Second Midterm-
Binary Choice Questions:
1. An increase in the corporate profits tax rate will cause the interest rate to _____.
a. Increase
b. Decrease
2. When the wage equals $10, the demand for labor is 240 hours and the supply of labor is 60 hours. When the wage rate is $20, the demand for labor is 120 hours and the supply of labor is 200 hours. Based on this information, we can say that the equilibrium wage rate is ______ than $10.
a. Higher
b. Lower
3. Which of the followings terms describes an economy with a decrease in the CPI from one year to the next?
a. deflation
b. stagnation
4. If the capital stock in a country decreases and there is no change in technology, what will happen to labor productivity?
a. It will decrease.
b. It will increase.
5. The Classical Model predicts that national savings will equal domestic investment in a closed economy.
a. True
b. False
6. The labor demand curve indicates the minimum wage for which firms will hire different quantities of labor.
a. True
b. False
7. Holding everything else constant, if government spending decreases, but tax revenues do not change, then the interest rate will ________.
a. increase
b. decrease
8. What do we know for certain if we observe that the CPI in 2001 is equal to 100?
a. This CPI was calculated using 2001 as the base year.
b. The cost of the market basket in 2001 is the same as the cost of the market basket in the base year.
9. Define the equilibrium aggregate price level to be a price such that the money demand and money supply are equal. If the current price is lower than the equilibrium aggregate price level, then spending will________ and consequently prices will increase until they reach the equilibrium level.
a. Increase
b. Decrease
10. If there is a decrease in labor supply, an increase in the capital stock, and labor demand is held constant, then labor productivity will always increase.
a. True
b. False
Multiple Choice Questions:
11. Consider a labor market and an aggregate production function. In which of the following situations can we absolutely determine the direction of the change in labor productivity?
a. Labor supply shifts leftward and labor demand shifts to the right.
b. Labor supply shifts leftward, technological capability is lowered, and the capital stock decreases.
c. Labor demand shifts to the right and the capital stock increases.
d. Labor supply shifts leftward and technology improves.
12. Assume that, when calculating the CPI, we use the consumption of the economy in 2004 as our market basket. Oranges were consumed in 2004 and therefore are part of the market basket. In 2005, oranges in Florida were seriously damaged by insects. As a result, between 2004 and 2005, the price of oranges increased by a factor of 10. Due to this price increase, the quantity of oranges traded decreased by 98%. Let INF1 be the inflation rate calculated using CPI values and let INF2 be the inflation rate calculated using GDP deflators. Which of the following statements is true?
a. INF1 will overestimate the effect of inflation on people's standard of living, while INF2 will underestimate the effect of inflation on people's standard of living.
b. INF1 will underestimate the effect of inflation on people's standard of living, while INF2 will overestimate the effect of inflation on people's standard of living.
c. Both INF1 and INF2 will underestimate the effect of inflation on people's standard of living.
d. Both INF1 and INF2 will overestimate the effect of inflation on people's standard of living.
13. What is the most important determinant of long-run economic growth?
a. Inflation
b. The unemployment rate
c. Government spending
d. Labor productivity
14. If the aggregate production function for a country is Y = f(L) = 2L, how will labor productivity change as labor increases?
a. It will increase.
b. It will decrease.
c. There will be no change.
d. There is not enough information to determine the change in labor productivity.
Use the following information to answer the next two questions:
Consider the market for loanable funds in a closed economy. The business demand for funds is given by
r = 12 - (1/2)I,
where I is investment (measured in millions of dollars) and r is the interest rate (percentage).
The private savings function is:
R = Sp,
where Sp is private savings (measured in millions of dollars).
Assume that the US government passes a bill that increases government spending, changing G-(T-Tr) from $0 to $6 million.
15. How much business investment is crowded out as a result of this increase in government spending?
a. $0
b. $2 million
c. $4 million
d. $6 million
16. What is the change in consumption by households due to this increase in government spending?
a. It increased by $2 million.
b. It decreased by $2 million.
c. It increased by $4 million.
d. It decreased by $4 million.
17. The US labor market is initially in equilibrium, but the US government imposes a minimum wage that moves the economy out of equilibrium. The aggregate production function is unchanged. What will happen to total output and labor productivity after the imposition of the minimum wage?
a. Output and productivity will both decrease.
b. Output and productivity will both increase.
c. Output will increase and productivity will decrease.
d. Output will decrease and productivity will increase.
Use the information below to answer the next two questions.
Using 2001 as the base year, the CPI in 2002 equals 200. Using 2002 as the base year, the CPI in 2003 equals 75. Using 2003 as the base year, the CPI in 2004 equals 200.
18. Which of the following statements is correct?
a. Using 2004 as the base year, the CPI in 2001 equals approximately 33.33.
b. Using 2001 as the base year, the CPI in 2004 equals approximately 33.33.
c. Using 2002 as the base year, the CPI in 2004 equals approximately 133.33.
d. Using 2004 as the base year, the CPI in 2003 equals approximately 66.67.
19. Which of the following statements is true?
a. The inflation rate from 2001 to 2002 was higher than the inflation rate from 2003 to 2004.
b. The inflation rate from 2001 to 2002 was equal to the inflation rate from 2003 to 2004.
c. The inflation rate from 2003 to 2004 was higher than the inflation rate from 2001 to 2002.
d. We cannot compare two inflation rates unless we know which base year we are considering.
20. Assume that the labor demand function and the labor supply function are given by the following 2 equations, where L is the quantity of labor, w is the wage, and P is the price level:
Demand: L = 260 - 2(w/P)
Supply: L = (w/P) + 20
Assume that the aggregate production function is given by Y = f(L) = 2√L.
Suppose that k (ratio of money to income that public desires) is equal to 0.25. If the government sets the supply of money at 50, what is the nominal wage rate in this economy?
a. $8
b. $80
c. $320
d. $800
21. Which of the following statements is false?
a. According to the Quantity Theory of Money, if the government increases the money supply, then the nominal GDP will increase.
b. According to the Classical Model, all markets clear even if there is a limited supply of some goods.
c. According to the Quantity Theory of Money, if the government increases the supply of money by 100%, the price level will increase by more than 100%.
d. In the Classical Model, to determine the full employment level of output, we need to know the equilibrium quantity in the labor market.
22. Assume that the value of capital stock in US economy was $100,000,000 at the end of 2003. In 2004, there was no investment in the US economy because the US was in a recession. Assuming the annual depreciation rate is 20%, how much investment is needed during 2005 so that the capital stock level at the end of 2005 equals the capital stock level at the end of 2003?
a. $20,000,000
b. $36,000,000
c. $40,000,000
d. $52,000,000
Use the following Classical Model to answer the next two questions.
Y = C + Sp + T - TR
SG = T - TR - G
NS = Sp + SG
NS = Y - C - G
KI = M - X
Y = C + I + G + (X - M)
In equilibrium, leakages = injections
Suppose that the government runs a balanced budget and collects $100 million in net tax revenue each year. Also assume that this economy runs a trade deficit of $300 million and that national savings equal $400 million.
23. What is the level of investment in this economy?
a. $400 million
b. $500 million
c. $600 million
d. $700 million
24. If government transfers are 0 and imports equal $400 million, what is the value of injections in equilibrium?
a. $700 million
b. $900 million
c. $1,000 million
d. $1,200 million
Use the information below to answer the next two questions.
There are 2 countries, Country A and Country B, that consume only 2 goods, hamburgers and soda. They both face the same prices in different years for these goods, as given in the following table.
|
Good
|
Price per unit
|
|
2003
|
2004
|
2005
|
|
Hamburger
|
$4.50
|
$7.50
|
$10
|
|
Can of Soda
|
$1
|
$1
|
$1
|
Consumers in these 2 countries have different preferences, and, correspondingly, when calculating the CPI, economists use different market baskets in each country. Country A's market basket consists of 10 hamburgers and 5 cans of soda. Country B's market basket instead consists of just 20 hamburgers.
25. Which of the following statements is correct?
a. Using 2003 as the base year, the CPI in Country A in 2004 is 80.
b. Using 2003 as the base year, the CPI in Country A in 2004 is 160.
c. Using 2005 as the base year, the CPI in Country B in 2003 is 200.
d. Using 2005 as the base year, the CPI in Country B in 2003 is approximately 222.22.
26. Furthermore, Country A and Country B have different wage rates, as given in the following tables. Some of the wage information is missing, however, as indicated by the blank entries in the table.
|
|
Country A
|
|
|
Country B
|
|
Year
|
Nominal Wage
|
Real Wage (in 2003 dollars)
|
|
Year
|
Nominal Wage
|
Real Wage (in 2003 dollars)
|
|
2003
|
10
|
|
|
2003
|
9
|
|
|
2004
|
24
|
|
|
2004
|
|
20
|
|
2005
|
|
20
|
|
2005
|
20
|
|
Which of the following statements is true?
I. The real wage of country A is increasing over time.
II. The real wage of country B is fluctuating over time.
a. I only
b. II only
c. I and II
d. None of the above statements are true.
27. Which of the following statements is not a benefit from knowing the value of the CPI for two different years?
a. It gives us an estimate of the rate of inflation between those two years.
b. It allows us to roughly estimate the change in the cost of living between those two years.
c. It tells us how the prices of individual goods change over those 2 years.
d. It allows us to calculate the real wage for either year once we know the nominal wage.
Use the following information to answer the next two questions.
Consider the following aggregate production function:
Y = f(L, K) = 3K√L
where K is capital and L is labor.
28. Assume that K = 5 and L = 4. What is total output (Y), given these values for K and L?
a. 30
b. 45
c. 60
d. 240
29. Now assume that labor supply is given by the equation W = 2 + 4L, and labor demand is given by the equation W = 56 - 2L, where W is the wage and L is the quantity of labor. Also assume that the capital stock changes and now K = 10. At full employment, what is the value of labor productivity when K = 10?
a. 6.67 units of output per unit of labor
b. 10 units of output per unit of labor
c. 15 units of output per unit of labor
d. 22.5 units of output per unit of labor
30. According to the Classical Model, which of the following changes will not increase long-run economic growth?
a. An increase in government spending.
b. Technological improvements.
c. A reduction in the capital gains tax, which will provide an incentive for firms to engage in a higher level of investment.
d. Increased accumulation of human capital