Douglas, Fall 2008September 23, 2008

PLEDGE: I have neither given nor received unauthorized help on this exam.SIGNED:__________________________ PRINT NAME: __________________________________

Econ 202 Section 2 Midterm 1

1. Which of the following goods or services are fully included in US GDP for 2005?

a.the value of illegal drugs goods produced and sold in California in 2005.

b.the value of meals cooked at home in 2005.

c.the value of computers produced in 2005 but not sold until 2006

d.All of the above are included.

2. If the December price index was 90 in 2001, 100 in 2002, and 95 in 2003, then the economy experienced

a.10 percent inflation in 2002 ,and 5 percent inflation in 2003.

b.10 percent inflation in 2002, and 5 percent deflation in 2003.

c.11.1 percent inflation in 2002, and 5 percent inflation in 2003.

d.11.1 percent inflation in 2002, and 5 percent deflation in 2003.

3. An increase in the price of inputs used by firms in a market will result in

a. a decrease in equilibrium price and an increase in equilibrium quantity.

b.an increase in equilibrium price and a decrease in equilibrium quantity.

c.an increase in equilibrium price and no change in equilibrium quantity.

d.an increase in equilibrium price and an increase in equilibrium quantity.

Figure 2-1

GDP is an imperfect measure of well-being, in part because

7.

a.GDP includes many non-market goods and services that are of little value to society.

b.GDP places too much emphasis on the value of leisure.

c.GDP increases as the cost of hurricane damage cleanup increases.

d.All of the above are correct.

As discussed in class, according to the most recent measure of CPI, inflation in the US in 2008 is about

8.

a.15.5%.

b. 1.1%.

c. 5.6%.

d.25.3%

In January 2005 Bob bought a brand new house in New Jersey for $300,000, but he was transferred to WV 6 9.

months later so he sold it for $320,000 in July. In 2006 it was resold for $350,000. How much did these

transactions contribute to U.S. GDP for 2005?

a.$320,000

b.$300,000

c.$350,000

d.$620,000

In the equation Y = C + I + G + NX,

10.

a.Y represents the economy’s total expenditure or GDP.

b.C represents household expenditures on non-durable goods only.

c.all of the variables are always positive numbers.

d.All of the above are correct.

Table 6A-1

The National Film Association developed the Movie Price Index (MPI) in 1998 based upon the annual purchases of a

typical moviegoer. Information on the market basket for the MPI and the prices for each of the goods in 1998, which is

the base year, and in 2001 and 2002 is shown in the table below.

Good Quantity199820012002

Movie tickets 10 $5 $7 $8

Tubs of popcorn 5 $6 $5 $4

Sodas 10 $1 $4 $4

Refer to Table 6A-1. Calculate the Movie Price Index for 2001 using 1998 as the base year.

11.

a.150

b.135

c.67

d.23

Refer to Table 6A-1. What was the approximate inflation rate between 2001 and 2002?

12.

a.56 percent

b. 4 percent

c.156 percent

d.66 percent.

In 2004, Freedonia had a population of 2200 and real GDP of about 11,000,000. In 2005 it had a population 13.

of 3000 and real GDP of about 21,000,000. Freedonia’s growth rate of real GDP per person was about

a.40 percent

b.14 percent

c.29 percent

d.91 percent

Figure 4-7

Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the 20.

following is likely to explain the failure of a poor county to catch up?

a.The poor country trades too much.

b.The poor country allows too much foreign direct investment.

c.The poor country’s courts are not able to defend private property rights.

d.All of the above are correct.

Cellphones are a normal good. What would happen to the equilibrium price and quantity of cellphones if 21.

incomes rise, and cellphone manufacturers anticipate a price drop in the near future?

a.Price will fall and quantity may either rise or fall.

b.Price will rise and quantity may either rise or fall.

c.Quantity will fall and price may either rise or fall.

d.Quantity will rise and price may either rise or fall.

Figure 2-4

TABLE 5A-1

The country of Springfield produces three goods: pizza, economics textbooks, and video games. The prices and output

for the goods are shown for the years 2001 and 2002.2001 IS THE BASE YEAR for calculating real GDP.

Year 2001 Year 2002

Quantity Price

Quantity Price

$9

160

$10

Pizza

150

20 $100

15 $120

textbooks

Economics

45 $60

40 $50

Video

games

Refer to Table 5A-1. Between 2001 and 2002, Springfield experienced

26.

a.real economic growth of about 8%.

b.real negative economic growth (that is, real economic contraction) of about 2.7%.

c.nominal economic contraction of about 2.7%, but real economic growth of about 8%.

d.real economic growth if 2002 is the base year, but real contraction if 2001 is the base

year.

Refer to Table 5-1A. Nominal GDP for 2002 was

27.

a.$5940, and 2002 real GDP was also $5940, so the 2002 GDP Deflator was 100.

b.$5940, and 2002 real GDP was $5350, so the 2002 GDP Deflator was 90.

c.$5350, and 2002 real GDP was $5940, so the 2002 GDP Deflator was 90.

d.$5940, and 2002 real GDP was $5350, so the 2002 GDP Deflator was 111.

Suppose the price of peanut butter increases rapidly, and that consumers respond by buying a smaller quantity 28.

of peanut butter. The consumer price index

a.reflects this price increase accurately.

b.understates inflation due to the so-called income bias.

c.overstates inflation due to the so-called income bias.

d.overstates inflation due to the so-called substitution bias.

In a developing country, as capital per worker increases, output per worker

29.

a.increases, and each additional unit of capital increases output by more than the last.

b.increases, but each additional unit of capital increases output by less than the last.

c.decreases, unless more land or better technology is applied as well.

d.increases most rapidly when the government controls the economy through central

planning.

Which of the following events would most likely cause the price of wool hats to fall?

30.

a.There is a surplus of wool hats.

b. A new study shows that wearing wool hats prevents Alzheimer’s disease.

c.Wages rise in the wool industry.

d.Two of the above answers are correct.

The logic behind the “catch-up effect” is that

31.

a.poor workers work more hours than rich workers.

b.capital in a rich country deteriorates faster because there is too much of it to maintain.

c. a unit of new capital adds more to output in a capital-poor country than in a capital-rich

country.

d.None of the above is correct.

In calculating the consumer price index, a fixed basket of goods is used. The quantities of the goods in the

32.

fixed basket are determined by

a.surveying consumers.

b.surveying sellers of those goods.

http://www.doczj.com/doc/4ebaea3331126edb6f1a10b6.htmling the overall rate of inflation to compute estimated values for those quantities.

d.arbitrary choices made by federal government employees.

If an American-based firm opens and operates a new watch factory in Panama, then it is engaging in

33.

a.foreign portfolio investment.

b.foreign financial investment.

c.foreign direct investment.

d.indirect foreign investment.

What would happen to the equilibrium price and quantity of cherry pie if the price of sugar used in making

34.

pie falls and the price of coffee (a complement) rises?

a.Price will fall and quantity may either rise or fall.

b.Price will rise and quantity may either rise or fall.

c.Quantity will fall and price may either rise or fall.

d.Quantity will rise and and price may either rise or fall.

If suppliers expect the price of their product to fall in the future they will

35.

a.decrease supply now.

b.increase supply now.

c.decrease supply in the future but not now.

d.increase supply in the future but not now.

During a presidential campaign, the challenger argues that the incumbent should not be reelected in part

36.

because nominal interest rates rose from 5% to 12% during his term in office, “more than doubling the real

cost of borrowing.” Inflation also rose from 2% to 10% during his term. You conclude

a.that the challenger is correct, the real cost of borrowing more than doubled.

b.that the challenger either doesn’t understand basic economics or is deliberately lying.

c.that it is impossible to tell whether or not the real cost of borrowing more than double

d.

d.the real cost of borrowing did rise, but it did not doubl

e.

One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $5.50 to

37.

consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. How much do these three transactions add to GDP?

a.GDP increases by $9.00.

b.GDP increases by $3.50.

c.GDP increases by $6.00.

d.GDP increases by $7.50.

Suppose the CPI was 90 in 1955, and suppose currently the CPI is 360. According to the CPI, $100 today

38.

purchases the same amount of goods and services as

a.$25.00 purchased in 1955.

b.$21.05 purchased in 1955.

c.$400 purchased in 1955.

d.$360 purchased in 1955.

Ralph puts money in the bank at a 5% nominal interest rate. At the end of a year, if the inflation rate is 3%,

39.

a.Ralph will have 3 percent more money, which will purchase 2 percent more goods.

b.Ralph will have 3 percent more money, which will purchase 8 percent more goods.

c.Ralph will have 5 percent more money, which will purchase 2 percent more goods.

d.Ralph will have 5 percent more money, which will purchase 8 percent more goods.

If the prices of Australian-made shoes imported into the United States increase, then, as a result,

40.

a.both the US GDP deflator and the US consumer price index increase.

b.neither the US GDP deflator nor the US consumer price index increases.

c.the US GDP deflator increases but the US consumer price index does not increase.

d.the US consumer price index will increase, but the US GDP deflator will not increas

e.

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,

41.

a.U.S. investment and GDP increase, but German GDP is unaffected.

b.U.S. investment and German GDP increase, but U.S. GDP is unaffected.

c.U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are

intermediate goods.

d.U.S. investment and U.S. GDP rise, and German GDP falls.

If a nation’s GDP rises, then it must be the case that the nation’s

42.

a.income and expenditure both rise.

b.income and saving both rise.

c.income rises, but expenditure may rise or fall.

d.saving rises, but income may rise or fall.

In 1970 Professor Fellswoop earned $12,000; in 1980 he earned $24,000; and in 1990 he earned $36,000. If 43.

the CPI was 40 in 1970, 60 in 1980, and 100 in 1990, then Professor Fellswoop's REAL salary was highest in

a.1970, and lowest in 1980.

b.1990, and lowest in 1980.

c.1980, and lowest in 1970.

d.1990, and lowest in 1970.

The key determinant of a typical person's standard of living in a country is

44.

a.the total amount of goods and services produced by each unit of labor (productivity).

b.the total nominal GDP of the country.

c.the total amount of its physical capital.

d.its growth rate of nominal GDP.

What will happen to the equilibrium price and quantity of Blu-Ray disks if Blu-Ray disk players become less 45.

expensive at the same time that an earthquake destroyed the main Blu-Ray factory?

a.Price will fall and the quantity may either rise or fall.

b.Price will rise and quantity may either rise or fall.

c.Quantity will fall and price may either rise or fall.

d.Quantity will rise and price may either rise or fall.

Econ 202 Section 2 Midterm 1Answer Section

MULTIPLE CHOICE

1. ANS: C

MSC: Definitional 2. ANS: D

MSC: Interpretive 3. ANS: B

MSC: Applicative 4. ANS: C

MSC: Interpretive 5. ANS: D

MSC: Interpretive 6. ANS: B

MSC: Definitional 7. ANS: C

MSC: Interpretive 8. ANS: C

MSC: Definitional 9. ANS: B

MSC: Applicative 10. ANS: A

MSC: Interpretive 11. ANS: A

MSC: Applicative 12. ANS: B

MSC: Applicative 13. ANS: A

MSC: Analytical 14. ANS: C

MSC: Applicative 15. ANS: D

MSC: Applicative 16. ANS: D

MSC: Definitional 17. ANS: A

MSC: Applicative 18. ANS: D

MSC: Definitional 19. ANS: D

MSC: Interpretive 20. ANS: C

MSC: Applicative 21. ANS: D

MSC: Analytical 22. ANS: D

MSC: Interpretive 23. ANS: D

MSC: Interpretive 24. ANS: C

MSC: Interpretive 25. ANS: C

MSC: Interpretive 26. ANS: B

27. ANS: D

28. ANS: D

MSC: Interpretive 29. ANS: B

MSC: Analytical 30. ANS: A

MSC: Applicative 31. ANS: C

MSC: Interpretive 32. ANS: A

MSC: Definitional 33. ANS: C

MSC: Applicative 34. ANS: A

MSC: Applicative 35. ANS: B

MSC: Interpretive 36. ANS: B

MSC: Interpretive 37. ANS: D

MSC: Interpretive 38. ANS: A

MSC: Interpretive 39. ANS: C

MSC: Applicative 40. ANS: D

MSC: Applicative 41. ANS: A

MSC: Applicative 42. ANS: A

MSC: Interpretive 43. ANS: C MSC: Applicative

44.

A MSC:

Interpretive ANS:

Analytical

B MSC:

ANS:

45.