ECO 2013-02

Second Midterm, 20 October 2003

Dr. Cobbe

Name___________________________________ Bubble in on scantron NAME, SOCIAL SECURITY #, and BEST response to each question. You may write on the questions. This exam consists of 56 questions. In taking this test, I certify that I have complied fully with the FSU Student Academic Honor Code. Signature:__________________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A new technology is discovered that results in all new cars producing 50 percent less pollution. The technology costs nothing to produce. As a result of the technology, there is a reduction in the number of visits people make to the doctor to complain of breathing difficulties. Which of the following is true? A) GDP will decrease as a result of fewer doctor services being provided. B) GDP is not affected. C) GDP will increase to reflect the improvement in the health of the population. D) GDP will increase to reflect the improvement in the health of the population, and the likely increase in the cost of the car. 2) You hire some of your friends to help you move to a new house and pay them a total of $200 and buy them dinner at Pizza Hut. Which of the following is true? A) The $200 will be counted as part of GDP but not the dinner at Pizza Hut. B) If your friends do not report the $200 on their tax forms, it becomes part of the underground economy. C) The dinner at Pizza Hut should be counted as part of GDP but not the $200. D) Hiring your friends is an illegal activity and should not be counted in GDP. 3) The measurement of GDP handles household production by A) estimating a dollar value of the goods purchased to do housework. B) estimating a dollar value of the services provided. C) ignoring it. D) including it in exactly the same way that all other production is included. 4) If you mow the lawn yourself, the lawn mowing is considered household production. If you pay Larry's Lawn Service to mow your lawn, the lawn mowing is considered A) a leisure time activity. B) a service, that will be counted as part of GDP. C) a value added that can't be counted as part of GDP because the mower is out of school. D) rent, and therefore is counted as part of GDP. 5) If real GDP is greater than nominal GDP then the GDP deflator ____. A) is greater than 100 B) is less than 100 C) is equal to 100 D) We need to choose a new base year. 6) If nominal GDP is $1,000 and the GDP deflator is 250, then real GDP is A) $1,000. B) $400. C) $250. D) impossible to determine with the information given.

7) At the movie theatre, the price of a box of popcorn is $2.25. The movie theatre buys the corn kernels for 25, cooking oil for 10, butter for 10, salt for 2, and the box for 3. The movie theatre's value added when it produces a box of popcorn is ____. A) $2.25 B) $1.75 C) $2.00 D) $0.50 8) One reason the total sum of all five income categories does not equal GDP exactly is that A) GDP values goods and services at market prices and the income approach values them at factor cost. B) GDP values goods and services at retail prices and the income approach values them at wholesale cost. C) taxes are generally larger than subsidies and the depreciation of capital is negligible. D) GDP does not include depreciation, which is part of the five income categories. 9) Which of the following would NOT be included in the expenditure approach to calculating GDP? A) government purchases of goods and services B) investment C) net exports of goods and services D) net interest 10) Suppose the U.S. government borrows $1 billion that it pays to Saudi Arabia for crude oil for the U.S. strategic reserve. Saudi Arabia uses the $1 billion to purchase planes made in Washington by Boeing. This series of transactions causes an increase in government purchases of goods and services A) and an increase in GDP. B) but no increase in GDP. C) and an increase in net exports of goods and services. D) and a decrease in net exports of goods and services. 11) In one year, a firm increases its production by $9 million worth of computers and increases sales by $8 million. All other things in the economy remaining the same, which of the following is true? A) GDP increases by $8 million and inventory investment decreases by $1 million. B) GDP increases by $9 million and inventory investment increases by $1 million. C) Inventory investment decreases by $1 million. D) GDP increases by $8 million and investment increases by $1 million. 12) Total expenditure equals A) C + I + G + (X-M).

B) C + I + G - (X-M).

C) C + I - G + (X-M).

D) C - I + G + (X-M).

13) When the unemployment rate is ____ the natural unemployment rate, real GDP is ____. A) above; increasing B) above; above potential GDP C) below; above potential GDP D) below; increasing 14) When the economy is at full employment, A) the natural unemployment rate equals zero. B) the amount of cyclical unemployment equals zero. C) the amount of structural unemployment equals zero. D) there is no unemployment.

15) Which of the following people is most likely frictionally unemployed? A) Cara, an executive who lost her job because her company could not compete with foreign competition and whose skills are not wanted by other companies. B) Tran, a building construction supervisor who was fired because of a downturn in the building industry that is the result of a general downturn in the economy. C) Eugene, a pharmaceutical drug salesman who was laid off when his company lost a large contract with an HMO. D) Amanda, a sales associate at J.C. Penney who quit her job to attend school full time. Labor Market Flows During 2002 Number of People Hires and recalls 1,000 Job losers 500 Job leavers 300 Entrants 200 Reentrants 300 Withdrawals 300 16) On December 31, 2002, on a remote northern island there were 18,000 people employed, 2,000 people unemployed, and 5,000 people not in the labor force. The table above gives information taken from a labor survey on this island. The unemployment rate between December 2002 and December 2003 A) increases B) decreases C) increases then decreases D) does not change 17) Potential GDP is A) the value of the maximum amount of output that can be produced at any given time. B) the amount of real GDP that the economy would produce if it were at full employment. C) another name for real GDP. D) the amount of real GDP that the economy would produce if the unemployment rate was zero. 18) The total U.S. labor force participation rate increased since 1962 because A) the female participation rate increased. B) more men are retiring early. C) fewer women are attending college. D) many blue-collar jobs with rigid work hours have been created in the last decade. 19) During a recession, the unemployment rate ____ and the percentage of part-time workers who are involuntary part-time workers ____. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Employment Unemployment Country (millions of people) (millions of people) Canada 4.5 1.2 Japan 64.2 3.2 United States 133.5 5.9 20) The table above gives the number of people employed and the number of people unemployed in Canada, Japan, and the United States on the average during 1999. In 1999, the unemployment rate in ____ was the highest and the unemployment rate in ____ was the lowest. A) the United States; Japan B) Canada; the United States C) Japan; Canada D) Canada; Japan

21) In a country with a working-age population of 200 million, 140 million people are employed and 20 million are unemployed. The size of the labor force is A) 200 million. B) 160 million. C) 140 million. D) 20 million. 22) You borrow at a nominal interest rate of 10 percent. If the inflation rate is 4 percent, then the real interest rate is approximately A) the $10 in interest you have to pay. B) 16 percent. C) 2.5 percent. D) 6 percent. 23) In 2002, in New York, apples cost $1.49 a pound. Suppose the CPI was 120 in 2002 and 140 in 2003. If there is no change in the real value of an apple in the year 2003, how much would a pound of apples sell for in 2003? A) $2.74 B) $1.69 C) $1.66 D) $1.74 24) You can put your savings into an account that earns 5 percent per year or you can put your savings into an account that earns 1 percent plus the rate of inflation per year. Which of the following is true? A) If inflation is less than 4 percent, you prefer the 1 percent plus account. B) If inflation is greater than 4 percent, you prefer the 5 percent account. C) If inflation is 3 percent, you prefer the 5 percent account. D) You are always better off with the 5 percent account. 25) If your real income in base year prices is $50,000 when the CPI is 170, what is your nominal income? A) $29,411.76. B) $50,000.00. C) $85,000.00. D) The nominal income is impossible to determine with the information given. 26) Over the last decade, the price of a dishwasher has remained relatively constant while the quality of dishwashers has improved. The CPI A) is adjusted monthly to reflect the improvement in quality. B) is increased monthly to reflect the increased quality of dishwashers. C) has an upward bias if it is not adjusted to take account of the higher quality. D) has an upward bias because it does not reflect the increased production of dishwashers. 27) Suppose the basket of consumer goods and services costs $180 using the base period prices, and the same basket of goods and services costs $300 using the current period prices. The CPI for the current year period equals A) 166.7. B) 66.7. C) 160.0. D) 60.0. 28) If a country has a CPI of 105.0 in 2002 and a CPI of 102.0 in 2003, then A) the average prices of goods and services increased between 2002 and 2003. B) the average prices of goods and services decreased between 2002 and 2003. C) the average quantity of goods and services decreased between 2002 and 2003. D) there was an error when calculating the CPI in 2003. 29) If the price level decreases from one year to the next, then the inflation rate is A) positive. B) above 100. C) below 100.

D) negative.

30) The existence of union wages, efficiency wages, and the minimum wage A) raises the real wage rate above the equilibrium wage and creates a shortage of labor. B) lowers the real wage rate below the equilibrium wage and creates a shortage of labor. C) raises the real wage rate above the equilibrium wage and raises the natural unemployment rate. D) does not have an impact on the equilibrium wage rate or on the amount of unemployment. Real wage rate Quantity of labor demanded (1996 dollars (millions of hours per hour) per month) 3 4 5 6 7 80 60 40 20 15 Quantity of labor supplied (millions of hours per month) 20 30 40 50 60

31) The table above gives the labor market for a small foreign economy. Equilibrium in the labor market occurs at a real wage rate of A) $3.00 per hour. B) $4.00 per hour. C) $5.00 per hour. D) $6.00 per hour. 32) With fixed quantities of capital, land, and entrepreneurship and fixed technology, actual real GDP produced depends on? A) the quantity of labor employed. B) the inflation rate. C) the price level. D) all of the above. 33) The quantity of labor demanded definitely increases if the A) real wage rate rises. B) real wage rate falls. C) nominal wage rate rises. D) nominal wage rate falls. 34) Diminishing returns means that A) each additional unit of labor employed produces successively less extra real GDP. B) hiring more labor results in less real GDP. C) each extra unit of real GDP produced requires less labor. D) each additional unit of labor produces successively more real GDP. 35) If the economy is fully employed, which of the following is true? A) The price level equals 100. B) Real and nominal GDP are equal. C) Real and potential GDP are equal. D) The unemployment rate is zero. 36) If the equilibrium real GDP is less than potential GDP, the economy is in ____ full-employment equilibrium; if equilibrium real GDP is greater than potential GDP, the economy is in ____ full-employment equilibrium. A) an above; an above B) an above; a below C) a below; an above D) a below; a below 37) A tax cut increases household expenditure, and so ____ aggregate demand and shifts the AD curve ____. A) decreases; rightward B) increases; leftward C) increases; rightward D) decreases; leftward

38) If the costs of production increase, there is A) an increase in aggregate supply and the AS curve shifts rightward. B) a decrease in aggregate supply and the AS curve shifts leftward . C) an increase in the quantity of real GDP supplied and a movement up along the AS curve. D) a decrease in the quantity of real GDP supplied and a movement down along the AS curve. 39) If the prices firms receive for their products are greater than they expected, firms A) decrease output with layoffs or shutting down their production facility. B) borrow money. C) produce more output. D) do none of the above. 40) If there is no Ricardo-Barro effect, a government budget surplus means that the real interest rate A) increases because the investment demand curve shifts rightward. B) falls because the investment demand curve shifts leftward. C) increases because the saving supply curve shifts leftward. D) falls because the saving supply curve shifts rightward. 41) During 2004, the world has net taxes of $5 trillion, government purchases of $4 trillion, and private savings of $6 trillion. Investment equals A) $5 trillion. B) $7 trillion. C) $10 trillion. D) $15 trillion. 42) The crowding-out effect describes how a government budget ____ decreases equilibrium investment by ____ the real interest rate. A) deficit; raising B) deficit; lowering C) surplus; raising D) surplus; lowering 43) If the economy enters a recession, the investment demand curve shifts ____ and the real interest rate ____. A) rightward; rises B) rightward; falls C) leftward; rises D) leftward; falls

44) In the figure above, if the interest rate is currently 2 percent then A) the interest rate is below equilibrium. B) the interest rate is above equilibrium. C) there is an excess supply of saving. D) the investment demand curve will shift to the right as firms increase investment. 45) Suppose that there is an increase in future expected disposable income and simultaneously an increase in the profitability of investment. As a result, the equilibrium real interest rate ____ and the equilibrium quantity of investment ____. A) increases; might increase, decrease, or not change B) increases; increases C) increases; decreases D) decreases; might increase, decrease, or not change 46) An increase in expected profits brings about a A) movement up along the investment demand curve. B) movement down along the investment demand curve. C) rightward shift of the investment demand curve. D) leftward shift of the investment demand curve. 47) Which of the following formulas is correct? A) Net investment = gross investment + depreciation B) Net investment = gross investment + capital C) Net investment = gross investment - depreciation D) Gross investment = net investment - depreciation 48) At the beginning of the year, AAA-1 Towing owns trucks and buildings for a total value of $1 million. During the year, it invests $250,000 to replace towing trucks worth $230,000 destroyed in a flood and to cover $50,000 worth of depreciation. AAA-1 Towing's capital stock at the end of the year was A) $970,000. B) $1,250,000. C) $950,000. D) $1,280,000.

49) Neoclassical growth theory A) predicts that growth rates and real GDP per person throughout the world will eventually converge. B) predicts that the faster growing underdeveloped nations will overtake the industrial nations. C) predicts that nations that enjoy a technological advantage will maintain that advantage. D) makes no predictions about the relative growth of real GDP among countries. 50) New growth theory predicts that A) national growth rates will not necessarily converge over time. B) national growth rates will slowly converge over time. C) countries with the highest real GDP per person are likely to be the first to experience a slowing economy. D) national growth rates will rise and fall as population growth rates change. 51) According to classical growth theory, following an increase in capital per hour of labor and a technological advance, real GDP per hour of labor ____. A) grows indefinitely B) grows until it equals capital per hour of labor C) grows by one third D) eventually returns to the subsistence level 52) An increase in the amount of capital per hour leads to ____ the productivity curve. A) a downward movement along B) an upward movement along C) an upward shift of D) a downward shift of

53) When technology advances, ____. A) the productivity curve shifts upward B) there is a movement upward along the productivity curve C) capital per hour of labor decreases D) labor productivity decreases because more people enter the labor force

54) Which of the following statements is correct? A) Growth in real GDP is determined only by growth in aggregate hours. B) Growth in real GDP is determined only by growth in labor productivity. C) Growth in real GDP is determined by the combination of growth in aggregate hours and growth in labor productivity. D) Growth in real GDP has nothing to do with growth in aggregate hours or with growth in labor productivity. 55) Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were employed. This year real GDP is $100 million and 950,000 workers are employed. Hence, labor productivity has A) increased. B) decreased. C) remained constant. D) might have changed, but more information is needed to determine if it changed. 56) If real GDP increases by 3 percent and at the same time the population increases by 1 percent, then real GDP per person grows by about A) 4 percent. B) 2 percent. C) 3 percent. D) by some amount that cannot be determined without more information.

Answer Key Testname: MT2F3.TST

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37) 38) 39) 40) 41) 42) 43) 44) 45) 46) A B C B B B B A D A B A C B C B B A A B B D D C C C A B D C C A B A C C C B C D B A D A A C 1

Answer Key Testname: MT2F3.TST

47) 48) 49) 50) 51) 52) 53) 54) 55) 56)

C A A A D B A C A B