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Econ 302
Spring 2009
Midterm #1 Disaster Recovery Exam
Name:____________________
Student ID#:_______________
Do not begin the exam until you are given instructions to do so!
Part I
(30 points possible) Solve the following problem on the second page. You may
use the back of the page if necessary. Show your work where possible.
A country produces 3 goods – eggs, flour, and cake. Output and price information from 2008 are:
Product
Eggs
Flour
Cake
Price per unit
$1
$2
$4
Output
10 units
8 units
6 units
The cake industry used up 3 units of eggs and 4 units of flour while producing cake. During
2008, the cake industry decreased its inventory of eggs by 2 units, and increased its inventory of
flour by 2 units.
The country’s citizens received $10 interest during 2008 on foreign government debt, and the
flour industry – which is owned by foreigners – earned $4 of profit.
The government purchased 2 units of eggs, 2 units of flour, and 1 unit of cake. It collected $30 in
taxes and made $10 of transfer payments.
All output not otherwise accounted for was consumed.
1. Compute the value of final goods output in each industry, and use these to arrive at GDP.
2. What is the value of GNP?
3. Calculate the amount of investment spending.
4. Calculate C, G, and NX.
5. Define national savings (GDP plus… minus…) and calculate it. Define the uses of national
savings and show that it is equal to national savings.
Part II
paper.
1.
(60 points possible) Select the best answer and indicate your choice clearly on the
For a consumer who is a net borrower, a rise in the real interest rate will:
a.
increase his current consumption spending only if the income effect is stronger than the
substitution effect.
b.
increase his current savings only if the substitution effect is stronger than the income
effect.
c.
increase his expected future income.
d.
increase his current savings (or make his current savings less negative).
e.
none of the above.
2.
According to Okun’s Law, reducing the unemployment rate from 10% to 8% would
require GDP to rise by:
a.
b.
c.
d.
e.
8%
2%
3%
4%
10%
3.
People who are unemployed because their training, skills, or personal characterisitics
(age, gender, etc.) are unsuited to the current needs of employers are ____ unemployed. These
unemployed workers _____ part of the “natural rate” of unemployment.
a.
b.
c.
d.
e.
structurally
frictionally
cyclically
structurally
frictionally
are
are not
are
are not
are
4.
If the real wage rate is at the level which sets labor demand equal to labor supply, there is
__________.
a.
b.
c.
d.
e.
no unemployment.
no unintended investment.
only the “natural” rate of unemployment.
no disinvestment.
no output.
Future Income,
Spending
F
PDIef
G
H
Cd
PDIt
Present Income, Spending
5.
In the diagram above, the consumer’s original budget line goes through points F, G, and
H. The movement from ____ to ____ shows the income effect of a rise in the interest rate.
a.
b.
c.
d.
e.
G
G
F
F
J
F
K
K
J
K
6.
If the income effect on the consumer is stronger than the substitution effect, then a rise in
r will cause:
a.
b.
c.
d.
e.
an increase in present savings.
an increase in present personal disposable income (PDIt).
a decrease in expected future PDI.
a decrease in present consumption.
none of the above.
Suppose an economy’s aggregate production function can be described by the equation
F(K,N) = K1/2  N1/2, where K is the use of capital services and N is the use of labor. This
7.
production function demonstrates:
a.
b.
c.
d.
e.
increasing marginal product of labor.
constant marginal product of capital.
constant returns to scale.
increasing returns to scale.
none of the above.
8.
The “intertemporal substitution of leisure” argument suggests that labor supply will ____
in response to a _____ increase in the real wage.
a.
b.
c.
d.
e.
increase
permanent
decrease
permanent
increase
temporary
decrease
temporary
none of the above.
9.
Suppose residents of island A own the firm that produces on island B, and in 2008
receive income of 20 dollars of profits. Residents of island B provide the labor used to produce
output on island A, and receive income of 25 dollars in 2008 for this labor. If these are the only
net factor payments on both islands, and both islands had GDP of 100 dollars in 2008, then the
two islands’ GNP would be:
a.
b.
c.
d.
e.
island A – 95 dollars; island B – 105 dollars
island A – 55 dollars; island B – 145 dollars
island A – 75 dollars; island B – 125 dollars
island A – 105 dollars; island B – 95 dollars
none of the above.
If the aggregate production function is F(K,N) = K1/2  N1/2, then the derivative of the
production function with respect to N is
= 1/2(K/N)1/2. As N rises, this value becomes
10.
smaller. This shows:
a.
b.
c.
d.
e.
diminishing returns to scale.
decreasing returns to scale.
diminishing marginal product of capital.
diminishing marginal product of labor.
none of the above.
11.
The _______ approach to measuring economic activity measures for each citizen the sum
of all wages, rents, royalties, interest, and profits. The total for all citizens is the country’s ____.
a.
b.
c.
d.
e.
income
GDP
expenditure GNP
value-added GDP
final goods
GNP
none of the above.
12.
In the labor-supply, labor-demand diagram, what would cause a shift of the labor demand
curve to the right?
(i)
(ii)
(iii)
a decrease in the amount of capital installed
an improvement in technology that affects the output of the firm
an increase in the number of workers seeking jobs
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
both (i) and (ii) are true.
both (ii) and (iii) are true.
13.
In a closed economy, the real interest rate is below the level that sets desired national
savings equal to desired investment. The difference between the desired national savings and
desired investment is:
a.
b.
c.
d.
e.
current account deficit
current account surplus
excess supply of labor.
unintended disinvestment.
budget deficit
14.
In the balance of payments accounting system, a country’s repayment of foreign debt is
counted as a ____ item in the ____ account.
a.
b.
c.
d.
e.
plus
current
plus
capital
minus
current
minus
capital
none of the above.
15.
When we earn incomes by contributing resources (like labor) to help produce output in
another country, we are contributing to our country’s ____ and the other country’s ____.
a.
b.
c.
d.
e.
GDP GNP
GDP NFP
NFP GNP
GNP GDP
none of the above.
16.
On our island, we spend time building a boat that we will sell to a foreign buyer. During
2008, we built a boat, but did not sell it. In 2009 we sell it for $500. Each year we also catch
$100 worth of fish and eat them, so we don’t starve. The amount and uses of GDP in 2008 and
2009 are:
a.
2008: GDP = 100; consumption = 100.
2009: GDP = 600; consumption = 100, investment = 500
b.
2008: GDP = 600; consumption = 100, investment = 500
2009: GDP = 100; consumption = 100, investment = -500, net exports = 500
c.
2008: GDP = 100; consumption = 100.
2009: GDP = 600; consumption = 100; net exports = 500
d.
2008: GDP = 600; consumption = 100, intermediate goods = 500
2009: GDP = 600; consumption = 100, net exports = 500
e.
none of the above.
17.
Variables that represent rates at which some activity takes place are ____ variables, and
variables that represent quantities of something that exist at a point in time are ____ variables.
a.
b.
c.
d.
e.
macroeconomic
stock
stock
flow
none of the above.
microeconomic
flow
bond
stock
18.
If an economy is “open”, then the difference between desired national savings and desired
investment at the prevailing (world) real interest rate is:
a.
b.
c.
d.
e.
unintended investment.
the government budget deficit.
the current account surplus.
personal disposable income.
none of the above.
19.
A person might supply less labor at high wages than at low wages if:
a.
b.
c.
d.
e.
the substitution effect of a wage increase is stronger than the income effect.
the income effect of a wage increase is stronger than the substitution effect.
leisure is an inferior good.
the person is a net borrower.
the person is neither a saver nor a borrower (like Polonius).
20.
The reason why an increase in GDP produces a smaller change in the unemployment rate
than the aggregate production function suggests it should is:
(i)
firms respond initially to higher demand by having existing workers work more
intensively, or for longer hours, instead of hiring extra workers.
(ii)
firms try to retain important employees during downturns even if there is not enough for
them to do, so the firm can expand output without expanding employment when demand goes
back up.
(iii) some persons re-enter the labor force when jobs become easier to find, so the number of
unemployed persons does not drop as fast as the growth in employment suggests.
a.
b.
c.
d.
e.
only (i) is true.
both (i) and (ii) are true.
both (ii) and (iii) are true.
both (i) and (iii) are true.
(i), (ii), and (iii) are all true.
Part III
(1 point possible)
The figure on the left can be divided into 2 identical shapes with a single cut, made along the
dashed line. The figure on the right can also be divided into 2 identical shapes with a single cut.
Show how.