -57.25
(c) -30
(d) -40.25
34. Assuming real growth in GDP was three percent per year in 1929, and the
multiplier is 4, then how much must government spend to get the economy
back to potential GDP in 1933?
(a) 865(1 + 0.03)4 divided by the multiplier.
(b) whatever GDP would have been in 1933 times the multiplier.
(c) 30 billion.
(d) (865-636)/multiplier.
35. The most important theoretical contribution made by Keynes was the
theory of
(a) structural unemployment.
(b) money.
(c) the consumption function and multiplier.
(d) the definition of GDP.
36. The most volatile component of aggregate demand
(a) investment.
(b) consumption.
(c) government expenditure.
(d) exports.
37. In the steady state of the Solow model occurs when
(a) the capital-labor ratio stops changing.
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(b) saving is equal to capital widening.
(c) the rate of growth of the capital stock is the same as the growth rate
of the labor force.
(d) all of the conditions obtain.
38. In 2000 real GDP was 82; in 2008 real GDP is 99. The average growth
rate of real GDP over the period is
(a) = (99/82)1/9 − 1.
(b) = (82/99)1/8 − 1.
(c) = (99/82)1/9 + 1.
(d) = (99/82)1/8 − 1
39. The Solow model, without technological change, reaches a steady state
because
(a) of diminishing returns to capital.
(b) of diminishing returns to labor.
(c) economies can’t grow forever.
(d) of convergence.
40. Suppose South Korea and Peru have the same populations but Peru has
one third as much capital as South Korea. Peruvian income per capita
can converge to that of South Korea if
(a) Peru saves a greater fraction of its output so that capital stock grows
faster.
(b) Peru experiences a faster rate of technological change.
(c) Peruvian labor force growth rate slows down.
(d) All of the above.
41. Between the first quarter of 2006 and the first quarter of 2007, the US
real GDP growth slowed to 0.6 percent and inflation increased. This was
caused by
(a) a shift in AD to right but a larger shift in AS to the right.
(b) a shift in AD to the left and a smaller shift in AS to the right.
(c) a shift in AD to the right and shift in the AS to the left.
(d) an increase in capacity utilization.
42. Freight transportation companies such as UPS provide domestic shipping
services to many foreign countries. How does this change the AS-AD when
UPS services become cheaper though computerized control of pick-ups and
drop-offs?
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(a) AD shifts to the right because of technical change.
(b) AS shifts to the right because of an increase in exports.
(c) AD remains fixed and AS shifts to the left.
(d) Reverse AD and AS in first two answers and they will be
correct.
43. How can the economy expand over time without inflation or constantly
falling prices?
(a) AD must always grow faster than AS to keep capacity utilization full.
(b) AD and AS must grow at the same rate.
(c) AD must lag behind AS so prices do not accelerate.
(d) capacity utilization must increase constantly.
44. Discouraged workers
(a) are not counted in the unemployment data.
(b) could be good for growth if they are busy acquiring human capital.
(c) lower the reported rate of unemployment.
(d) all of the above are correct.
45. Structural unemployment
(a) can be added to cyclical as a way of estimating frictional.
(b) is the result of long-term changes in the domestic or world
economy.
(c) is always greater than cyclical unemployment.
(d) is the easiest kind of unemployment to reduce using monetary and
fiscal policy.
46. The wealth-effect says that consumption increases when prices fall because
(a) bond prices fall, so people sell them to obtain more cash.
(b) the real value of nominal balances, like savings accounts,
increases.
(c) the wealthy have more income than the poor and can consume more.
(d) the real value of nominal balance falls with falling prices.
47. The demand for labor depends on
(a) the real wage.
(b) technology.
(c) the capital stock.
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(d) all of the above.
48. The SRAS is upward sloping, while the LRAS curve is vertical, because
(a) of the time it takes to adjust wages to prices.
(b) the LRAS is the transient part of the solution.
(c) the SRAS assumes workers are rational and will respond to higher
wages by supplying more labor.
(d) in the long run, workers recognize that their real wages have
actually fallen when prices rise and will supply less labor.
49. If the capital-output ratio is constant at and inflation is 6 percent while
nominal GDP is growing by 9%, the capital stock must be growing by
(a) 1%
(b) 1.5%
(c) 2.%
(d) 3%.
50. The convergence hypothesis says
(a) all countries will grow at a similar rate.
(b) countries with lower per capita incomes should grow faster
than developed countries with similar institutional structures.
(c) population growth rates will slow down to almost zero.
(d) countries with higher per capita incomes should grow faster than
developing countries.
51. In figure 2 two underlying parameters have changed and the dotted lines
indicate the shifts. The shift in the AD curve was due to an increase in
(a) imports
(b) exports through the effect of price on the real exchange rate.
(c) autonomous consumption C̄.
(d) an increase in the interest rate.
52. In figure 2 two underlying parameters have changed and the dotted lines
indicate the shifts. The shift in the AS curve is due to an increase in
(a) the wage rate.
(b) technical change parameter A.
(c) the share of capital (β).
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price
1.6
AS
1.4
1.2
1.0
0.8
0.6
0.4
AD
0.2
quantity
0.0
0
10
20
30
40
50
60
Figure 2: Aggregate demand and supply
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70
80
(d) the capital stock.
53. In figure 2 the new equilibrium corresponds to a higher price. What do
you expect next to happen as the economy moves toward the long run?
(a) Nothing; this is a new long-run equilibrium.
(b) There will be an increase in the wage rate as the SRAS
starts to move to the LRAS.
(c) It is likely that the price level will fall as unemployment increases.
(d) There will be technical change and that will cause the AS to shift to
the right.
54. The dynamic AD-AS curve analysis brings together
(a) income and expenditure.
(b) the short run equilibrium determined by the Solow model and the
long run determined by the Keynesian model.
(c) the short-run equilibrium determined by the Keynesian model
and the long run determined by the Solow model.
(d) supply as determined by the capital stock and demand determined
by the supply of labor.
55. In the dynamic AD-AS, the AS shifts to the right over time because
(a) more capital per unit of labor.
(b) more labor.
(c) technical change.
(d) all of these answers are correct.
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