University of California, Santa Barbara

Econ 2 Spring 2012 Midterm 1

1)Diminishing returns to capital implies:

 

	Holding the quantity of labor constant, each additional unit of capital adds less to output. Holding the quantity of labor constant, each additional unit of capital adds more to output. Holding the quantity of capital constant, each additional unit of labor adds less to output. Holding the quantity of capital constant, each additional unit of labor adds more to output.
____	2. Unemployment compensation is part of GDP because it represents income. part of GDP because the recipients must have worked in the past to qualify. not part of GDP because it is a transfer payment. not part of GDP because the payments reduce business profits.
____	3. Suppose an economy produces only iPhones and bananas.  In 2010, 1000 iPhones are sold at $300 each and 5000 pounds of bananas are sold at $3 per pound.  In 2009, the base year, iPhones sold at $400 each and bananas sold at $2 per pound.  For 2010,  nominal GDP is $315,000, real GDP is $410,000, and the GDP deflator is 76.83. nominal GDP is $410,000, real GDP is $315,000, and the GDP deflator is 130.16. nominal GDP is $315,000, real GDP is $410,000, and the GDP deflator is 130.16. nominal GDP is $410,000, real GDP is $315,000, and the GDP deflator is 76.83.
____	4. Waldo works eight hours and produces 7 units of goods per hour. Emerson works six hours and produces 10 units of goods per hour. Waldo’s productivity and output are greater than Emerson’s. Waldo’s productivity is greater than Emerson’s but his output is less. Emerson’s productivity and output are greater than Waldo’s. Emerson’s productivity is greater than Waldo’s but his output is less.
____	5. When the quality of a good improves while its price remains the same, the purchasing power of the dollar increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
____	6. The consumer price index was 200 in 2006 and 210 in 2007.  The nominal interest rate during this period was 6.5 percent.  What was the real interest rate during this period? a. 1.5 percent 1.75 percent 11.25 percent 11.5 percent

 

 

 

 

 

 

____	7. Lucas on Growth, Poverty and Business Cycles: According to Lucas, which of the following is significantly affected by monetary policy? a. Inflation Changes in employment. Economic growth All of the above
____	8. Al’s Aluminum Company sells $1 million worth of aluminum to Shiny Foil Company, which uses the aluminum to make aluminum foil.  Shiny Foil Company sells $4 million worth of aluminum foil to households.  The transactions just described contribute how much to GDP? a. $1 million $3 million $4 million  $5 million
____	9. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because a. the CPI is easier to measure. the CPI is calculated more often than the GDP deflator is. the CPI better reflects the goods and services bought by consumers. the GDP deflator cannot be used to gauge inflation.
____ 10. According to Lucas, which of the following best explains why third world farmers do not invest in enough capital on their chicken farms? Farmers would rather use labor instead of capital since labor in third world country is relatively cheap compared to developed countries. There is not enough physical capital available for third world countries. Human capital is low in third world and farmers do not have relevant knowledge to operate machines for chicken farms. There is an invisible gap between developed and developing countries, which prevents the third world from acquiring relevant technological knowledge.    ____ 11. JR sells RV’s. In 2010 she added $400,000 worth of RV’s to her inventory.  $100,000 of this addition was from used RV’s she purchased while the remaining $300,000 was from her purchases of newly manufactured RV’s.  None of the RV’s were sold.   How much of JR’s inventory is included in 2010 GDP? a. $0 $100,000 $300,000 $400,000    ____ 12. Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a

population of 100.  Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. 

What happened to the real GDP per person? a. It more than doubled.

2. It increased, but it less than doubled.
3. It was unchanged.
4. It decreased.

 

 

 

 

 

 

13.         In the economy of Ukzten in 2010, consumption was $1000, GDP was $1950, government purchases were

$500, and investment was $700.  What were Ukzten’s net exports in 2010? a. -$250

2. $250
3. $2200
4. Net exports cannot be calculated from the information given.

 

 

Table 24-3

 

Note:  The inflation rate for a given year is the inflation that occurred between the previous year and the current year.  For example, the inflation rate in 2007 is the inflation rate from 2006-2007.  

 

The table below pertains to Studious, an economy in which the typical consumer’s basket consists of 5 books and 10 calculators.

 

Year	Price of a Book	Price of a Calculator
2006	$24	$8
2007	$30	$12
2008	$32	$15

 

 

____ 14. Refer to Table 24-3.  The inflation rate was

1. 22.6 percent in 2007 and 12.9 percent in 2008.
2. 25.9 percent in 2007 and 14.8 percent in 2008.
3. 35 percent in 2007 and 14.8 percent in 2008.
4. 35 percent in 2007 and 20 percent in 2008.

  

____ 15. Country A and country B are the same except country A currently has a lower level of capital.  Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then

1. output in country A increases by more than in country B.
2. output in country A increases by the same amount as in country B.
3. output in country A increases by less than in country B.
4. None of the above is necessarily correct.

  

____ 16. Which of the following transactions would NOT be counted as part of GDP for the year 2011?

1. Monica buys a whole-wheat wedding cake at Whole Foods in December 2011, but she

doesn’t eat the cake until her wedding in July 2012.

2. Patrick sells Issac a pair of used basketball shorts for $1 million
3. Severen Motors sells a truck to a customer in another country
4. Fienupworks, a rock climbing school, buys $1,000 in harnesses to be used in teaching customers how to climb

 

 

 

 

 

 

 

 

 

 

Table 23-4 

The table below reports nominal and real GDP for the U.S. from 1929 to 1932.

 

Year	Nominal R GDP	eal GDP
1929	103.6	977
1930	91.2	892.8
1931	76.5	834.9
1932	58.7	725.8

 

 

____ 17. Refer to table 23-4.  What is the GDP deflator for 1931 and the inflation rate for 1930-1931? a. 9.17, -11.5

2. 9.17, -10.3
3. 1091.37, 10.3
4. 1091.37, 11.5

  

____ 18. Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50.  If the CPI rises from 150 to 177, then people likely will buy a. more ice cream and more coffee.

2. more ice cream and less coffee.
3. less ice cream and more coffee.
4. less ice cream and less coffee.

  

____ 19. If a country were to increase its saving rate, then in the long run it would also increase its a. level of income.

2. growth rate of income.
3. growth rate of productivity.
4. All of the above are correct.

  

____ 20. In the economy of Ukzten in 2010, consumption was $1000, exports were $100, government purchases were

$450, imports were $150, and investment was $350.  What was Ukzten’s GDP in 2010? a. $1750

2. $1850
3. $1900
4. $2050

  

____ 21. This is from the Easterly podcast:

What does Easterly suggest as a successful strategy for providing aid to poor countries? a. Increase spending on education.

2. Give aid money directly to individuals.
3. Give aid money to governments.
4. Establish free markets.

 

 

 

 

 

 

 

22. The president of a poor country has announced that he will implement the following measures which he claims are designed to increase growth: 1. Reduce corruption in the legal system; 2. Reduce reliance on market forces because they allocate goods and services in an unfair manner; 3. Restrict investment in domestic industries by foreigners because they take some of the profits out of the country; 4. Encourage trade with neighboring countries; and 5. Increase the fraction of GDP devoted to consumption. Which of these measures will have a positive effect on growth? a. 1 & 5

2. 1 & 4
3. 3 & 4
4. 3 & 5

  

____ 23. The substitution bias in the consumer price index refers to the

1. substitution by consumers toward new goods and away from old goods.
2. substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods.
3. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.
4. substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.

  

____ 24. Consider the following simple economy where only two items are produced: beer and pizza.

 

Year	Pizza Price	Pizza Quantity	Beer Price	Beer Quantity
2009	2	200	6	150
2010	4	350	9	100
2011	5	400	10	200

 

What are the 2011 nominal GDP, real GDP, and GDP deflator (base year 2009)?

 

1. $4000, $4000, 100
2. $1300, $2000, 200
3. $4000,  $2000, 200  
4. $1300, $1300, 100

  

____ 25. In a particular production process, if the quantities of all inputs used are increased by 60 percent, then the quantity of output increases by 60 percent as well.  This means that 

1. the production process cannot be enhanced by technological advances.
2. no mathematical representation of the relevant production function can be formulated.
3. the relevant production function has the limits-to-growth property.
4. the relevant production function has the constant-returns-to-scale property.

  

____ 26. Ralph is a plumber.  Which of the following are included in his physical capital?

1. the knowledge he learned on the job, and the tools he uses
2. the knowledge he learned on the job, but not the tools he uses
3. the tools he uses, but not the knowledge he learned on the job
4. neither the knowledge he learned on the job nor the tools he uses

 

 

 

 

 

 

27.         Which of the following statements about GDP is correct?

1. Nominal GDP values production at current prices, whereas real GDP values production at constant prices.
2. Nominal GDP values production at constant prices, whereas real GDP values production at current prices.
3. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process.
4. Nominal GDP values production at the cost of the resources used in the production process, whereas real GDP values production at market prices..

  

____ 28. The consumption component of GDP includes spending on

1. durable goods and nondurable goods, but not spending on services.
2. durable goods and services, but not spending on nondurable goods.
3. nondurable goods and services, but not spending on durable goods.
4. durable goods, nondurable goods, and services.

  

____ 29. In class, an example of the relative price of the average refrigerator changing over time was discussed.

 

If the quality of the average refrigerator has also changed over time, how would this affect the relative price adjusted for quality of the average refrigerator?

 

1. the relative price should be lower if quality has increased and lower if quality has decreased
2. the relative price should be lower if quality has increased and higher if quality has decreased
3. the relative price should be higher if quality has increased and lower if quality has decreased
4. the relative price should be higher if quality has increased and higher if quality has decreased

  

____ 30. Which of the following transactions adds to U.S. GDP for 2010?

1. In 2010, Ashley sells a car that she bought in 2006 to William for $5,000.
2. An American management consultant works in Mexico during the summer of 2010 and earns the equivalent of $30,000 during that time.
3. When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent.  John and Jennifer got married in 2010 and they bought a previously unoccupied house that, according to reliable estimates, could be rented for $1,600 per month.
4. None of the above transactions adds to U.S. GDP for 2010.

  

____ 31. Ethel purchased a bag of groceries in 1970 for $8.  She purchased the same bag of groceries in 2006 for $25.  If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars? a. $5.39

2. $25.00
3. $29.11
4. $37.11

 

 

 

 

 

 

32.         Which of the following items is included in U.S. GDP?

1. goods produced by foreign citizens working in the United States
2. the difference in the price of the sale of an existing home and its original purchase price c. known illegal activities

d. None of the above is included in U.S. GDP.

 

 

Scenario 25-1.   An economy’s production form takes the form Y = AF(L, K, H, N).

 

____ 33. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then it could be rewritten as

1. Y/L = AF(1, K/L, H/L, N/L)
2. Y/L = AF(L, 1, H/L, N/L)
3. Y/L = AF(L, K/L, 1, N/L)
4. Y/L = AF(L, K/L, H/L, 1)

  

____ 34. When the consumer price index falls, the typical family

1. has to spend more dollars to maintain the same standard of living.
2. can spend fewer dollars to maintain the same standard of living.
3. finds that its standard of living is not affected.
4. can save less because they do not need to offset the effects of rising prices.

  

____ 35. Which of the following is a way to compute GDP?

1. add up the wages paid to all workers
2. add up the quantities of all final goods and services
3. add up the market values of all final goods and services
4. add up the difference between the market values of all final goods and services and the costs of producing those goods and services

  

____ 36. The traditional view of the production process is that capital is subject to

1. diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries.
2. diminishing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich countries.
3. increasing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries.
4. increasing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than in rich countries.

  

____ 37. Janet bought flour and used it to bake bread she ate.  ABC Bakery bought flour which it used to bake bread that customers purchased.   In which transactions will the flour be counted as a final good? a. Janet’s purchase and ABC Bakery’s purchase.

2. ABC Bakery’s purchase but not Janet’s purchase.
3. Janet’s purchase but not ABC Bakery’s purchase.
4. Neither Janet’s purchase nor ABC Bakery’s purchase.

  

____ 38. If real GDP is 5,100 and nominal GDP is 4,900, then the GDP deflator is

1. 104.1 so prices are higher than in the base year.
2. 104.1 so prices are lower than in the base year.
3. 96.1 so prices are higher than in the base year.
4. 96.1 so prices are lower than in the base year.

 

 

39. Which of these payments made by the government are not part of government purchases (G) when estimating GDP?

1. Social Security payments.
2. Buying books for a public library.
3. Spending on roads and bridges.
4. Buying garbage cans for a neighborhood.

  

____ 40. If over a short time (where output doesn’t change) there is an increase in the number of people retired and a decrease in the number of people working, then productivity a. and real GDP per person rise.

2. rises but real GDP per person falls.
3. falls and real GDP per person rises.
4. and real GDP per person fall.