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Unformatted text preview: Economics 102, Principles of Macroeconomics Fall 2008 Midterm 1 October 7, 2008 Form A Student Name: __________________________________________ Student ID #: ____________________________________________ Section #: _______________________________________________ INSTRUCTIONS: Please do not start turn this page over and start the test before you are instructed to do so. You will have 1 hour and 45 minutes to complete this test. If you have finished the test before the 5‐ minutes‐remaining announcement, you can walk to the front of the class and turn your test in. If you have finished your test after the 5‐minutes‐remaining announcement, you must remain seated until the proctor collects your test. You must stop writing once a proctor has announced that the test time is up. You must present your Michigan student ID to the proctor when you turn in the test. Failure to cooperate with these instructions will result in the score of 0 assigned to your midterm grade. If you feel that several choices may be the correct response, please select the best one. Q1) Your test’s form is: a) A b) B c) C d) D e) E Q2) Suppose demand for a good X is given by Q = 10 – P and supply for the same good is given by Q = 5 + 2P. Which of the following is FALSE? a) b) c) d) e) Q3) Suppose that the demand schedule is linear. Which of the following is TRUE? a) b) c) d) e) The price demand elasticity should decrease as you go down the demand curve. The price demand elasticity should increase as you go down the demand curve. The price demand elasticity should always be positive. Demand will never be elastic. Demand will never be inelastic. The inverse demand schedule is given by P = 10 – Q. The inverse supply schedule is given by P = 2Q – 5. The equilibrium quantity is 25/3. The equilibrium price is 5/3. The supply elasticity with respect to price is positive. Q4) Which of the following is an example of a positive statement: a) The government should cut taxes b) Housing prices are too high c) Real GDP growth rate is 1% d) The Federal Reserve must cut interest rates to avert financial meltdown e) None of the above Q5) If there is a price ceiling in a given market, the sum of consumer surplus and producer surplus without a price ceiling is __________the sum of consumer surplus and producer surplus with price ceiling. a) b) c) d) e) Strictly greater than Strictly less than Equal Greater than or equal to Less than or equal to Q6) The market for Widgets is depicted in the graph below. The point labeled E represents the market equilibrium today. Suppose the following events both happen tomorrow: I) Transportation costs increase, increasing the cost of selling Widgets. II) Consumers’ incomes increase, making them demand more Widgets. Which of the following could represent the new resulting market equilibrium? a) b) c) d) e) Only A Only B Only C and D Only A and B Only E Q7) The revenue of a single firm operating in the market is maximized when which of the following statements holds true? a) b) c) d) e) If the absolute elasticity of demand is less than 1. If the absolute elasticity of demand is equal to 1. If the absolute elasticity of demand is greater than 1. Firm revenue is unrelated to the elasticity of demand. If the firm sets prices slightly above all of its competitors’ prices. Q8) An excise tax creates the smallest deadweight loss when: a) supply is elastic and demand is elastic b) supply is elastic and demand is inelastic c) supply is inelastic and demand is elastic d) supply is inelastic and demand is inelastic e) deadweight loss is not affected by supply or demand elasticities. Q9) The State of Michigan has a 6% sales tax. Suppose Michigan was to cancel its state sales tax on clothing. Refer to the graph below and indicate which of the following statements is TRUE. [Hint: first determine the direction of the supply curve shift in response to canceling the tax] Price G A F B C E D Quantity a) b) c) d) e) The consumer surplus lost is A+B+C, and the producer surplus gained is D+E+F. The consumer surplus gained is A+B+C, and the producer surplus lost is D+E+F. The deadweight loss is A+F+G. The consumer surplus gained is A+B+C, and the producer surplus gained is D+E+A. None of the above. Q10) All of the following are examples of market failure EXCEPT: a) Positive externalities b) Moral hazard c) Imperfect competition d) Adverse selection e) Delays in the adoption of fiscal measures Q11) The supply of a good to a market is likely to be more elastic when a) The time period required for production is small b) When the demand for the good is very elastic c) Producers are operating close to full capacity d) Factor inputs cannot be substituted between alternative uses e) A higher price cannot bring about a higher quantity supplied Q12) All of the following would generate a change in demand EXCEPT: a) Change in income b) Change in the own price of the good c) Change in the price of a substitute d) Change in the price of a complement e) Change in the expectations of future income Q13) Suppose that the economy has one resource and uses it to produce two different goods, X and Y. Which of the following combinations the production functions for X and Y may generate a production possibilities frontier with a constant slope? a) Increasing returns to the resource for both X and Y b) Decreasing returns to the resource for both X and Y c) Increasing returns to the resource for X, decreasing for Y d) Constant returns to the resource for X, increasing for Y e) Decreasing returns to the resource for X, constant for Y Q14) If the average annual growth rate is 5% per year, GDP will double approximately how many times in a century? a. 2 b. 7 c. 14 d. 20 e. 126 Q15) Which of the following most correctly describes a price elasticity of demand of 0.25 (in absolute value)? a) When the price of the product increases by $1, the quantity demanded decreases by 0.25 b) When the quantity of the product demanded increases by 2%, the price decreases by 0.5% c) When the price of the product increases by 2%, demand decreases by 0.5% d) When the demand increases by 1%, the equilibrium price increases by 0.25% e) When the price of the product increases by 2%, the quantity demanded decreases by 0.5% Q16) Consider the production possibilities frontier (PPF) of an economy which produces computers and cars. Assume the production technology for both goods is constant returns to scale and that the economy currently lies inside the area bounded by the PPF. Which of the following is FALSE? a) b) c) d) e) We can increase the production of computers. We can increase the production of cars. We can increase the production of both goods. The PPF is not a straight line. The current equilibrium is inefficient. Q17) Suppose that Zimbabwe is characterized by the Malthusian growth model and Switzerland is characterized by the Solow growth model. Currently, population growth rates are zero in both countries. Now suppose that both countries adopt nuclear energy technology that they did not have before; this change is permanent. Which of the following is true? a) Population growth in Switzerland will increase; consumption per capita in Zimbabwe will rise permanently b) Consumption per capita in Switzerland will rise permanently; population growth will increase in Zimbabwe c) Consumption per capita in Switzerland will rise permanently; consumption per capita in Zimbabwe will decrease permanently d) The effect on consumption per capita in Switzerland is ambiguous; population growth will increase in Zimbabwe e) Population growth in Switzerland will increase; population growth in Zimbabwe will remain unaffected Q18) What is always true in the steady state of the Malthusian model? a) The population growth rate is negative b) The population growth rate is positive c) The population growth rate is zero d) Consumption per capita is growing e) Consumption per capita is declining Q19) According to the Malthusian Model studied in class, for which of the following choices does the consumption‐to‐labor ratio (c = C/L) remain constant in the LONG RUN for BOTH scenarios given? a) technological improvement, decrease in land b) exogenous increase in birth rate, exogenous increase in death rate c) exogenous increase in birth rate, exogenous decline in population level d) exogenous increase in death rate, technological improvement e) exogenous increase in birth rate, decrease in land Q20) Which of the following statements is ALWAYS true in the Solow growth model: a) Increases in the savings rate generate decreases in consumption per capita b) Increases in technology generate decreases in consumption per capita c) Increases in the rate of depreciation generate decreases in per capita output in the steady state d) Decreases in the rate of population growth generate decreases in the steady state capital per capita e) Decreases in per capita consumption generate increases in the rate of population growth Q21) Suppose that the growth rate in the number of workers is currently zero and that there is a hurricane that destroys 20% of a country’s land. In the context of the Malthusian model, which of the following MUST BE TRUE the long run equilibrium: (a) (b) (c) (d) (e) Consumption per capita falls. Consumption per capita rises. Population growth rate is positive. Population growth rate is negative. Population level falls. Q22) Which of the following is NEVER true in the Solow growth model: a) Increases in the savings rate decrease consumption per capita b) Increases in the population growth rate decrease the steady state capital per capita c) Increases in technology decrease consumption per capita d) Decreases in the depreciation rate increase the steady state output per capita e) Decreases in the savings rate decrease consumption per capita Q23) According to Okun’s Law, each additional percentage point of output gap reduces the unemployment rate by: a) More than 2% b) Exactly 1% c) Less than 1% d) Less than 2%, but more than 1% e) None of the above Q24) Which macroeconomic school of thought first encouraged the use of fiscal policy tocontrol recessions? a) Keynesian b) Classical c) New Keynesian d) Neo‐Classical e) None of the above Q25) Which of these activities cannot count as investment? a. A firm buys a brand new building b. A firm buys new computers for its office. c. An individual buys stock in a new company. d. An individual buys a brand new house e. Trick question—these are all investment. Q26) If the demand curve for pierogies is Q = 20 − 2P and the supply curve is Q = 2P , then how much tax revenue would a $2 per unit tax generate? a) $8 b) $10 c) $16 d) $18 e) $20 Q27) Returning to the previous question, how would the tax burden be shared? That is, whose surplus would the tax revenue come out of? a) Consumers would pay the full tax. b) Producers would pay the full tax. c) Consumers would pay most—but not all—of the tax. d) Producers would pay most—but not all—of the tax. e) The burden would be split equally. Q28) Say that the interest rate rises. Which of the following would you not expect to happen? a) Consumption falls. b) Investment falls. c) Net exports fall. d) Government purchases fall. e) None of the above. Q29) Which of the following statements is not normative? a) The government needs to pass Treasury Secretary Paulson’s bailout plan. b) Nationalizing AIG was a good call. c) Any bailout plan should limit the practice of golden parachutes for CEOs. d) The failure of Washington Mutual represents the failure of the largest bank yet. e) We are in a mental recession and have become a nation of whiners. Q30) Suppose the base year for the Consumer Price Index (CPI) is 2007 and the consumption basket used to compute the CPI is 1 book and 1 candy. Given the following schedule of prices and quantities consumed in the economy, what is the CPI in 2008? 2007 Price Candy Books 3 2 Quantity 1 2 2008 Price 2 3 Quantity 3 3 (a)100 (b)120 (c)150 (d)80 (e)60 Q31) Suppose that real income per capita does not grow at all in country A and the growth rate of real income per capita in country B is 3.5 % . If per capita income is $48,000 in country A and $3000 in country B, how long will it take for country B to catch up country A? a) 40 years b) 50 years c) 60 years d) 70 years e) 80 years Q32) Suppose that the production function that posits output per capita (y) in terms of capital per capita (k) is given by y = 2 k . Suppose that the savings rate is 0.2, capital depreciation rate is 0.04 and population growth rate is 0.16. Which of the following is the steady state level of capital? a) 1 b) 2 c) 3 d) 4 e) 5 Q33) Suppose the following equations describe the relationship between shares of spending in GDP (Y) and the interest rate (R), measured in decimal fractions: C/Y=.6‐.1(R‐.1) I/Y=.6‐.6(R‐.1), G/Y=.4, NX/Y=0‐ .9(R‐.1). Determine the interest rate (R) and the share of consumption (C/Y): a) R=.5, C/Y=.6 b) R=.5, C/Y=.56 c) R=.5, C/Y=.64 d) R=.1, C/Y=.6 e) R=.2, C/Y=.59 Q34) Suppose nominal GDP in 2006 is $400 billion and the GDP deflator in 2006 is 1. Now, suppose real GDP in 2007 using 2007 prices is $500 billion and real GDP in 2007 using 2006 prices is $400 billion. Which of the following statements is not true? a) Real GDP in 2006 is $400 billion, and the GDP deflator for 2007 is 1.25 b) The GDP deflator for 2007 is .8 and the inflation rate between 2006 and 2007 is 25%. c) Real GDP in 2006 is $400billion, and the percentage increase in real GDP using 2006 prices is 0%. d) The GDP deflator for 2007 is 1.25 and the percentage increase in nominal GDP is 25%. e) Nominal GDP in 2007 is $500 billion, and the GDP deflator is 1.25 Q35) A friend that lives in Ann Arbor tells you that she is structurally unemployed. This most likely means that she: a) lost her job due to the recession that began last month b) lost her job when she moved from Chicago to Ann Arbor last month c) lost her job because she decided to switch occupations d) lost her job and cannot find a new one because she has insufficient skills e) none of the above Q36) Which of the following can be said of the Malthusian Epoch? A) Growth in income per capita was negative. B) There was increased investment in human capital. C) There was rapid technological growth. D) Income per capita was positively related to population growth. E) The US was the richest country throughout the period. Q37) Consider the Solow model. The economy is in its steady state when a hurricane hits the economy and destroys half of its capital stock, but leaves the population unchanged. Which of the curves in the Solow model shifts due to this shock? a. The production function, y b. The savings function, sy c. The effective depreciation curve, (δ+gL)k d. The death rate curve, DR e. None of the above Q38) A country has a total civilian population (over age 16) of 300 million. Of this population, 225 million are employed, 25 million are unemployed, and the remainder of the population is not in the labor force. Then, the unemployment rate is a. b. c. d. e. 8.3% 10% 11.1% 15% 20% 39) A worker who cannot get a job because the minimum wage is too high is considered a) b) c) d) e) Frictionally unemployed Structurally unemployed Cyclically unemployed Out of the labor force None of the above 40) Which of the following monetary policy actions are expansionary (i.e. increase the supply of money)? I. Lower reserve requirement II. Higher interest rates III. Open market purchase of bonds a) I only b) II only c) III only d) I and II e) I and III 41) Suppose that the required reserve ratio is 20%; all of the money holding are in the form of checking accounts. The Fed sells 100 mln worth of Treasury securities to the citizens who withdraw the money to pay for them from their checking accounts. This transaction will result in the money supply: a) increasing by 100 mln b) decreasing by 100 mln c) increasing by 500 mln d) decreasing by 500 mln e) not changing at all 42) Suppose that the velocity of money circulation is constant and output grows by 2% per year. If the central bank increases money supply by 5% per year, in the long run, inflation rate will be: a) 2% b) 3% c) 5% d) 7% e) 8% y (δ+gL)k y A B sy C D E F k 43) In the graph above, the steady state level of capital per worker corresponds to: (a) (b) (c) (d) (e) 44) In the graph above, the level of consumption per worker in this economy corresponds to (a) (b) (c) (d) (e) A B C A‐C B‐C D E F F‐E none of the above 45) Suppose that the marginal propensity to consume is 0.75 and autonomous consumption increases from 100 to 120. Consumption is the only component of aggregate expenditure in this economy. Then the equilibrium level of output: a) increases from 100 by 20 b) increases from 120 by 20 c) increases from 400 by 20 d) increases from 400 by 80 e) increases from 480 by 80 ...
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- Fall '08