Midterm 1 Principles of Macroeconomics (ECON 2020) Spring 2010 On the scantron fill out your name (both bubbles and write in portion), your student ID, and put your recitation number in the "1,2,3,4" section. There are 35 multiple choice questions and you may use a calculator (no cell phone calculators). Good luck. 1. Which of the following arguments about our current recession is made in the article titled "The Trap"? A) Cyclical unemployment will decrease due to sectors such as retail trade and leisure. B) Due to layoffs and stagnant wages, consumers will borrow more which will lead to economic recovery. C) The increase in discouraged workers has been remarkably high compared to other recessions. D) Long term unemployment is not quite as problematic as is widely feared. 2. Suppose that there is higher than expected inflation and that wages kept pace with this increase in the price level. Who benefits? A) Consumers B) Lenders C) Producers D) Borrowers 3. A new wonder diet that results in a dramatic loss of weight sweeps through America. The key to the diet is to eat unlimited amounts of red meat (beef) but no poultry or carbohydrate-rich foods. As millions of Americans switch to the new diet, we can expect: A) an increase in the supply of poultry, leading to a shift to the right in the supply curve for poultry and higher poultry prices. B) a decrease in the demand for poultry, leading to a shift to the right in the demand curve for poultry and lower beef prices. C) a decrease in the demand for poultry, leading to a shift to the left in the demand curve for poultry and lower poultry prices. D) a decrease in the supply of poultry, leading to a shift to the left in the supply curve for poultry and higher poultry prices. Version 1 Page 1 4. Lobster prices usually fall during the summer peak harvest season, despite the fact that people like to eat lobster during the summer months more than during any other time of the year. This is because: A) Supply increases by more than demand increases. B) Demand decreases by more than supply decreases. C) Supply increases by less than demand increases. D) Demand increases and supply doesn?t change. 5. Suppose the local real estate market is in equilibrium. Recently a recession has caused local household incomes to decline. At the same time, construction of a large subdivision of new homes has just been completed. Given these two changes, we can predict the price of real estate will ________ and the quantity of real estate bought and sold will ________. A) fall; rise if the demand decrease is larger than the supply increase B) fall if the demand decrease is larger than the supply increase; rise C) rise if the supply increase is larger than the demand decrease; fall D) fall; fall if the demand decrease is larger than the supply increase 6. Which of the following is a microeconomic question rather than a macroeconomic question? A) ?Will an increase in the cigarette tax cause a decrease in the number of smokers?? B) ?Will a decrease in the income tax rate create a budget deficit?? C) ?Will a decrease in the income tax rate lift the nation out of a recession?? D) ?Will an increase in consumer spending create inflation?? 7. In the open economy flow of money model, capital inflow can be seen directly as the interaction of A) firms with the factor market B) the rest of the world with the market for goods and services C) the government with households D) the financial markets with the rest of the world 8. Structural unemployment can be caused by all of the following EXCEPT: A) labor unions. B) efficiency wages. C) fluctuations in the business cycle. D) minimum wages. Version 1 Page 2 9. Suppose GDP in 2008 is $1000, consumer spending is $600, government purchases are $200, investment spending is $400, and exports are $200. What is the value of imports in this economy? A) $400 B) -$400 C) $200 D) $0 10. An ambiguous change in price and a decrease in quantity are most likely caused by: A) a shift to the left in supply and a shift to the right in demand. B) a shift to the right in supply and a shift to the left in demand. C) no shift in supply and a shift to the left in demand. D) a shift to the left in supply and a shift to the left in demand. Use the following to answer questions 11-12: Table: Price Index A vegetarian consumes 7 lbs of lettuce, 3 lbs of carrots, and 2 lbs of squash in a week. Below is a table of the prices for these goods in $ per lb. Use 2008 as the base year. Year Lettuce Carrots Squash 2008 $1.90/lb $1.10/lb $1.05/lb 2009 $2.00/lb. $1.00/lb $1.30/lb 11. (Table: Price Index) The price index for 2008 is A) 100 B) 95.4 C) impossible to determine without more information D) 104.8 12. (Table: Price Index) The vegetarian's price index rate of inflation from 2008 to 2009 was approximately A) 6.4% B) 9.1% C) 4.8% D) 2.1% Version 1 Page 3 Use the following to answer questions 13-14: Table: Growth Rate Aggregate output at beginning of 2008 $12 billion Population at beginning of 2008 2 million Output increased 3.5% during 2008 Population increased 1.5% during 2008 Aggregate price level remained constant during 2008 13. (Table: Growth Rates) Aggregate output per capita in this economy at the beginning of 2008 was: A) $6 B) $6,000 C) $8,000 D) $12,000 14. (Table: Growth Rates) The growth rate of aggregate output per capita in this economy during 2008 was approximately: A) 3% B) 2.5% C) 2% D) 1.5% 15. The article, "Hey, big number, make room for the rest of us" argues that GDP misses some important factors. The article mentions all of the following factors except: A) health outcomes B) intermediate goods C) educational attainment D) environmental damage 16. Suppose the population of Andover is 200 people, of which 25 are retired and 25 are too young to work. 100 people are employed and of the 50 people that are without jobs half are looking for work and the other half have given up looking for work. What is the unemployment rate in Andover? A) 20% B) 16.7% C) 12.5% D) 25% Version 1 Page 4 17. Over the course of the 20th century, the real GDP per capita in the United States rose mostly as a result of: A) rising employment. B) rising productivity. C) decreasing unemployment. D) rising population. 18. Suppose nominal GDP in 2006 was $14,006 billion while real GDP in 2006 was $12,141 billion (using a base year of 2000). It is likely that real GDP was less than nominal GDP because: A) prices were falling from 2000 to 2006. B) it doesn't include output produced by U.S. companies abroad. C) of the base year selected. D) prices were rising from 2000 to 2006. 19. According to "Boulder, Broomfield rental outlook: Vacancies low, rents high" rents in the Denver metro area have increased 3% while rents in Boulder and Broomfield have increased 18% since 2007. This large increase in rental rates in Boulder can be best explained by: A) supply increasing by more than demand. B) demand and supply increasing the same amount. C) demand increasing and supply decreasing. D) demand increasing by more than supply. Use the following to answer questions 20-21: Table: Exchange Rates Below is a table of recent prices for a gallon of gasoline in different locations in the world and exchange rates: Location Price Exchange Rate Price in USD ($) London, UK 3.26 £ .513 £ per $ Mexico City, Mexico 24.75 Peso 11 Peso per $ Paris, France 4.73 ? .769 ? per $ Chicago, USA $2.13 Version 1 Page 5 20. (Table: Exchange Rates) What is the price of a gallon of gasoline in Mexico City in US Dollars? A) $1.67 B) $6.35 C) $2.25 D) $272.25 21. (Table: Exchange Rates) Where is gasoline the least expensive? A) Mexico City B) London C) Chicago D) Paris 22. During a traditional business cycle, we expect that unemployment and aggregate output are: A) not related. B) positively related. C) approximately the same. D) negatively related. 23. The convergence hypothesis of long run economic growth is most relevant for: A) countries with similar GDP per capita. B) all countries. C) European countries. D) countries with similar institutions. 24. In "Is Trade the Problem?" the author says "While trade can hurt some workers, most economists believe it plays a modest role compared with other forces in the economy." Which of the following "forces" does the article not cite: A) a shortage of educated, skilled workers. B) advances in technology. C) immigration of low skilled workers. D) decline in trade unions. Version 1 Page 6 Use the following to answer questions 25-26: Figure: Labor Market 25. (Figure: Labor Market) In equilibrium, the size of the labor force is: A) 110 B) not enough information to determine C) 100 D) 80 26. (Figure: Labor Market) What is the unemployment rate if the government sets a minimum wage equal to $16? A) 30% B) 27% C) 37.5% D) 73% Version 1 Page 7 Use the following to answer questions 27-30: Figure: Comparative Advantage Eastland and Westland produce only two goods, peaches and oranges, and this figure shows each nation's production possibility frontier for the two goods. 27. (Figure: Comparative Advantage) Westland has an absolute advantage in producing: A) neither oranges or peaches. B) both oranges and peaches. C) oranges only. D) peaches only. 28. (Figure: Comparative Advantage) Suppose without trade Westland produces and consumes 25 oranges and 100 peaches. If 30 oranges are traded for 80 peaches then Westland's gains from trade are: A) 30 oranges, 120 peaches. B) 20 oranges, 80 peaches. C) 5 oranges, 20 peaches. D) 55 oranges, 20 peaches. 29. (Figure: Comparative Advantage) Eastland has a comparative advantage in producing: A) both oranges and peaches. B) oranges. C) neither oranges nor peaches. D) peaches. Version 1 Page 8 30. (Figure: Comparative Advantage) Suppose without trade Eastland produces and consumes 50 oranges and 50 peaches. If 40 oranges are traded for 75 peaches then Eastland's gains from trade are: A) 60 oranges, 75 peaches. B) 100 oranges, 0 peaches. C) 40 oranges, 25 peaches. D) 10 oranges, 25 peaches. 31. Long-run economic growth is: A) lower in countries that enforce property rights. B) higher in countries that invest in research and development. C) lower in countries that invest in infrastructure. D) higher in countries that reduce spending on education. 32. The negative relationship between inflation and unemployment evident in the Phillips Curve broke down in the 1970's for all of the following reasons except: A) higher expected inflation. B) a negative supply shock. C) stagflation. D) a decrease in demand. 33. The production of a Mercedes Benz car (a German company) in Alabama is part of A) US GNP and German GNP B) US GDP and German GDP C) US GNP and German GDP D) US GDP and German GNP 34. You could calculate GDP in all of the following ways except: A) wages plus interest plus rent B) the value of all final goods and services C) the sum of value added D) consumption plus investment plus government spending minus capital inflow 35. Which of the following is true about the three price indexes discussed in class (CPI, PPI, and GDP Deflator): A) The PPI is a leading indicator for the CPI. B) A reduction in the rate at which these indexes increase is know as deflation. C) The inflation rates calculated using these price indexes are typically quite different. D) They are all calculated using a market basket of goods. Version 1 Page 9 Answer Key 1. C 2. D 3. C 4. A 5. D 6. A 7. D 8. C 9. A 10. D 11. A 12. C 13. B 14. C 15. B 16. A 17. B 18. D 19. D 20. C 21. C 22. D 23. D 24. C 25. C 26. B 27. D 28. C 29. B 30. D 31. B 32. D 33. D 34. A 35. A Version 1 Page 10 Will C:\DOCUME~1\Will\LOCALS~1\Temp\btv149.rtf
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