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Ec 102.01 Name: 17.03.2015 I. MID-TERM - KEY Multiple choice questions: 0.8 points each True-False questions: 0.5 points each 1. Classical economics is best characterized with which statement below? a) The business cycle is a function of “animal spirits.” b) Taking advantage of the division of labor through specialization leads to economic growth. c) Stable monetary policy is the key to steady economic growth. d) Government intervention is required to “fine tune” the economy. e) Government policy should be used to ensure that economic growth is distributed evenly throughout society. 2. Which one of the following statements is FALSE? a) Classical economists normally believe the economy should not be regulated by governments. b) Say’s Law states that supply creates its own demand. c) Monetarists believe that the economy can be fine tuned by governments. d) Fiscal policy concerns the levels of government spending and taxation. e) The issuance of currency is an example of monetary policy. 3. Living standards growth may be achievable even in the absence of economic growth. TRUE FALSE 4. John Maynard Keynes believed that the key to increasing aggregate demand is to have the government take a more active role in investment TRUE FALSE 5. How is the value-added approach to measuring GDP calculated? a) b) c) d) e) The difference between income and saving The difference between income and investment The difference between the selling price and the cost of intermediate inputs The difference between the selling price and the value of wages The difference between the selling price and profits 6. Which of the following identities defines GDP using the income approach? a) GDP = National income – Net income payments from the foreign sector + Depreciation b) GDP = Household income + Business income + Government income – Net income payments from the foreign sector c) GDP = Personal Consumption – Net income payments from the foreign sector + Depreciation d) GDP = National income – Net income payments from the foreign sector e) GDP = Household income + Business income + Government income – Net income payments from the foreign sector 7. Which of the following would be included in GDP for Turkey? Explain (1.5 points) a) The value of a glass of Italian wine sold at a Chinese restaurant in Istanbul to a German tourist. THE WINE WAS FIRST IMPORTED AND THEN SOLD TO A TOURIST IN THE COUNTRY. THE VALUE OF WINE WILL NOT BE INCLUDED, BUT THE VALUE OF SERVICE PROVIDED BY THE RESTAURANT WILL BE INCLUDED. b) The value of teaching offered by a Japanese teacher at Boğaziçi University. INCLUDED, SINCE THE TEACHER EARNED HIS/HER INCOME IN A DOMESTIC UNIVERSITY. c) Profit earnings of a Mavi Jeans shop located in New York that is transferred to Turkey. NOT INCLUDED, SINCE THE PROFIT IS EARNED OUTSIDE DOMESTIC BORDERS. 8. The implicit price deflator is obtained by … a) calculating a weighted average of the prices paid for a typical market basket of goods. b) dividing nominal GDP by the consumer price index. c) dividing real GDP by the consumer price index. d) dividing nominal GDP by real GDP. e) subtracting real GDP from nominal GDP. 9. . If during 2015, the country of Atlantis recorded a GDP of $65 billion, interest payments of $15 billion, imports of $13 billion, profits of $7 billion, investment spending of 14 billion, exports of $15 billion, and government evpenditures of $7 billion, consumption spending during 2005 in Atlantis were a) $64 billion b) $36 billion c) $42 billion d) $34 billion e) none of the above 10. Net national product is defined as … a) GDP minus net foreign borrowing. b) c) d) e) GDP minus net foreign lending. GDP minus depreciation. GDP minus net exports. GDP minus investment. 11. The Table below shows the GDP per capita for Turkey for 2007 and 2008. Discuss the change in the well-being of the people in Turkey between these two years. (3 points) Per capita gross domestic product Year Nominal GDP per capita (TL) 2007 12 009 2008 13 370 THERE IS AN INCREASE IN THE NOMINAL GDP PER CAPITA, HOWEVER WE DO NOT KNOW FROM THE INFORMATION GIVEN ABOVE WHETHER THERE IS A REAL GDP PER CAPITA INCREASE OR NOT. THERE MAY WELL BE A DECREASE IN THE REAL GDP. REAL GDP IS BETTER THAN THE NOMINAL GDP, BECAUSE IT IS INFLATIONADJUSTED. HOWEVER, EVEN REAL GDP IS NOT A GOOD MEASURE OF WELL-BEING. FOR WELL-BEING, WE NEED TO KNOW THE INCOME DISTRIBUTION, WORKING CONDITIONS, HEALTH CONDITIONS, ENVIRONMENTAL CIRCUMSTANCES, ETC. 12. The foreign sector does not contribute to the gross domestic product using the product approach. TRUE FALSE 13. Suppose in Country A 135 million people is employed and the unemployment rate is 10%. How many people are in the labor force in this example? a) b) c) d) e) 140 million 148.5 million 150 million 165 million We don’t have enough information to determine the size of the labor force 14. Suppose Turkey enters a recession, what type of unemployment would be most likely to rise as a result of the recession? a) b) c) d) e) Structural unemployment Frictional unemployment Sectoral unemployment Cyclical unemployment Efficiency unemployment 15. The introduction of compact discs made vinyl records obsolete. To the extent this caused higher unemployment among workers who had manufactured records, which type of unemployment was created? a) b) c) d) e) Frictional unemployment Efficiency unemployment Underemployment Structural unemployment Cyclical unemployment 16. Someone not currently working who has just entered the labor force after graduating college and is actively seeking his or her first job would not be classified as unemployed by TURKSTAT. TRUE FALSE 17. The sticky wage theory states that wages may stay at below-equilibrium levels for an extended period of time, thus keeping unemployment high. TRUE FALSE 18. According to John Maynard Keynes, the key to reducing high levels of unemployment was to … a) b) c) d) set long-term employment contracts that eliminate uncertainty. eliminate government intervention in the labor market. increase aggregate demand. create retraining programs so that unemployed workers can acquire new skills as technology changes. e) offer employees above-equilibrium wages to attract more workers. 19. TURKSTAT would classify women who work in family business but does not receive any wages as employed. TRUE FALSE 20. “Discouraged” workers are a subset of those workers classified as not in the labor force by TURKSTAT. TRUE FALSE 21. The increased flexibility in working arrangements in Turkey has been a result of the advocacy of labor unions. TRUE 22. If the consumer price index is 130, this means that: a. Prices are 130 percent higher than in the base year. b. Prices are 0.13 times higher than in the base year. c. Prices are 30 percent higher than in the base year FALSE d. Nominal GNP must be inflated to determine the real GNP. 23. According to Turkish Statistical Institute, in January 2009, non-institutionalized population of Turkey was 70.166 million people, of which 18.843 million was below the age of 15. Of these, 23.523 million people were in the labor force and 19.873 million as employed. a. What would be the unemployment rate in this example? b. Find the labor force participation rate. (1 point) Non-institutionalized population (15+ age)70 166 – 18 843=51323 Labor Force: 23 523 Employed: 19 873 Unemployed: 3650 a. Unemployment rate = (Unemployed/Labor force)x 100 = (3650 / 23523) 100 = 15.5% b. Labor force participation rate=(Labor force/Non-institutionalized pop (15+age)) 100 = (23523/51323)100 =45.8% 24. In the Classical model of the labor market there is no involuntary unemployment at the equilibrium wage. TRUE FALSE 25. What is NAIRU? On which grounds do critics of NAIRU question this approach? (1 point) NAIRU is non-accelerating inflation rate of unemployment. It is the lowest rate of unemployment that can be sustained without causing rapidly rising inflation. NAIRU is criticized on the grounds that it is neither constant nor measurable. It is unlikely to have a static rate of unemployment that will last for long periods of time, because different levels of factors affecting the workforce and employers (such as the presence of unions and monopolies) can quickly shift this equilibrium. 26. Suppose a simple economy produces three goods, hats, bread and books. In the first year, 10 hats are produced and sold at 5 TL each. 30 units of bread are produced, and sold at 1 TL, and 4 books are produced and sold at 3 TL each. In the second year, 12 hats are produced and sold for 6 TL each; 40 units of bread are produced and sold at 1 TL each, and 4 books are produced and sold at 4 TL each. Show your calculations. (2 pts) i. What is nominal GDP in each of the two years? Year 1: 10*5+30*1+4*3 =92 TL Year 2: 12*6+40*1+4*4= 128 TL ii. What is the growth rate of nominal GDP? Nominal growth rate: ((128-92) /92)*100 =39% iii. What is the real GDP in the second year, given that the first year is the base year? Real GDP second year= 12*5+40*1+4*3= 112 TL iv. What is the growth of real GDP (in year 1 prices)? Real growth rate: ((112-92)/92)*100= 22%