Quiz1testbank
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Quiz1testbank

Course Number: ECON 001, Fall 2010

College/University: UPenn

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QUIZ 1 TEST BANK If you want partial credits always show your calculations. Exercise 1: The economy of McNeil Building is very small and the transactions per year are so few that we can keep track of all of them. You have been hired as the chief of the bureau statistics of the McNeil Building. Some of the people who live in this small country are: Milton (who sells tomatoes), Robert (who owns a wheat farm) and...

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1 QUIZ TEST BANK If you want partial credits always show your calculations. Exercise 1: The economy of McNeil Building is very small and the transactions per year are so few that we can keep track of all of them. You have been hired as the chief of the bureau statistics of the McNeil Building. Some of the people who live in this small country are: Milton (who sells tomatoes), Robert (who owns a wheat farm) and Edward (who has a bakery). Theseareallthetransactionsforthelastthreeyears: Year2008 Milton sells 3 pounds of tomatoes at 20 utils each (the currency of McNeil Building) to a final consumer. Someoneboughtasecondhandbikefor300utils. Robertsells4poundofwheattoEdwardfor15utilseach. Edward uses those 4 pounds to produce 4 pounds of bread. He sells each pound of that bread for25utils. Year2009 Fact: The government of the McNeil Building decides to stimulate the economy printing a lot more Money. Miltonsells3poundsoftomatoesat27utilseach. Robertsells4poundofwheattoEdwardfor20utilseach. Edward uses those 4 pounds to produce 4 pounds of bread. He sells each pound of that bread for32utils. Year2010 Fact:Miltondiscoversanewtechnologyforproducingtomatoes. Now Milton can produce 7 pounds of tomatoes. He sells 4 of those rounds to Robert at 25 utils each,andheexportstherestofthemtotheAnnenbergHallforthesameprice. WiththeMoneyoftheexportedtomatoesMiltongets2importedcarrots. Robertsells4poundofwheattoEdwardfor22utilseach. Edward uses those 4 pounds to produce 4 pounds of bread. He sells each pound of that bread for35utils. TherepresentativeconsumptionbasketoftheMcNeilbuildingis3poundsoftomatoesand3poundsof bread.Useyear2008asthebaseyear. a) (5points)ComputeforeachyeartherealGDP,thenominalGDP,theGDPdeflatoradtheCPIfor thissmallcountry. Page 1 of 11 b) (2 points) Use your computations to explain the differences between the CPI and the GDP deflator. Exercise 2: Youarethenewchiefeconomistofasmallcountrywiththefollowinginformation: Inthis countrythereareonly4goods:Books(QB); Magazines(QM); Films (QF);andCDs(QCD). WecandenotethepricesofthosegoodsrespectivelybyPB,PM,PF,andPCD. AllthebooksandtheMagazinesareproducedinthecountryandconsumedinsidethecountry. AlltheCdsareimported(notproducedinthecountry)andconsumedinthecountry Allthefilmsareproducedinthecountryandexported(notconsumedinthecountry). Belowisalltherelevantdataforthiscountry: PB 2008 2009 2010 $500 $550 $600 QB 350 420 450 PM $300 $350 $380 QM 250 220 180 PF $250 $300 $350 QF 200 180 220 PCD $80 $85 $90 QCD 120 140 160 a) (4 points) Compute for each year the real GDP, the nominal GDP and the GDP deflator adforthissmallcountry.Use2008asabaseyear. b) (3 points) What is the basket that you should use to calculate the CPI if you use 2008 as abaseyear?Useitforcomputingthatindex. Exercise 3: The Table below shows some data from the imaginary country of Gagaland in 2008 and 2009 (a) (3points)CalculatetheGDPin2008andstatewhichmethodyouareusing (b) (3points)CalculatetheGDPin2009andstatewhichmethodyouareusing (c) (1points)CalculatethegrowthrateofGDPbetween2008and2009 Item Billions of Gaga$ 2008 500 791 394 67 273 209 200 322 38 366 2009 789 800 200 50 300 250 100 129 123 123 Wages paid to labor: Consumption expenditure: Taxes: Transfer payments: Profits: Investment: Government expenditure: Exports: Saving: Imports: Page 2 of 11 Exercise 4: Below is the price and quantity sold of golf balls and golf clubs in 2003 and 2004 in Scotland. Assume Scotland only produces those two goods. 2003 Quantity Price Golf balls Golf clubs 500 80 $5/ball $200/club 2004 Quantity Price Golf balls Golf clubs 600 50 $4/ball $250/club (a) (3points)CalculatethenominalGDPandtherealGDPforScotlandin2003and2004using2003 asthebaseyear (b) (4points)Calculatetheinflationratebetween2003and2004using2003asthebaseyear.Re calculatetheinflationrateusing2004asthebaseyearinstead. Exercise 5: There are 3 countries in this problem. They are creatively named, A, B and C. The population of each country (in millions) and REAL GDP are given in the following table. Country A Pop GDP (mil) (mil $*) 1 1 1 1.1 1 1.21 Country B Pop GDP (mil) (mil $*) 1 1 0.9 1 0.81 1 Country C Pop GDP (mil) (mil $*) 1 1 1.1 1.2 1.21 1.44 Year 1 2 3 * Year 1 prices (a) (4points)What is the growth (in %) in Population and GDP for countries A and B? Write your answer in the following table. A Year Pop Growth (%) GDP Growth (%) Pop Growth (%) B GDP Growth (%) 1 to 2 2 to 3 Page 3 of 11 Is the following true or false for this problem? Increasing GDP by 10% improves GDP per capita as much as reducing the population by 10% (b) (3points)Consider now country C. Suppose that 20% of the population in Year 3 is noncitizen. The remaining 80% are citizens. Naturally, the whole population of citizens and non citizens grow and resides in country C. All the citizens of country C work in country C (there are no citizens living abroad). Suppose the country wealth is spread evenly across all individuals. That is, every individual in the country owns an equal share of the economic pie. What is GNP in Year 3? What is per capita GNP as a percentage of per capita GDP in Year 3? Exercise 6: Consider the following situation. China exports textiles to an American clothing company for $100 million. The American clothing company has total revenue of $300 million coming from sales to consumers. Its costs include the $100 million for textiles, $40 million in wages, $30 million in rent, and $30 million in taxes. The U.S. government earns $50 million in tax revenue and pays $50 million in wages. Consumers in the United States earn $90 million in wages, $30 million in rent income, and $100 million in profits distributed to the consumer. The U.S. consumers pay $20 million in taxes. A) (3points)WhatistheGDPofU.S.usingtheexpenditureapproach? B) (4points)WhatistheGDPofU.S.usingtheincomeapproach? Exercise 7: A miner searches for gold ore in the mountains, which he sells to a refinery for $500. The refinery cleans the gold, and sells it to a ring-maker for $1000. The ring-maker molds the gold into a ring, which he sells to a jeweler for $2000. The jeweler showcases the ring, and marks it up by $2000. The ring is then bought by a consumer. a) (5points)Calculate the value added by each stage of the ring production in this economy. c) (2points)What is GDP in this economy? Explain. Exercise 8: Consider the following data for the imaginary economy of Twilight: Year 1 2 3 4 5 GDP (mil) 1 1.4 1.3 1.2 1 Page 4 of 11 (a) (3points)What is the percent change in GDP from year to year? That is, between 1-2, 234-5. (b) (3points)What is the average per year percent change in GDP? (c) (1point)What is the percent change in GDP between Year 1 and year 5? Exercise 9: Suppose an economy produces beer and pizza. In 2009, 100 beers are produced and sold for $2 each and 75 pizzas sold for $10 each. In 2010, 150 beers sold for $3 each and 100 pizzas sold for $12 each. In 2011, 200 beers are sold for $5 each and 150 pizzas sold for $20. The base year is 2009. A) (2points)CalculatethenominalGDPfor2009and2010. B) (2points)CalculatetherealGDPfor2009and2010. C) (1points)Calculatetherateofinflationbetween2009and2010. Exercise 10: Collegeville is an isolated community in upstate New York that produces only three goods: pizza, hamburgers, and beer. Information on population, nominal prices and total output for each good in the years 1980 and 2003 is given below. 1980 Price in $ pizza slices Burgers beer pints $2.50 $0.50 $1 Output in millions 300 1 2 Price in $ $7.00 $0.80 $5.00 2003 Output in millions 350 100 2 a) (2points) Calculate nominal GDP for 1980 and 2003. b) (2points)Calculate real (in 1980 dollars) GDP for 1980 and 2003. c) (1points)By what percent has the price level increased between 1980 and 2003? MULTIPLE CHOICES 1. In a closed economy (i.e. an economy that does not exchange anything with the rest of the world, the level of GDP is defined as a. YC-G b. YIGX+M c. YIC d. G+C+I Page 5 of 11 2. a. b. c. d. 3. a. b. c. d. 4. a. b. c. d. 5. a. b. c. d. 6. a. b. c. d. 7. a. b. c. d. 8. a. b. c. d. An example of investment in macroeconomics is the purchase of bonds stocks equipment clothing What is the real rate of interest if the nominal interest rate is 8 percent and the Inflation rate is 4 percent? 6 percent 5 percent 4 percent 1 percent Macroeconomics is concerned with all of the following except business cycles supply of corn standard of living unemployment Economic well-being is best measured by which of the following? Per capita real GDP Real GDP Nominal GDP Per capita nominal GDP When society requires that firms reduce pollution, there is a tradeoff because of reduced incomes to the firms' owners and workers. a tradeoff only if some firms are forced to close. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements. no tradeoff, since everyone benefits from reduced pollution. Economists use the word equality to describe a situation in which each member of society has the same income. each member of society has access to abundant quantities of goods and services, regardless of his or her income. society is getting the maximum benefits from its scarce resources. society's resources are used efficiently. When the government attempts to improve equality in an economy the result is often an increase overall in output in the economy. additional government revenue since overall income will increase. a reduction in equality. a reduction in efficiency. Page 6 of 11 9. a. b. c. d. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for parking otherwise. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise. Only half of the cost of the parking permit is part of the opportunity cost of attending college. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances. College-age athletes who drop out of college to play professional sports are not rational decision makers. are well aware that their opportunity cost of attending college is very high. are concerned more about present circumstances than their future. underestimate the value of a college education. Suppose the state of Iowa passes a law that increases the price of cigarettes by $1 per pack. As a result, residents in Iowa start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate? People respond to incentives Rational people think at the margin Trade can make everyone better off Markets are usually a good way to organize economic activity 10. a. b. c. d. 11. a. b. c. d. 12. The income of a typical worker in a country is most closely linked to which of the following? a. population b. productivity c. market power d. government policies 13. Suppose that in Chile total annual output is worth $600 million and people work 70 million hours. In Argentina total annual output is worth $450 million and people work 40 million hours. Productivity is higher in Chile. Most variation in the standard of living across countries is due to differences in productivity. in Chile. Differences in productivity explain very little of the variation in the standard of living across countries. in Argentina. Most variation in the standard of living across countries is due to differences in productivity. in Argentina. Differences in productivity explain very little of the variation in the standard of living across countries. a. b. c. d. Page 7 of 11 14. In a particular country in 1998, the average worker needed to work 40 hours to produce 60 units of output. In that same country in 2008, the average worker needed to work 35 hours to produce 55 units of output. In that country, the productivity of the average worker a. decreased between 1998 and 2008, so we would expect the standard of living to have decreased accordingly. b. increased between 1998 and 2008, so we would expect the standard of living to have increased accordingly. c. decreased between 1998 and 2008, so we would expect inflation to have decreased accordingly. d. increased between 1998 and 2008, so we would expect inflation to have increased accordingly. 15. a. b. c. d. In the short run, which of the following rates of growth in the money supply is likely to lead to the highest level of unemployment in the economy? 1 percent per year 2 percent per year 3 percent per year 4 percent per year 16. Suppose that the Federal Reserve Bank announces that it will be making a change to a key interest rate to increase the money supply. This is likely because a. the Federal Reserve Bank is worried about inflation. b. the Federal Reserve Bank is worried about unemployment. c. the Federal Reserve Bank is hoping to reduce the demand for goods and services. d. the Federal Reserve Bank is worried that the economy is growing too quickly. 17. a. b. c. d. 18. Gross domestic product is defined as the quantity of all final goods and services demanded within a country in a given period of time. the quantity of all final goods and services supplied within a country in a given period of time. the market value of all final goods and services produced within a country in a given period of time. Both (a) and (b) are correct. Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid $200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following statements is correct regarding the sale of the house? a. The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP. b. The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP. c. The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be revised upward by $25,000. d. The 2006 sale affected neither 2005 GDP nor 2006 GDP. Page 8 of 11 19. Anna, a U.S. citizen, works only in Germany. The value she adds to production in Germany is included a. in both German GDP and U.S. GDP. b. in German GDP, but it is not included in U.S. GDP. c. in U.S. GDP, but it is not included in German GDP. d. in neither German GDP nor U.S. GDP. 20. If total spending rises from one year to the next, then which of the following could not be true? a. the economy is producing a smaller output of goods and services, and goods and services are selling at higher prices b. the economy is producing a larger output of goods and services, and goods and services are selling at lower prices c. the economy is producing a larger output of goods and services, and goods and services are selling at higher prices d. the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices 21. If nominal GDP doubles and the GDP deflator doubles, then real GDP a. remains constant. b. doubles. c. triples. d. quadruples. 22. Which of the following is not an example of a nondurable good? a. a loaf of bread b. a pair of jeans c. a microwave d. a pound of bacon 23. Which of the following is included in the consumption component of U.S. GDP? a. b. c. d. purchases of staplers, paper clips, and pens by U.S. business firms purchases of natural gas by U.S. households purchases of newly constructed homes by U.S. households All of the above are correct. 24. Which of the following is included in the investment component of GDP? a. households purchases of newly constructed homes b. net additions to firms inventories c. firms purchases of capital equipment d. All of the above are correct. 25. Consider two items that might be included in GDP: (1) the estimated rental value of owneroccupied housing and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is calculated? a. Both item (1) and item (2) are included in the consumption component of GDP. Page 9 of 11 b. c. d. Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP. Item (1) is included in the investment component of GDP, while item (2) is included in the consumption component of GDP. Only item (2) is included in GDP, and it is included in the investment component. 26. An Iowan receives a Social Security check for $500, which he uses to purchase a $480 television made in Japan by a Japanese firm and a $20 dinner at a local restaurant. As a result, U.S. GDP a. does not change. b. increases by $20. c. increases by $520. d. increases by $1000. 27. An American soldier stationed in California receives a paycheck from the federal government for $500, which she uses to purchase a $300 stereo made in Korea by a Korean firm and $200 worth of groceries produced in California. As a result, U.S. GDP increases by a. $200. b. $500. c. $700. d. $1000. 28. Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct? a. GDP would definitely increase, despite the fact that GDP includes leisure. b. GDP would definitely increase because GDP excludes leisure. c. GDP could either increase or decrease because GDP includes leisure. d. GDP could either increase or decrease because GDP excludes leisure. 29. Suppose the government eliminates all environmental regulations and, as a result, the production of goods and services increases, but there is considerably more pollution. Based on this scenario, which of the following statements is correct? a. GDP would definitely increase, despite the fact that GDP includes environmental quality. b. GDP would definitely decrease because GDP includes environmental quality. c. GDP would definitely increase because GDP excludes environmental quality. d. GDP could either increase or decrease because GDP excludes environmental quality. 30. International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with a. longer life expectancy and a lower percentage of the population that is literate. b. longer life expectancy and a higher percentage of the population that is literate. c. very nearly the same life expectancy and a lower percentage of the population that is literate. Page 10 of 11 d. very nearly the same life expectancy and a higher percentage of the population that is literate. Page 11 of 11

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