Econ 202 Midterm 1

Douglas, Spring 2007
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Econ 202 Midterm 1
1. Which of the following is considered human capital?
a. the amount you get paid each week to work at the library
b. the comfortable chair in your dorm room where you read economics texts
c. the things you have learned this semester
d. any capital goods that require a human to be present to operate
Table 23-3
Prices and Quantities
Year
Price of
Sandwiches
Quantity of
Sandwiches
Price of
Magazines
Quantity of
Magazines
2006 $4.00 100 $2.00 180
2007 $5.00 120 $2.50 200
2008 $6.00 150 $3.50 200
2. Refer to Table 23-3. Using 2006 as the base year, for 2007,
a. real GDP is $880 and the GDP deflator is 80.
b. real GDP is $880 and the GDP deflator is 125.
c. real GDP is $950 and the GDP deflator is 95.
d. real GDP is $950 and the GDP deflator is 116.
3. Which of the following is not included in GDP?
a. production of foreign citizens living in the United States
b. unpaid cleaning and maintenance of houses
c. services such as those provided by lawyers and hair stylists
d. the estimated rental value of owner-occupied housing
4. Rob asks Jennifer for $100,000 that he plans to use to make a movie. He tells her that he will pay her half the
annual earnings from the movie each year on December 31. She counters that she wants the $100,000 back in
one year, and another $30,000 in two years.
a. Rob wants to finance with equity; Jennifer is willing to purchase a bond from Bob.
b. Rob wants to finance with debt; Jennifer is interested in buying an equity interest.
c. Both Rob and Jennifer are proposing debt finance.
d. Both Rob and Jennifer are proposing equity finance.
5. All else equal, when people become more optimistic about a company's future profits, the
a. demand for the stock and the price will both rise.
b. supply of the stock and the price will both fall.
c. supply of the stock and the price will both rise.
d. demand for the stock and the price will both fall.
6. At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?
a. 9
b. 11
c. 5
d. 7
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Econ202 Exam 1, Spring 2007
Douglas
7. The dictator of a certain country takes some farms away from their owners each year and gives them to his
friends who he sincerely believes are better farmers than the former owners. Other things the same, in the
long run this practice will most likely
a. reduce real GDP per person and reduce productivity.
b. reduce real GDP per person, but increase productivity.
c. increase real GDP per person and increase productivity.
d. increase real GDP per person, but decrease productivity.
8. Birdfeeders are normal goods. What will happen to the equilibrium price of birdfeeders if consumers
experience an increase in income, the price of bird food falls, and the number of birdfeeder manufacturers
falls?
a. Price will stay exactly the same.
b. Price will rise.
c. Price will fall.
d. The price change will be ambiguous.
Table 23-2. The information in the table pertains to the country of Ophir.
Year Nominal GDP GDP Deflator
2004 $4000 100
2005 $4100 105
2006 $4200 110
9. Refer to Table 23-2. Rank the years from highest Real GDP to lowest Real GDP:
a. 2004 is highest, then 2005, and 2006 is lowest.
b. 2006 is highest, then 2005, and 2004 is lowest.
c. 2004 is highest, then 2006, and 2005 is lowest.
d. 2005 is highest, then 2004, and 2006 is lowest.
10. The current price of neckties is $30 and the equilibrium price of neckties is $25. As a result,
a. There is currently a surplus of neckties.
b. the equilibrium quantity of neckties exceeds the quantity demanded at the $30 price.
c. the current quantity supplied of neckties exceeds the quantity demanded of neckties.
d. All of the above are correct.
11. In a closed economy, what does (T - G) represent?
a. national saving
b. public saving
c. investment
d. private saving
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Econ202 Exam 1, Spring 2007
Douglas
Table 2-1. Production Possibilities for Toyland
Dolls Fire Trucks
400 0
300 200
200 350
100 450
0 500
12. In Table 2-1, what is the opportunity cost of increasing the production of dolls from 200 to 300?
a. It is impossible to tell what the opportunity cost is since in this example costs are not
constant.
b. 100 fire trucks
c. 150 fire trucks
d. 200 fire trucks
13. What is the present value of a payment of $200 to be made one year from today if the interest rate is 10
percent?
a. $181.82
b. $220
c. $180
d. $222.22
14. Compared to long-term bonds, other things the same, short-term bonds generally have
a. about the same risk and so pay about the same interest.
b. more risk and so pay higher interest.
c. less risk and so pay higher interest.
d. less risk and so pay lower interest.
Table 24-4
The table below pertains to an economy with only two goods -- books and calculators. The fixed basket
consists of 5 books and 10 calculators.
Year Price of books Price of calculators
2006 $24 $8
2007 30 12
2008 32 15
15. Refer to Table 24-4. Using 2006 as the base year, the consumer price index is
a. 100 in 2006, 135 in 2007, and 155 in 2008.
b. 200 in 2006, 270 in 2007, and 310 in 2008.
c. 100 in 2006, 270 in 2007, and 310 in 2008.
d. 200 in 2006, 540 in 2007, and 620 in 2008.
16. If the consumer price index was 100 in the base year and 107 in the following year, the inflation rate was
a. 107 percent.
b. 10.7 percent.
c. 7 percent.
d. 1.07 percent.
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Econ202 Exam 1, Spring 2007
Douglas
17. Which of the following is correct?
a. If a relatively poor country had grown at 3.5 percent per year for the last 100 years, it
would most likely be a relatively rich country today.
b. In the United States, average income today is about twice as high as it was a century ago.
c. International data on the history of the growth of real GDP per person shows that the rich
countries get richer and the poor countries get poorer.
d. All of the above are correct.
18. Which of the following items is included in GDP?
a. the sale of services such as those performed by a doctor
b. the sale of stocks and bonds
c. the sale of used goods
d. All of the above are included in GDP.
19. Suppose a closed economy had public saving of $1 trillion and investment of $6 trillion. Consumption is $7
trillion and GDP is $14 trillion. What is private saving in this country?
a. $5 trillion
b. $7 trillion
c. $1 trillion.
d. $6 trillion
20. Which of the following events could shift the demand curve for gasoline to the left?
a. The price of gasoline rises.
b. Income of gasoline buyers falls, and gasoline is an inferior good.
c. Income of gasoline buyers rises, and gasoline is a normal good.
d. The price of tires rises.
21. If you put $300 into an account paying 2 percent interest and let the interest accumulate without withdrawing
it, what will be the value of this account in two years?
a. $312
b. $314.24
c. $310
d. $312.12
22. You are expecting to receive $750 at some time in the future. Which of the following would unambiguously
increase the present value of this future payment?
a. Interest rates rise and you get the payment sooner.
b. Interest rates fall and you get the payment sooner.
c. Interest rates rise and you have to wait longer for the payment.
d. Interest rates fall and you have to wait longer to get the payment.
23. In a certain economy in 2005, GDP amounted to $5,000; consumption amounted to $3,000; investment was
$900; and the value of imports exceeded the value of exports by $200. Taxes collected were $900. It follows
that government purchases amounted to
a. $2200.
b. $900.
c. $400.
d. $1300.
24. Goods that go into inventory and are not sold during the current period are
a. included in current period GDP as consumption.
b. counted in current GDP only if the firm that produced them sells them to another firm.
c. included in current period GDP as inventory investment.
d. counted as intermediate goods and so are not included in current period GDP.
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Econ202 Exam 1, Spring 2007
Douglas
25. The primary advantage of mutual funds is that they
a. allow people with small amounts of money to diversify.
b. always make a return that "beats the market."
c. provide customers with a medium of exchange.
d. All of the above are correct.
26. If Susan quits going to Speedy Lube and starts changing the oil in her old car herself, she will cause GDP to
a. rise.
b. fall.
c. be unaffected because the same service is produced in either case.
d. be unaffected because maintenance on old cars is not included in GDP.
27. What would happen to the equilibrium price and quantity of cotton shirts if the price of cotton fell and the
price of silk shirts fell?
a. Price will rise and the effect on quantity is ambiguous.
b. Price will fall and the effect on quantity is ambiguous.
c. Quantity will rise and the effect on price is ambiguous.
d. Quantity will fall and the effect on price is ambiguous.
28. In the circular-flow diagram,
a. spending on goods and services flows from firms to households.
b. income paid to the factors of production flows from firms to households.
c. goods and services flow from households to firms.
d. factors of production flow from government to firms.
29. When supply and demand both increase, equilibrium
a. price may increase, decrease, or remain unchanged.
b. quantity may increase, decrease, or remain unchanged.
c. price will definitely decrease.
d. price will definitely increase.
30. Suppose the price of gasoline increases rapidly, and consumers respond by buying a smaller quantity of
gasoline. The consumer price index
a. will accurately reflect inflation.
b. will overstate inflation due to the so-called substitution bias.
c. will overstate inflation due to the so-called income bias.
d. will understate inflation due to the so-called substitution bias.
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Econ202 Exam 1, Spring 2007
Douglas
Short Essay Question. Answer all three parts in the space provided.
31. a. In a closed economy, suppose that the government increases spending without raising taxes, and
interest rates subsequently fall. Why is this surprising? Explain briefly in the space below, using a
graph, complete sentence(s), and perhaps a little bit of algebra, why you would expect interest rates
to rise when government spending rises, with taxes held constant.
b. Name one event (e.g., a change in government policy or individual behavior or attitudes) that, if it
occurred simultaneously with the spending increase, could have caused interest rates to fall.
c. If your explanation in part b is correct, then the amount of private investment must have
(circle one) RISEN, FALLEN. Explain your answer below, using a second graph to illustrate.
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ID: A
Econ 202 Midterm 1
Answer Section
MULTIPLE CHOICE
1. ANS: C MSC: Definitional
2. ANS: B MSC: Applicative
3. ANS: B MSC: Definitional
4. ANS: A MSC: Interpretive
5. ANS: A MSC: Analytical
6. ANS: D MSC: Applicative
7. ANS: A MSC: Applicative
8. ANS: B MSC: Analytical
9. ANS: A MSC: Applicative
10. ANS: D MSC: Interpretive
11. ANS: B MSC: Definitional
12. ANS: C MSC: Interpretive
13. ANS: A MSC: Applicative
14. ANS: D MSC: Definitional
15. ANS: A MSC: Applicative
16. ANS: C MSC: Interpretive
17. ANS: A MSC: Definitional
18. ANS: A MSC: Interpretive
19. ANS: A MSC: Definitional
20. ANS: D MSC: Interpretive
21. ANS: D MSC: Applicative
22. ANS: B MSC: Analytical
23. ANS: D MSC: Applicative
24. ANS: C MSC: Interpretive
25. ANS: A MSC: Definitional
26. ANS: B MSC: Applicative
27. ANS: B MSC: Applicative
28. ANS: B MSC: Interpretive
29. ANS: A MSC: Applicative
30. ANS: B MSC: Interpretive
PROBLEM
31. ANS:
a. It is surprising because an increase in government spending increases the deficit (makes public
savings T-G fall), which would cause savings to fall, reducing Supply of Loanable Funds. .
b & c. Events that could explain the paradox include a fall in wealth that causes an increase in private
saving (Y-T-C), which would cause I to rise too, or a fall in optimism, which causes a decrease in
Demand for Loanable Funds, which would cause I to fall.
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