NAME: ______________________________ DATE: _____________    

ECON 1010: PRINCIPLES OF

MACROECONOMICS

MIDTERM EXAM II
SUMMER 2008

MULTIPLE CHOICE QUESTIONS

FORM A
Answer Key
1. B
2. A
3. D
4. C
5. D
6. C
7. B
8. D
9. C
10. C
11. B
12. D
13. A
14. D
15. B
16. A
17. B
18. A
19. C
20. B
21. C
22. C
23. C
24. B
25. A
26. B
27. B
28. D
29. D
30. C
31. B
32. D
33. C
34. A
35. B
36. B
37. D
38. B
39. C
40. B

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Instructions:
Please carefully read each question (underline key points if you have to) then select the
best/correct answer. Fill in the bubble sheet neatly so that the grading machine can
properly grade your answers.

1. In the “paradox of thrift”:

A) profligate behavior during economic tough times has large negative consequences
for society.
B) increased saving by individuals increases their chances of becoming unemployed.
C) firms that are pessimistic about the future lay off the most saving-conscientious
workers.
D) when families and business are feeling pessimistic about the future, they spend
more today.

2. Monetary policy attempts to stabilize the economy during the business cycle through:
A) changes in the quantity of money or the interest rate.
B) changes in tax policy or government spending.
C) discretionary regulation of profits and wages.
D) changes in the inflation rate.

Use the following to answer question 3:

Table: Unemployment and Employment Data

Unemployment and Employment Data

Population 170
Employed 95
Unemployed and looking for work 5
Discouraged workers 3
Retired 60

All figures are in the millions

3. (Table: Unemployment and Employment Data) According to the accompanying table,

the unemployment rate for this economy is:
A) 4.8%.
B) 5.3%.
C) 2.9%.
D) 5.0%.

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 4. Secular long-run growth is the sustained upward trend in:
A) nominal GDP over time.
B) aggregate output per person over the business cycle.
C) aggregate output per person over several decades.
D) real GDP over time.

5. A nominal measure, as opposed to a real measure, is:

A) inversely affected by inflation.
B) a measure that has been adjusted for changes in prices over time.
C) an accurate indicator of the general cost of living.
D) a measure that has not been adjusted for changes in prices over time.

6. As opposed to a closed economy, in an open economy:

A) trade is only beneficial to the relatively larger economy.
B) the exchange rate is determined by the government.
C) there is trade in goods, services, or assets with other countries.
D) specialization in activities with a comparative advantage is not possible.

7. The exchange rate is:

A) the growth rate differential between two countries.
B) the value of one currency in terms of another.
C) the rate at which goods are sold in a country.
D) the interest rate differential between two countries.

8. The reason the dollar value of only final goods and services are counted in GDP is that:
A) intermediate goods reduce GDP.
B) we can only measure the value of final goods and services and can not measure the
value of inputs.
C) only final goods and services matter for the economy.
D) if we counted the value of all goods we would count inputs, like the value of steel in
a new automobile, more than once.

9. The market(s) that channel excess savings of households into investment spending by
firms is(are) known as:
A) the international market.
B) the bond market.
C) the financial markets.
D) the stock market.

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 10. Gross Domestic Product is defined as:
A) disposable income + taxes + investment spending + exports + imports.
B) consumer spending + government purchases + financial spending + exports –
imports.
C) consumer spending + government purchases + investment spending + exports –
imports.
D) consumer spending + government transfers + investment spending + exports –
imports.

11. The Human Development Index is:

A) an incomplete measure of a countries standard of living.
B) used by the U.N. to compare nations by measures other than real GDP per capita.
C) the only way to measure living standards between different countries.
D) a perfect measure of a countries standard of living.

12. Economists frequently use GDP per capita to better reflect:

A) people who are both employed and unemployed
B) people who are employed.
C) the impact of prices on GDP.
D) differences in living standards across countries.

Use the following to answer questions 13-14:

Table: Pizza Economy III

Gino's pizza Bruno's dough Carlo's tomatoes Aldo's pepperoni
2004 units of output 4,000 3,000 2,000 5,000
2004 price per unit $10 $9 $6 $7
2005 units of output 4,000 1,000 1,000 2,000
2005 price per unit $8 $6 $1 $4

13. (Table: Pizza Economy) Considering 2004 as the base year, real GDP in 2005 was:
A) $69,000.
B) $72,000.
C) $114,000.
D) $47,000.

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 14. (Table: Pizza Economy III) Considering 2004 as the base year, nominal GDP in 2005
was:
A) $69,000.
B) $72,000.
C) $114,000.
D) $47,000.

15. The major difference between the Consumer Price Index and the Producer Price Index is
that:
A) the PPI measures the cost of living of self-employed workers and the CPI measures
the cost of living of salaried workers.
B) the PPI is based on the cost of a basket typically purchased by producers, while the
CPI is based on the cost of a basket typically purchased by consumers.
C) the PPI is based on retail prices and CPI is based on wholesale prices.
D) the PPI generally registers a higher rate of inflation than the CPI.

Use the following to answer question 16:

Exhibit: Price Index

Suppose that in the base period a college student buys 20 gallons of gasoline at $2.00 per gallon, 2 CDs
for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per
gallon, CDs cost $12.50 each, and the price of a movie ticket is $7.50.

16. (Exhibit: Price Index) The change in prices for the month is:
A) 6.4%.
B) 7.6%.
C) -6%.
D) 94%.

Use the following to answer question 17:

Scenario: Growth Rates

Suppose that the current real GDP per capita of the United States is $32,000, and its growth rate is 2%
per year. Assume that the real GDP per capital of China is $4000, and its annual growth rate is 7%.

17. (Scenario: Growth Rates) How long will it take the real per capita GDP of the United
States to double?
A) 14 years
B) 35 years
C) 50 years
D) 2.25 years

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 18. Which of the following is a chief measure of economic growth over time?
A) increases in real per capita GDP
B) increases in the available labor supply
C) inflation
D) decline in real interest rates

Use the following to answer questions 19-20:

Figure: Technological Progress and Productivity Growth

19. (Figure: Technological Progress and Productivity Growth) If there is significant

technological progress (all other factors remaining unchanged), then this is best
indicated by a move from?
A) C to B
B) A to B
C) B to C
D) B to A

20. (Figure: Technological Progress and Productivity Growth) If there is an increase in

physical capital per worker (all other factors remaining unchanged), then this is best
indicated by a move from:
A) B to C.
B) A to B.
C) B to A.
D) C to B.

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 21. Natural resources are:
A) the reason behind the fast development of countries like Japan.
B) the reason behind the slow development of countries like Nigeria.
C) less reliable indicators of productivity today than they were a century ago.
D) more important determinants of productivity today than ever before.

22. Human capital is:

A) the machinery and tools that each individual worker owns.
B) robots that can perform tasks that only humans could do in the past.
C) the improvement in labor created by education and knowledge that is embodied in
the work force.
D) all of the above.

23. Economies with higher growth rates tend to be those that:

A) have high levels of government regulation.
B) have large amounts of natural resources.
C) have a stable government that protects property rights.
D) have all of the above.

24. A relatively low saving rate affects productivity growth by:

A) reducing the tax base and preventing the government from providing public goods.
B) depriving investment spending of the funds needed to increase the physical capital.
C) stimulating imports and increasing the trade deficit.
D) promoting consumption spending and depriving investment in human capital of the
funds needed for tuition.

25. All of the following are examples of government policies aimed at promoting economic
growth EXCEPT:
A) implementing a monetary policy that increases inflation.
B) subsidizing education.
C) providing political stability and protecting property rights.
D) building infrastructure and providing public goods.

26. The convergence hypothesis says that:

A) aggregate production functions in different countries will all be the same in the long
run.
B) differences in real GDP per capita among countries tend to narrow over time.
C) differences in real GDP per capita among countries tend to increase over time.
D) differences in real GDP per capita do not have much affect on living standards in
the long run.

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Use the following to answer question 27:

Figure: Market for Loanable Funds with Government Borrowing

27. (Figure: Market for Loanable Funds with Government Borrowing) According to the
accompanying figure, after an increase in government borrowing, the new equilibrium
interest rate will rise from ______ and the amount of private borrowing will _______.
A) 6% to 8%; rise
B) 6% to 8%; fall
C) 6% to 8%; be indeterminate
D) 6% to 8%; stay the same

28. Crowding out means:

A) some bond holders will be squeezed out of the market.
B) there are too many players in the financial markets.
C) private savings decreases when the government borrows.
D) private investment decreases when the government borrows.

29. A business will want to borrow to undertake an investment project when the rate of
return on that project is:
A) greater than the exchange rate.
B) less than the interest rate.
C) equal to the inflation rate.
D) greater than the interest rate.

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 30. To help increase investment spending, the government can:
A) raise taxes on the returns from bonds while lowering taxes on stock dividends.
B) lower taxes on investment spending while raising taxes on savings, so that total tax
revenue remains constant.
C) lower taxes on the returns from savings, so that total savings increase and the
interest rate falls.
D) lower taxes on consumption, so that disposable income rises.

31. Stagflation is a combination of:

A) decreasing unemployment and increasing inflation.
B) increasing unemployment and increasing inflation.
C) decreasing unemployment and decreasing inflation.
D) increasing unemployment and decreasing inflation.

32. All of the following will increase the economy's potential output EXCEPT:
A) an increase in human capital.
B) an increase in physical capital.
C) technological innovation.
D) a decrease in the aggregate price level.

33. In the long run, nominal wages are:

A) sticky upward but flexible in a downward direction.
B) sticky in both an upward and downward direction.
C) flexible because contracts and informal agreements are renegotiated in the long run.
D) sticky downward but flexible in an upward direction.

34. The point where the long-run aggregate supply curve intercepts the horizontal axis:
A) is the economy's potential output.
B) is the level of real GDP the economy would produce if all prices were flexible and
wages were fixed.
C) is the point of macroeconomic equilibrium.
D) is all of the above.

35. Suppose that a presidential candidate who promised large personal income tax cuts is
elected. Which of the following is most likely to occur?
A) a decrease in aggregate demand
B) an increase in aggregate demand
C) a decrease in short-run aggregate supply
D) an increase in short-run aggregate supply

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 36. According to the interest rate effect, an increase in the price level causes people to:
A) to decrease their money holdings, which decreases interest rates and increases
investment spending.
B) increase their money holdings, which increases interest rates and decreases
investment spending.
C) decrease their money holdings, which increases interest rates and decreases
investment spending.
D) to increase their money holdings, which decreases interest rates and decreases
investment spending.

37. The multiplier is:

A) MPS/MPC.
B) 1/[MPC].
C) 1[1+MPC].
D) 1/[1-MPC].

38. Suppose that the marginal propensity to consume is 0.8, and investment spending
increases by $100 billion. The increase in aggregate demand is:
A) $125 billion, composed of $100 billion in investment spending and $25 billion in
consumption.
B) $500 billion, composed of $100 billion in investment spending and $400 billion in
consumption.
C) $100 billion, the amount of investment spending.
D) $80 billion, composed of $100 billion in investment spending and a decrease in
consumption of $20 billion.

39. In the long run, inflationary and recessionary gaps are self-correcting because,
eventually:
A) nominal wages rise and fall in order to close a recessionary gap or an inflationary
gap.
B) the multiplier compensates the negative supply or demand shocks.
C) nominal wages rise and fall in order to close an inflationary or a recessionary gap.
D) the government applies the right combination of fiscal and monetary policies.

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Use the following to answer question 40:

Figure: AD-AS Model 1

40. (Figure: AD-AS Model 1) If the economy is at point X, which of the following
describes the likely adjustment to long-run equilibrium?
A) Nominal wages decrease, and the short-run aggregate supply curve shifts left until
the economy reaches long-run equilibrium.
B) Nominal wages decrease, and the short-run aggregate supply curve shifts right until
the economy reaches long-run equilibrium.
C) Nominal wages decrease, and the aggregate demand curve shifts left until the
economy reaches long-run equilibrium.
D) Nominal wages increase, and the aggregate demand curve shifts right until the
economy reaches long-run equilibrium.

  

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