201M2Fall03 - Name: Section#: ECON 201 11/10/2003 Prof....

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Unformatted text preview: Name: Section#: ECON 201 11/10/2003 Prof. Gordon Midterm II Multiple Choice Answer Sheet 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 Short Answer Questions (36-41) 36 Sorinland Capital Market 37 Sorinland Capital Market Saving and investment Saving and investment 38 Sorinland Capital Market 39 Sorinland Capital Market Saving and investment Saving and investment Neatness counts! Think before you write… 40 41 Each question counts one point unless otherwise stated (Total: 41 pts) 1 Suppose a firm borrows funds to finance investment. The opportunity cost of this investment a) b) c) d) is greater than if the firm used its retained earnings. is less than if the firm used its retained earnings. is greater than the real interest rate. is equal to the real interest rate. 2 In the above figure, the economy is at point a on the initial investment demand curve ID0. What happens if corporate taxes are reduced? a) b) c) d) There is a movement to a point such as b on investment demand curve ID0. The investment demand curve shifts rightward to a curve such as ID2. The investment demand curve shifts leftward to a curve such as ID1. There is a movement to a point such as c on investment demand curve ID0. 3 Due to the crowding out effect, a government deficit ___________ the real interest rate and __________ private investment. a) increases; increases b) increases; decreases c) decreases; increases d) decreases; decreases Suppose a firm is considering a new investment project. The total cost is $100,000 and the firm expects to earn $9,000 in profit from the new project. The current real interest rate is 8 percent. Which of the following is true? a) The firm will make the investment. b) The firm will make the investment only if the real interest rate falls. c) The firm will make the investment only if the real interest rate increases. d) The firm will make the investment only if the expected profit rate from it increases. 4 5 A decrease in the real interest rate leads to a ____ the investment demand curve, and a decrease in the expected profit rate leads to a ____ the investment demand curve. a) rightward shift in; leftward shift in b) movement down along; movement up along c) rightward shift in; movement up along d) movement down along; leftward shift in According to the Ricardo-Barro effect, a) b) c) d) government deficits raise the real interest rate. taxpayers fail to foresee that government deficits imply higher future taxes. households increase their personal saving when governments run budget deficits. government budget deficits increase households’ expected future disposable income. 6 7 Which of the following is (are) TRUE regarding the demand for labor? I. The quantity of labor demanded depends on the real wage rate. II. If the money wage rate increases and the price level remains the same, the quantity of labor demanded decreases. III. If the money wage rate and the price level increase in the same proportion, the quantity of labor demanded decreases. a) b) c) d) I. I and II. II and III. I, II, and III. The supply of labor curve slopes upward, in part, because a) b) c) d) the opportunity cost of taking leisure rises when the real wage rate increases. households’ incomes increase when the real wage rate increases. firms will demand more labor when the real wage rate falls. workers are better off when the money wage rate falls and the price level rises. 8 9 At the full-employment equilibrium in the labor market, a) b) c) d) there is no unemployment. there are no job vacancies. there is neither a shortage nor a surplus of labor. the money wage rate equals the real wage rate. Questions 10-11 refer to the figure at the right… 10 Which of the following might have shifted the labor supply curve from LS0 to LS1? a) b) c) d) An increase in the wage rate. A decrease in the wage rate. An increase in population. An increase in technology. 11 Which of the following would decrease the unemployment rate? a) b) c) d) An increase in the efficiency wages firms pay A decrease in the efficiency wages firms pay An increase in the minimum wage An increase in unemployment compensation 12 When the economy is at a point on its short-run aggregate supply curve that is above potential GDP, the real wage rate is ____ the full-employment equilibrium real wage rate. a) equal to b) less than c) greater than d) not comparable to A nation hoping to boost its economic growth can do all of the following except: a) b) c) d) stimulate saving target high-technology industries raise tariffs to discourage international trade improve the quality of education 13 Questions 14 and 15 refer to the figure to the right: 14 In the above figure, the movement from point a to point e shows a) b) c) d) e) an increase in the capital stock an increase in labor productivity an advance in technology. both (a) and (b) are right both (a) and (c) are right 15 In the above figure, as the amount of capital per hour of labor increases and the economy moves from point d to point a to point e, i. real GDP per hour increases at a decreasing rate. ( change in GDP/worker )/( change in K/worker ) ii. the level of technology is improved iii. the law of diminishing returns holds. a) b) c) d) ii only iii only i and iii ii and iii 16 According to the classical growth theory of Thomas Malthus, a) b) c) d) labor productivity increases continuously the population growth rate is fixed technological advances lead to permanent increases in real GDP per person increases in real GDP per person are only temporary In answering questions (17) to (19) use the following information: Item Amount Budget surplus National saving Net exports Indirect taxes less subsidies Depreciation GDP 800 1000 300 200 500 2500 17 Investment is:____________ 18 Private Saving used to finance Investment is:_____________ 19 Net Domestic Income at Factor Cost is:___________ In answering questions (20) to (23) use the following table: GDP Data for 2001 Item Balls Bats In addition you are given: 20 Quantity 100 50 Price $20 $10 nominal GDP in 2002 is 4,000 GDP deflator in 2002 with base year 2001 is 200% GDP deflator in 2001 with base year 2002 is 250% Nominal GDP in 2001 is:______________ 21 Real GDP in 2002 with base year 2001 is:____________ 22 Real GDP in 2001 with base year 2002 is:____________ 23 The economic growth rate, using base year 2001, is:___________ 24 A rise in the money wage: (a) (b) (c) (d) (e) Leaves SAS unchanged and shifts LAS to the left leaves SAS and LAS unchanged shifts SAS and LAS to the right shifts SAS to the left and shifts LAS to the right none of the above In answering questions (25) to (27) use the following: In the economy shown in the figure, initially the long-run aggregate supply is LAS0, short-run aggregate supply is SAS0 and aggregate demand is AD. Next, the aggregate supply curves shift to the right as shown: LAS0 to LAS1 and SAS0 to SAS1. 25 The short-run equilibrium after the change is at point:________________ 26 After the increase in the aggregate supply: (a) (b) (c) (d) the real GDP is greater than the potential GDP there is a recessionary gap the potential GDP has decreased there is a above-full employment equilibrium 27 (True/False) A new long-run equilibrium occurs if the aggregate demand curve shifts to the right so that the new aggregate demand curve goes trough point C. An increase in the aggregate demand occurs when: (a) monetary policy decreases the quantity of money and increases interest rate (b) fiscal policy decreases government purchases, increases taxes or decreases transfer payments (c) monetary policy increases the quantity of money and decreases interest rate (d) the exchange rate increases or foreign income decreases 28 29 Transfer payments are (a) (b) (c) (d) A subtraction from GDP Excluded from GDP Treated as negative taxes and c) (we corrected this to read (a) and (c) during the exam) 30 The recession of 2001 eliminated relatively more _______ jobs in contrast to the 1981-82 recession which eliminated relatively more ________ jobs (a) blue collar; white collar (b) white collar; blue collar (c) white collar; government (d) blue collar; government A reason cited for the declining saving rate in Japan is (a) High taxes on saving (b) Rapid economic growth (c) Aging population (d) b) and c) 31 32 The desire to have babies is related to (a) (b) (c) (d) Classical theory of economic growth Financial problems of pension plans in the 21st century Excessive labor supply causing unemployment a) and b) 33 Which of the following is a true statement (a) (b) (c) (d) Income is distributed more equally than spending Stock ownership is distributed more equally than income Stock ownership is distributed more equally than spending Spending is distributed more equally than income 34 Many problems in the 1970s can be traced to the behavior of oil prices which (a) (b) (c) (d) Shifted SAS to the left and AD to the right Shifted SAS to the left without affecting AD Shifted SAS to the right and AD to the left Shifted SAS to the right without affecting AD 35 The marginal product of labor is shown by the slope of the ___ curve while the marginal product of capital is shown by the slope of the ___ curve (a) PC; PF (b) PC; PPF (c) PPF; PC (d) PF; PC Short Answer Questions For the following questions, consider the nation of Sorinland; use the four graphs on your answer sheet. 36 Draw a sketch of Sorinland's investment supply and investment demand curves; you may assume throughout this problem that both are linear. Clearly label the initial equilibrium point. As it turns out, Benji, the new economic Secretary of Sorinland, proves to be quite successful (or perhaps lucky) in generating economic growth. Firms--responding to higher expected profits--adjust their investment demand. Re-draw the initial curves from #36, but then add the new investment demand curve for Sorinland. Now, suppose Benji, hoping to capitalize politically on this prosperity, increases the budget deficit of Sorinland: assuming that only the direct effect of this is observed (hint: ignore Ricardo-Barro). Re-draw the curves from #37, but then add the new investment supply curve to reflect Benji's policy. Label the new equilibrium point in the market. Of course, Sorinland is a modern nation and believes in free trade. Hence, the capital market in Sorinland interacts with a world interest rate. Re-draw your curves from #38, adding a single line indicating the world interest rate in our capital market such that • Before growth and fiscal policy changes (i.e. the initial equilibrium in #36), Sorinland is a nation that borrows capital from the world • After the growth and fiscal policy (i.e. in the equilibrium you indicated in #38), Sorinland is a nation that borrows capital from the world In the equilibrium in #36, which of the following is true (where M denotes imports and X denotes exports): a) M - X > 0 b) M - X < 0 c) M - X = 0 d) Not enough information to say 37 38 39 40 41 In # 38, when the budget deficit of Sorinland increased, in which direction did M - X move (hint: assume that investment minus saving stayed constant)? a) M - X increased b) M - X stayed constant c) M - X decreased d) Not enough information Solutions to Exam 1. D 2. B 3. B 4. A 5. D 6. C 7. B 8. A 9. C 10. C 11. B 12. B 13. C 14. D 15. C 16. D 17. 700 18. 200 19. 1800 20. 2500 21. 2000 22. 1000 23. –20% 24. E 25. B 26. B 27. True 28. C 29. D 30. B 31. C 32. D 33. D 34. B 35. D 36. should be the simple, crossed demand curve with the intersection marked 37. demand curve should be shifted out 38. the crowded out supply curve should be shifted to the left 39. interest rate line should be below both equilibrium 40. A 41. A ...
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This note was uploaded on 09/04/2010 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.

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