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Midterm Examination of Economics b1.Factor markets are different from product markets in an important way because a. equilibrium is the exception, and not the rule, in factor markets. b. the demand for a factor of production is a derived demand. c. the demand for a factor of production is likely to be upward sloping, in violation of the law of demand. d. All of the above are correct. d2.When a firm maximizes profit, a. it will hire workers up to the point where the marginal product of labor is equal to the product price. b. it will hire workers up to the point where the marginal product of labor is equal to the wage. c. it will hire workers up to the point where the value of the marginal product of labor is equal to the product price. d. it will hire workers up to the point where the value of the marginal product of labor is equal to the wage. b3. If a firm finds that the wage rate (W) is higher than the marginal revenue product (MRP), then to maximize its profit the firm should hire a. no more or less labor, because profits are greatest when W < MRP. b. less labor, which will increase the MRP. c. more labor, which will decrease the MRP. d. more labor, because hiring more labor will increase both W and MRP until they are equal. 1 b4.A competitive firm sells its output for $30 per unit. The marginal product of the 10th worker is 20 units of output per day; the marginal product of the 11th worker is 16 units of output per day. The firm pays its workers a wage of $150 per day. a. For the 11th worker, the value of the marginal product of labor is $120. b. For the 11th worker, the value of the marginal product of labor is $480. c. For the 11th worker, the value of the marginal product of labor is $600. d. For the 11th worker, the value of the marginal product of labor is $2,400. c5.Which of the following statements is correct? An individual worker's labor supply curve a. can never be backward sloping. b. slopes backward if that person responds to a higher wage by taking fewer hours of leisure per week. c. slopes backward if that person responds to a higher opportunity cost of leisure by working fewer hours per week. d. slopes upward if that person works the same number of hours per week, regardless of the opportunity cost of leisure. d6.Suppose that the market for labor is initially in equilibrium. An increase in immigration will cause a. b. c. d. the equilibrium wage and the quantity of labor to both rise. the equilibrium wage and the quantity of labor to both fall. the equilibrium wage to rise and the quantity of labor to fall. the equilibrium wage to fall and the quantity of labor to rise. b7.Consider the labor market for computer programmers. Because of the dot.com boom in the late 1990s, a lot of workers went to school to learn how to write computer code for one of thousands of new dot.com companies. However, when these computer programming students graduated, the dot.com bust took place. The dot.com bust decreased the value of the marginal product of computer programmers. Holding all else equal, what effect did these two circumstances have on the equilibrium wage in the labor market for computer programmers? a. The equilibrium wage increased. b. The equilibrium wage decreased. c. The equilibrium wage did not change. d. It is not possible to determine what happens to the equilibrium wage. 2 b8.Which of the following events would cause GDP for 2007 to increase? a. In February 2007, Amanda sells a 1996 Honda Accord to Isabella. b. In February 2007, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in April 2007. c. In December 2007, Isabella eats onions that she harvested from her backyard garden in October 2007. d. All of the above are correct. a9.A Minnesota farmer buys a new tractor made in Iowa by a German company. a result, a. U.S. investment and GDP increase, but German GDP is unaffected. As b. U.S. investment and German GDP increase, but U.S. GDP is unaffected. c. U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods. d. U.S. investment, U.S. GDP, and German GDP all increase. b10.The U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2006. The economist then retires. In 2007, the government pays him $30,000 in retirement benefits. Which of the following is correct? a. The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as government purchases. b. The 2006 payment is included in 2006 GDP as government purchases, but the 2007 payment is not included in 2007 GDP. c. The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as government transfer payments. d. The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is allocated to previous years' GDP according to the amount of work performed by the economist each year. d11.If a U.S. citizen buys a television made in Korea by a Korean firm, then a. U.S. net exports decrease and U.S. GDP decreases. b. U.S. net exports are unaffected and U.S. GDP decreases. c. U.S. net exports are unaffected and U.S. GDP is unaffected. d. U.S. net exports decrease and U.S. GDP is unaffected. 3 b12.The table below contains data for the country of Togogo. Year Nominal GDP GDP Deflator 1974 $2000 100 1975 $3000 120 1976 $3750 150 1977 $6000 200 The base year is 1974. Which of the following is not correct? a. b. c. d. This economy experienced growth from 1974 to 1975. This economy experienced growth from 1975 to 1976. This economy experienced growth from 1976 to 1977. This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from 1976 to 1977. a13.The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it sells all 25 cars. a. The value of increased inventory will be counted as part of GDP in 2003, but the value of the cars sold in 2004 will not cause GDP to increase. b. The value of the increased inventory will not affect 2003 GDP, but will be included in 2004 GDP. c. The value of the increased inventory will be counted as 2003 GDP and the value of the cars sold in 2004 will increase 2004 GDP. d. None of the above are correct. c14.Suppose that Wisconsin produces cheese and fish. In 2002, 20 units of cheese are sold at $5 each, and 8 units of fish are sold at $50 each. In 2001, the base year, the price of cheese was $10 per unit, and the price of fish was $75 per unit. a. Nominal 2002 GDP is $800, real 2002 GDP is $500, and the GDP deflator is 160. b. Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 160. c. Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 62.5. d. Nominal 2002 GDP is $800, real 2002 GDP is $500, and the GDP deflator is 62.5. 4 c15.The CPI is more commonly used as a gauge of inflation than the GDP deflator is because a. the CPI is easier to measure. b. the CPI is calculated more often than the GDP deflator is. c. the CPI better reflects the goods and services bought by consumers. d. the GDP deflator cannot be used to gauge inflation. a16.The table below pertains to Yackandsnack, an economy in which the typical consumer’s basket consists of 2 cell phones and 20 ham sandwiches. Year Price of a Price of a Cell Phone Ham Sandwich 2006 $50 $3 2007 $60 $4 2008 $55 $5 If the base year is 2006, then the consumer price index was a. 100 in 2006, 125 in 2007, and 131.25 in 2008. b. 100 in 2006, 200 in 2007, and 210 in 2008. c. 160 in 2006, 125 in 2007, and 131.25 in 2008. d. 160 in 2006, 200 in 2007, and 210 in 2008. d17.A decrease in the price of large tractors imported into the United States from Russia a. leaves the GDP deflator unchanged but decreases the consumer price index. b. decreases the GDP deflator but leaves the consumer price index unchanged. c. decreases both the GDP deflator and the consumer price index. d. leaves both the GDP deflator and the consumer price index unchanged. b18.In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover’s 1931 salary was equivalent to a 2007 salary of about a. $5507. b. $1,021,382. c. $1,140,000. d. $15,525,000. 5 a19.The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. during this period? a. 2.5 percent b. 4.0 percent c. 6.76 percent d. 10.5 percent What was the real interest rate d20.An inflation rate calculated using the CPI shows the rate of change of a. all prices. b. the prices of all final goods and services. c. the prices of all consumer goods. d. the prices of some consumer goods. b21. Laura bought word-processing software in 2005 for $50. Laura's twin brother, Laurence, buys an upgrade of the same software in 2006 for $50. What problem in the construction of the CPI does this situation best represent? a. substitution bias b. unmeasured quality change c. introduction of new goods d. income bias b22. Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the population of both countries was unchanged. a. It follows that real GDP per person must be higher in Oceania than in Freedonia. b. It follows that real GDP per person grew faster in Oceania than in Freedonia. c. It follows that the standard of living must be higher in Oceania than in Freedonia. d. All of the above are correct. 6 b23. If an economy with constant returns to scale were to double its physical capital stock, its available natural resources, and its human capital, but leave the size of the labor force the same, a. its output would stay the same and so would its productivity. b. its output and productivity would increase, but less than double. c. its output and productivity would increase by more than double. d. None of the above is correct. c24.On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L). Y/L K/L The shape of the curve is consistent with which of the following statements about the economy to which the curve applies? a. In the long run, a higher saving rate leads to a higher growth rate of productivity. b. In the long run, a higher saving rate leads to a higher growth rate of income. c. Returns to capital become increasingly smaller as the amount of capital per worker increases. d. All of the above are correct. 7 d25.Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the long run a. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with more capital. b. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with less capital. c. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with more capital. d. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital. a26.Suppose U.S.-based Intel Corporation builds and operates a new computer chip factory in Honduras. Future production from such an investment would a. increase Honduran GDP more than it would increase Honduran GNP. b. increase Honduran GNP more than it would increase Honduran GDP. c. not affect Honduran GNP, but would increase Honduran GDP. d. have no affect on either Honduran GDP or GNP. a27.The Economic Development Minister of a country has a list of things she thinks may explain her country's low growth of real GDP per person relative to other countries. She asks you to pick the one you think most likely explains her country's low growth. Which of the following contributes to low growth? a. poorly enforced property rights b. outward-oriented trade policies c. policies that permit foreign investment d. All of the above are correct. 8 d28.Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If in the next 100 years it doubles every 25 years, then a century from now U.S. real GDP per person will be a. 4 times higher than it is now. b. 8 times higher than it is now. c. 12 times higher than it is now. d. 16 times higher than it is now. d29.We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that a. Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation. b. Bond A was issued by the General Electric Corporation and Bond B was issued by the state of California. c. Bond A has a term of 20 years and Bond B has a term of 1 year. d. All of the above are correct. b30.Municipal bonds pay a relatively a. low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax. b. low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. c. high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay. d. high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax. a31. Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,000, and government purchases equal 3,000. What are private saving and public saving? a. 1,500 and -500, respectively b. 1,500 and 500, respectively c. 1,000 and -500, respectively d. 1,000 and 500, respectively Scenario: Assume the following information for an imaginary, closed economy. GDP = $110,000; consumption = $70,000; private saving = $8,000; national saving = $12,000. 9 c32.For this economy, investment amounts to a. b. c. d. $4,000. $8,000. $12,000. $16,000. a33.This economy’s government is running a a. budget surplus of $4,000. b. budget surplus of $8,000. c. budget deficit of $4,000. d. budget deficit of $8,000. d34.Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate a. and investment both would increase. b. and investment both would decrease. c. would increase and investment would decrease. d. would decrease and investment would increase. a35.A change in the tax laws that increases the supply of loanable funds will have a bigger effect on investment when a. the demand for loanable funds is more elastic and the supply of loanable funds is more inelastic. b. the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic. c. both the demand for and supply of loanable funds are more elastic. d. both the demand for and supply of loanable funds are more inelastic. d36.A person who is counted as unemployed by the Bureau of Labor Statistics a. b. c. d. is also in the labor force. must have recently looked for work or be on temporary layoff. be at least 16 years old. All of the above are correct. 10 a37.Sirius has just finished high school and started looking for his first job, but has not yet found one. Other things the same, the unemployment rate a. and the labor-force participation rate both increase. b. increases and the labor-force participation rate is unaffected. c. is unaffected and the labor-force participation rate increases. d. and the labor-force participation rate are both unaffected. Labor Data for Wrexington Year 2004 2005 2006 Adult population 2000 3000 3200 Number of employed 1400 1300 1600 Number of unemployed 200 600 200 d38.The labor-force participation rate of Wrexington a. increased from 2004 to 2005 and increased from 2005 to 2006. b. increased from 2004 to 2005 and decreased from 2005 to 2006. c. decreased from 2004 to 2005 and increased from 2005 to 2006. d. decreased from 2004 to 2005 and decreased from 2005 to 2006. c39.Merideth is looking for work as a computer programmer. Although her prospects are good she hasn’t yet taken a job. Julie is looking for work in a steel mill, but there aren’t many job ads for steel workers and every time she shows up for an interview, there are many more people than openings. a. Meredith and Julie are both frictionally unemployed. b. Meredith and Julie are both structurally unemployed. c. Meredith is frictionally unemployed, and Julie is structurally unemployed. d. Meredith is structurally unemployed, and Julie is frictionally unemployed. 11 c40.Which of the following is not correct? a. It is only among the least skilled and least experienced members of the labor force that minimum-wage laws cause unemployment. b. The equilibrium wages of the least skilled and least experienced members of the labor force tend to be low, and, therefore, are more likely to fall below the legal minimum wage. c. If the wage is kept below the equilibrium level for any reason, the result is unemployment. d. Minimum-wage laws, unions, and efficiency wages are all reasons wages may be kept above the equilibrium level. b41.Suppose that efficiency wages become more common in the economy. Economists would predict that this would a. increase the quantity demanded and decrease the quantity supplied of labor, thereby decreasing the natural rate of unemployment. b. decrease the quantity demanded and increase the quantity supplied of labor, thereby increasing the natural rate of unemployment. c. increase the quantity demanded and decrease the quantity supplied of labor, thereby increasing the natural rate of unemployment. d. decrease the quantity demanded and increase the quantity supplied of labor, thereby decreasing the natural rate of unemployment. 12 d42.Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed, a. both the unemployment rate and labor-force participation rate would be higher. b. both the unemployment rate and labor-force participation rate would be lower. c. the unemployment rate would be higher and the labor-force participation rate would be higher. d. the unemployment rate would be lower and the labor-force participation rate would be unaffected. b43.In a system of 100-percent-reserve banking, a. banks do not accept deposits. b. banks do not influence the supply of money. c. loans are the only asset item for banks. d. All of the above are correct. d44.An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. Assets Liabilities Reserves Deposits $750 $10,000 Loans 9,250 If all banks in the economy have the same reserve ratio as this bank, then the value of the economy’s money multiplier is a. 1.33. b. 10.00. c. 10.81. d. 13.33. 13 b45.To increase the money supply, the Fed can a. b. c. d. buy government bonds or increase the discount rate. buy government bonds or decrease the discount rate. sell government bonds or increase the discount rate. sell government bonds or decrease the discount rate. d46.The manager of the bank where you work tells you that your bank has $5 million in excess reserves. She also tells you that the bank has $300 million in deposits and $255 million dollars in loans. Given this information you find that the reserve requirement must be a. 50/255. b. 40/255. c. 50/300. d. 40/300. c47.In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then a. M1 would increase. b. M1 would decrease. c. M1 would not change. d. M1 might rise or fall. a48.The money supply decreases if a. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans. b. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans. c. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans. d. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans. 14 b49.Suppose that the Federal Reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have $5 million more they wish to lend out. If the required reserve ratio is 10%, how much more money can banks create if they lend out the remaining amount? a. $55 million b. $50 million c. $45 million d. $40 million d50.When the Fed increases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases. b. borrow more from the Fed and lend less to the public. The money supply decreases. c. borrow less from the Fed and lend more to the public. The money supply increases. d. borrow less from the Fed and lend less to the public. The money supply decreases. 15