1. No category

Econ 2105 Principles of Macroeconomics
Spring 2012
Sample Exam 1
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1. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided.
b. Fortunately, government policies are designed to promote both equity and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equity can both be achieved if the economic pie is cut into equal pieces.
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2. Trade can benefit a family
a. by allowing the family to buy a greater variety of goods and services at a lower cost.
b. by allowing each person to specialize in the activities he or she does best.
c. only if the family is not in economic competition with other families.
d. All of the above are correct.
e. Both a and b are correct.
____
3. In a market economy, economic activity is guided by
a. the government.
b. corporations.
c. central planners.
d. prices.
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4. One advantage market economies have over central planning is that market economies
a. provide an equal distribution of goods and services to consumers.
b. establish government economic control.
c. solve the problem of scarcity.
d. are more efficient.
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5. An externality is the impact of
a. one person's actions on the well-being of a bystander.
b. a person's actions on that person's well-being.
c. society's decisions on the well-being of society.
d. society's decisions on the well-being of one person in the society.
____
6. Which is the most correct statement about the invisible hand?
a. The invisible hand always ensures both equity and efficiency.
b. The invisible hand cannot ensure either equity or efficiency.
c. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
d. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency.
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7. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States
can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?
a. U.S. textile workers belong to a union.
b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.
c. Labor is more productive making cotton cloth with a mechanical loom than with a hand
loom.
d. Bangladesh has a low-wage policy to make its textile industry more competitive in world
markets.
1
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8. Which of the following
g is the most correct statem
ment about thee relationship
p between infllation and
yment?
unemploy
a. In thee short run, reeducing inflattion is associaated with falliing unemploy
yment.
b. In thee short run, reeducing inflattion is associaated with risin
ng unemploym
ment.
c. In thee long run, red
ducing inflatiion is associatted with fallin
ng unemploym
ment.
d. In thee long run, red
ducing inflatiion is associatted with risin
ng unemploym
ment.
____
9 Senator Sm
9.
mart is trying
g to convince workers in heer district thaat trade with other countriees is beneficiaal. Senator
Smart arg
gues that tradee can be beneeficial
a. only if
i it allows us to obtain thin
ngs that we co
ouldn't makee for ourselvess.
b. becau
use it allows specialization,, which increaases total outp
put.
c. to us if
i we can gain
n and the otheers involved in
i the trade lo
ose.
d. in onlly a limited nu
umber of circcumstances beecause otherss are typically
y self-interesteed.
____
100. Factors off production are
a
a. the mathematical
m
calculations
c
fiirms make to determine prroduction.
b. weath
her and sociall and politicall conditions th
hat affect pro
oduction.
c. the ph
hysical relatio
onships betweeen economicc inputs and outputs.
o
d. inputs into the pro
oduction process.
____
111. The two lo
oops in the ciircular-flow diagram
d
repreesent the flow
w of
a. goodss and the flow
w of services.
b. dollarrs and the flow
w of financiall assets.
c. inputs and outputss and the flow
w of dollars.
t flow of co
onsumer good
ds.
d. capitaal goods and the
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122. Which of the following
g is the most accurate
a
stateement about production
p
po
ossibilities?
p
only on
o the production possibillities frontier..
a. An ecconomy can produce
b. An ecconomy can produce
p
at any
y point insidee or outside a production possibilities
p
frrontier.
c. An ecconomy can produce
p
at any
y point on or inside the production posssibilities fron
ntier,
but no
ot outside thee frontier.
d. An ecconomy can produce
p
at any
y point insidee the productiion possibilitiies frontier, but
b not
on or outside the frrontier.
Figure 2-55
____
133. Refer to Figure
F
2-5. Th
he shift of the frontier from
m A to B was most
m
likely caaused by whicch of the follo
owing?
a. technological imprrovement in the production
n of batteries
ble in the econ
nomy
b. more labor availab
c. a geneeral technolog
gical breakthrrough
d. more capital availa
able in the eco
onomy
2
Figure 2-77
____
144. Refer to Figure
F
2-7. Wh
hich of the fo
ollowing woulld most likely
y have caused
d the productiion possibilitiies frontier to
o
shift outw
ward from A to
t B?
a. an inccrease in resources necessaary to produce capital good
ds
b. an im
mprovement in
n the technolo
ogy of produccing consumeer goods
c. an inccrease in the overall
o
level of
o technology
y in the econom
my
d. an inccrease in unem
mployment
on Possibilities for Toylan
nd
Productio
Table 2-1
Dolls
400
Fire Tru
ucks
0
300
200
100
0
200
350
450
500
____
155. Refer to Table
T
2-1. Wh
hat is the oppo
ortunity cost to Toyland off increasing th
he production
n of dolls from
m 200 to 300??
a. 200 firre trucks
b. 150 firre trucks
c. 100 firre trucks
d. It is im
mpossible to tell
t what the opportunity cost is since in
n this examplle costs are no
ot
constaant.
____
166. Economissts consider normative stattements to be
a. descriiptive, makin
ng a claim abo
out how the world
w
is.
b. statem
ments about th
he normal con
ndition of thee world.
c. prescrriptive, makin
ng a claim about how the world
w
ought to
t be.
d. statem
ments which establish
e
prod
duction goals for the econo
omy.
____
177. Almost alll economists agree that ren
nt control
a. impro
oves the availlability and qu
uality of houssing.
b. allow
ws the market for housing to work more efficiently.
c. adverrsely affects th
he availability
y and quality of housing.
d. is a veery inexpensiive way to hellp the most needy
n
memberrs of society.
____
188. A professional gambler moves from
m a state wherre gambling iss illegal to a state where gaambling is leg
gal. This
move
G
a. necessarily raises GDP.
b. necessarily decreasses GDP.
n't change GD
DP because gaambling is nev
ver included in
i GDP.
c. doesn
d. doesn
n't change GD
DP because in either case hiis income is in
ncluded.
3
____
19. Darla, a Canadian citizen, only works in the United States. The value added to production from her employment
is
a. included in both U.S. GDP and U.S. GNP.
b. included only in U.S. GDP.
c. included only in U.S. GNP.
d. not included in either U.S. GDP or U.S. GNP.
____
20. Which of the following is counted in U.S. GDP?
a. final goods and services purchased by the government
b. both the peaches used by a bakery to make peach pies and the peach pies
c. goods and services produced by U.S. citizens working in foreign countries
d. None of the above are correct.
____
21. A U.S. publisher purchases new American made computers. This purchase by itself makes
a. investment and GDP higher.
b. investment higher and leaves GDP unchanged.
c. investment higher and reduces GDP.
d. neither investment nor GDP higher.
____
22. If a U.S. household buys a $75 handbag from Italy, U.S. consumption increases by $75, U.S.
a. imports increase by $75, and U.S. GDP increases by $75.
b. imports increase by $75, but U.S. GDP is unaffected.
c. imports are unaffected, and U.S. GDP is unaffected.
d. exports increase by $75, and U.S. GDP increases by $75.
____
23. Which of the following statements about GDP is most accurate?
a. Nominal GDP values production at current prices, while real GDP values production at
constant prices.
b. Nominal GDP values production at constant prices, while real GDP values production at
current prices.
c. Nominal GDP values production at market prices, while real GDP values production at
the cost of the resources used in the production process.
d. Nominal GDP consistently underestimates the value of production, while real GDP
consistently overestimates the value of production.
____
24. Suppose GDP consists of wheat and rice. In 2002, 20 bushels of wheat are sold at $4 per bushel, and 10 bushels of
rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the price of rice was $1 per bushel in
2001, the base year, nominal 2002 GDP is
a. $100, real 2002 GDP is $50, and the GDP deflator is 50.
b. $50, real 2002 GDP is $100, and the GDP deflator is 200.
c. $100, real 2002 GDP is $50, and the GDP deflator is 200.
d. $40, real 2002 GDP is $100, and the GDP deflator is 50.
____
25. If a small country has current nominal GDP of $20 billion and a GDP deflator of 50, what is its real GDP?
a. $100 billion
b. $40 billion
c. $10 billion
d. $4 billion
4
____
26. Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities,
and desirable moral attributes of the population, are not measured as part of GDP.
a. Therefore, GDP is not a useful measure of society's welfare.
b. However, GDP is still a useful measure of society's welfare because providing these other
attributes is the responsibility of government.
c. However, GDP is still a useful measure of society's welfare because it measures a nation's
ability to purchase the inputs that can be used to help produce the things that contribute
to welfare.
d. However, GDP is still the best measure of society's welfare because these other values
cannot actually be measured.
____
27. For any given year, the CPI is the price of the basket of goods and services in the
a. given year divided by the price of the basket in the base year, then multiplied by 100.
b. given year divided by the price of the basket in the previous year, then multiplied by 100.
c. base year divided by the price of the basket in the given year, then multiplied by 100.
d. previous year divided by the price of the basket in the given year, then multiplied by 100.
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28. The price index in the first year is 125, in the second year is 150, and in the third year is 200. What is the inflation
rate between the first and second year and between the second and third year?
a. 20 percent between the first and second year, 33 percent between the second and third
year
b. 25 percent between the first and second year, 75 percent between the second and third
year
c. 25 percent between the first and second year, 50 percent between the second and third
year
d. 50 percent between the first and second year, 100 percent between the second and third
year
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29. From October 2001 to October 2002 the CPI in Canada rose from 116.5 to 119.8. In Mexico it rose from 97.2 to
102.3. What were the inflation rates for Canada and Mexico?
a. 3.3 percent and 6.7 percent
b. 3.3 percent and 5.1 percent
c. 2.8 percent and 6.7 percent
d. 2.8 percent and 5.2 percent
For the following question, consider the table below.
Table 24-4
Food and Beverages
Housing
Transportation
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2000
168.4
169.6
153.3
2001
173.6
176.2
154.3
30. Refer to Table 24-4. Among these categories, what was the highest rate of inflation?
a. 6.6 percent
b. 5.2 percent
c. 3.9 percent
d. 3.1 percent
5
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31. The substitution bias in the consumer price index refers to the
a. substitution of new goods for old goods in the purchases of consumers.
b. substitution of quality for quantity in consumer purchases over time.
c. fact that consumers substitute toward goods that have become relatively less expensive.
d. substitution of new prices for old prices in the basket of goods from one year to the next.
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32. Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy
causes the CPI to overestimate the cost of living. This is so because
a. new goods and services are always of higher quality than existing goods and services.
b. new goods and services cost less than existing goods and services.
c. new goods and services cost more than existing goods and services.
d. when a new good is introduced, it gives consumers greater choice, thus reducing the
amount they must spend to maintain their standard of living.
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33. Which of the problems in the construction of the CPI is the creation of the mobile phone most relevant to?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. income bias
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34. An important difference between the GDP deflator and the consumer price index is that
a. the GDP deflator reflects the prices of goods and services bought by producers, whereas
the consumer price index reflects the prices of goods and services bought by consumers.
b. the GDP deflator reflects the prices of all final goods and services produced domestically,
whereas the consumer price index reflects the prices of some goods and services bought
by consumers.
c. the GDP deflator reflects the prices of all final goods and services produced by a nation's
citizens, whereas the consumer price index reflects the prices of final goods and services
bought by consumers.
d. the GDP deflator reflects the prices of all goods and services bought by producers and
consumers, whereas the consumer price index reflects the prices of final goods and
services bought by consumers.
____
35. The price of imported athletic shoes produced by a U.S. company operating in Thailand increases. By itself what
effect will this change have on the GDP deflator and on the CPI?
a. The GDP deflator and the CPI will both increase.
b. The GDP deflator will increase and the CPI will be unaffected.
c. The GDP deflator and the CPI will both be unaffected.
d. The GDP deflator will be unaffected and the CPI will increase.
____
36. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2003 for $25. If the
price index was 38.8 and is 180 in 2003, what's the price of a 1970 bag of groceries in 2003 prices?
a. $25.00
b. $29.11
c. $37.11
d. None of the above are correct?
____
37. Andrew is offered a job in Des Moines where the CPI is 80 and a job in New York where the CPI is 125. Andrew's
job offer in Des Moines is for $42,000. How much does the New York job need to pay in order to make the two
salaries have almost the same purchasing power?
a. $74,667
b. $65,625
c. $60,900
d. $52,500
6
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38. If the nominal interest rate is 8 percent and rate of inflation is 2 percent, the real interest rate is
a. 16 percent.
b. 10 percent.
c. 6 percent.
d. 4 percent.
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39. Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the loan in
full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could
before he loaned Elwood the $5,000. From this we can conclude that the rate of inflation during the year was
a. 2.5 percent.
b. 6 percent.
c. 8 percent.
d. 14 percent.
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A
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