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University of California, Santa Barbara Econ 2 Spring 2011 Midterm 1 1)GDP is defined as  the market value of all goods and services produced within a country in a given period of time

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University of California, Santa Barbara

Econ 2 Spring 2011 Midterm 1

1)GDP is defined as 

1. 1. the market value of all goods and services produced within a country in a given period of time.
   2. the market value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.
   3. the market value of all final goods and services produced within a country in a given period of time.
   4. the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

  

2. Gross domestic product adds together many different kinds of goods and services into a single measure of the value of economic activity.  To do this, GDP makes use of  a. market prices.
   2. prices that government economists believe reflect the true value of goods and services to society.
   3. the assumption that quantities of goods and services produced are unchanged from year to year.
   4. the assumption that prices of goods and services are unchanged from year to year.

  

3. Until recently, George lived in a home that was newly constructed in 2005.  In 2005, he paid $200,000 for the brand new house.  He sold the house in 2006 for $225,000.  Which of the following statements is correct regarding the sale of the house?
   1. The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP.
   2. The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP.
   3. The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be revised upward by $25,000.
   4. The 2006 sale affected neither 2005 GDP nor 2006 GDP.

  

4. Darla, a Canadian citizen, works only in the United States.  The value of the output she produces is
   1. included in both U.S. GDP and U.S. GNP.
   2. included in U.S. GDP, but it is not included in U.S. GNP.
   3. included in U.S. GNP, but it is not included in U.S. GDP.
   4. included in neither U.S. GDP nor U.S. GNP.

  

5. Household spending on education is counted in which component or subcomponent of GDP? a. consumption of durable goods
   2. consumption of nondurable goods
   3. consumption of services
   4. investment

  

6. What word do economists use to refer to the purchase of goods that will be used in the future to produce more goods and services? a. capital
   2. consumption
   3. investment
   4. costs

 

 

7. The value of goods added to a firm's inventory in a certain year is treated as
   1. consumption, since the goods will be sold to consumers in another period.
   2. saving, since the goods are being saved until they are sold in another period.
   3. investment, since GDP aims to measure the value of the economy's production that year.
   4. spending on durable goods, since the goods could not be inventoried unless they were durable.

  

8. Which of the following items is counted as part of government purchases?
   1. The federal government pays the salary of a Navy officer.
   2. The state of Nevada pays a private firm to repair a Nevada state highway.
   3. The city of Las Vegas, Nevada pays a private firm to collect garbage in that city. d. All of the above are correct.

  

9. If net exports is a negative number for a particular year, then
   1. the value of firms’ inventories declined over the course of the year.
   2. consumption exceeded the sum of investment and government purchases during the year.
   3. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year.
   4. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

  

10. An Iowan receives a Social Security check for $500, which he uses to purchase a $480 television made in Japan by a Japanese firm and a $20 dinner at a local restaurant.  As a result, U.S. GDP a. does not change.
    2. increases by $20.
    3. increases by $520.
    4. increases by $1000.

  

11. In the economy of Wrexington in 2008, nominal GDP was $20 billion and the GDP deflator was 50.  What was Wrexington’s real GDP in 2008? a. $2.5 billion
    2. $10 billion
    3. $40 billion
    4. $100 billion

  

12. Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP.  It follows that a. GDP is not a useful measure of society's welfare.
    2. GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of government.
    3. GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.
    4. GDP is still the best measure of society's welfare because these other values cannot actually be measured.

  

13. GDP is not a perfect measure of well-being; for example,
    1. GDP incorporates a large number of non-market goods and services that are of little value to society.
    2. GDP places too much emphasis on the value of leisure.
    3. GDP fails to account for the quality of the environment.
    4. All of the above are correct.

 

 

14. International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with
    1. longer life expectancy and a lower percentage of the population that is literate.
    2. longer life expectancy and a higher percentage of the population that is literate.
    3. very nearly the same life expectancy and a lower percentage of the population that is literate.
    4. very nearly the same life expectancy and a higher percentage of the population that is literate.

  

15. The consumer price index is used to
    1. monitor changes in the level of wholesale prices in the economy.
    2. monitor changes in the cost of living over time.
    3. monitor changes in the level of real GDP over time.
    4. monitor changes in the stock market.

  

16. When the overall level of prices in the economy is increasing, economists say that the economy is experiencing a. economic growth.
    2. stagflation.
    3. inflation.
    4. deflation.

  

17. The CPI is a measure of the overall cost of the goods and services bought by a. a typical firm.
    2. the government.
    3. a typical consumer.
    4. All of the above are correct.

  

18. Suppose the price index was 110 in 2004, 120 in 2005, and 125 in 2006.  Which of the following statements is correct?
    1. The economy experienced inflation between 2004 and 2005 and between 2005 and 2006.
    2. The inflation rate was positive between 2004 and 2005, and it was negative between 2005 and 2006.
    3. The inflation rate was higher between 2005 and 2006 than it was between 2004 and 2005. d. All of the above are correct.

 

 

Table 24-2

 

The table below pertains to Iowan, an economy in which the typical consumer’s basket consists of 3 pounds of pork and 4 bushels of corn.  

 

Year	Price of Pork	Price of Corn
2008	$20 per pound	$12 per bushel
2009	$25 per pound	$18 per bushel

 

 

19. Refer to Table 24-2.  The cost of the basket in 2008 was
    1. $108.
    2. $147.
    3. $160.
    4. $224.

  

20. Refer to Table 24-2.  If 2009 is the base year, then the inflation rate in 2009 was
    1. 26.5 percent.
    2. 36.1 percent.
    3. 39 percent.
    4. 47 percent.

 

 

Table 24-3

 

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

 

 

21. Refer to Table 24-3.  If 2007 is the base year, then the consumer price index was
    1. 74.1 in 2006, 100 in 2007, and 114.8 in 2008.
    2. 74.1 in 2006, 270 in 2007, and 310 in 2008.
    3. 200 in 2006, 100 in 2007, and 114.8 in 2008.
    4. 200 in 2006, 270 in 2007, and 310 in 2008.

  

22. Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10.  If the CPI rises from 150 to 175, then people likely will buy a. more milk and more T-shirts.
    2. more milk and fewer T-shirts.
    3. less milk and more T-shirts.
    4. less milk and fewer T-shirts.

  

23. The CPI differs from the GDP deflator in that
    1. the CPI is a price index, while the GDP deflator is an inflation index.
    2. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
    3. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.
    4. increases in the prices of domestically produced goods that are sold to the U.S.

government show up in the CPI but not in the GDP deflator.

  

24. A Japanese automobile company produces cars in the United States, with some of those cars being exported to other nations and some of them being sold within the United States.  If the prices of these cars increase, then a. the GDP deflator and the CPI will both increase.
    2. the GDP deflator will increase and the CPI will be unchanged.
    3. the GDP deflator will be unchanged and the CPI will increase.
    4. the GDP deflator and the CPI will both be unchanged.

  

25. The basket of goods in the consumer price index changes
    1. occasionally, as does the group of goods used to compute the GDP deflator.
    2. automatically, as does the group of goods used to compute the GDP deflator.
    3. occasionally, whereas the group of goods used to compute the GDP deflator changes automatically.
    4. automatically, whereas the group of goods used to compute the GDP deflator changes occasionally.

 

 

Scenario 24-2

 

The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00.  The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3.

 

26. Refer to Scenario 24-2.  Assume 1975 and 2005 golf balls are identical.  In 1975 dollars, a 1975 golf ball cost

$0.20 and a 2005 golf ball cost

1. 1. $0.55, so golf balls were cheaper in 1975.
   2. $0.55, so golf balls were cheaper in 2005.
   3. $7.32, so golf balls were cheaper in 1975.
   4. $7.32, so golf balls were cheaper in 2005.

  

27. Iggie took a university teaching job as an assistant professor in 1974 at a salary of $10,000.  By 2003, she had been promoted to full professor, with a salary of $50,000.  If the price index was 50 in 1974 and 180 in 2003, then what is Iggie's 2003 salary in 1974 dollars? a. $13,888.89
    2. $40,000
    3. $65,000
    4. $180,000

  

28. In 1972, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50.  If the same goods today cost $6.00, then which pair of CPIs would make the cost in today's dollars the same for both years?
    1. 60 in 1972 and 150 today
    2. 65 in 1972 and 156 today
    3. 75 in 1972 and 160 today
    4. 90 in 1972 and 145.8 today

  

29. If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is a. -9.5 percent.
    2. -4.5 percent.
    3. 4.5 percent.
    4. 9.5 percent.

  

30. During a certain year, the consumer price index increased from 150 to 159 and the purchasing power of a person’s bank account increased by 3.5 percent.  For that year, a. the nominal interest rate was 6 percent.
    2. the nominal interest rate was 9.5 percent.
    3. the inflation rate was 3.5 percent.
    4. the inflation rate was 9.5 percent.

  

31. Maxine deposits $100 in a bank account that pays an annual interest rate of 20%.  A year later, after Maxine has accumulated $20 in interest, she withdraws her $120.  Maxine’s purchasing power a. did not change if the inflation rate was 0%.
    2. decreased if the inflation rate was -2%.
    3. increased if the inflation rate was 5%.
    4. More than one of the above is correct.

  

32. Which of the following would NOT be included in United States GDP?
    1. Honda, a Japanese car company, sells a car produced at a factory in Detroit, Michigan
    2. Hershey’s chocolates sells your local bakery a case of chocolate for cake
    3. General Motors sells a car produced in Detroit to Professor Rupert
    4. You buy a California avocado at the local grocery store for your fiesta

  

 33. 

Good	Price 2008	Price 2009	Price 2010
Blanket	$25	$30	$27
Pillow	$10	$12	$15
Slippers	$37	$42	$50

 

The bundle of goods used to calculate the Consumer Price Index in the economy of Nap Time is made up of 1 Blanket, 2 Pillows and 1 Pair of Slippers. Using 2009 as the base year, what is the consumer price index of 2008? a. 85.42

1. 2. 111.46
   3. 85.71
   4. 109.5

  

34. If real GDP increases and the price index has increased:
    1. Nominal GDP must have fallen.
    2. Nominal GDP must have increased.
    3. Nominal GDP may have fallen or increased.
    4. The percentage increase in Nominal GDP must have been less than the percentage increase in the price level.

  

35. Which of the following does NOT affect US GDP?
    1. A German citizen watches an American movie in Paris.
    2. A factory in Los Angeles pollutes the surrounding air.
    3. You hire someone to clean your room.
    4. A Japanese citizen watches an American movie in San Francisco.

  

36. 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
    2. $3 million
    3. $4 million 
    4. $5 million

  

37. In 2007, Corny Company grows and sells $2 million worth of corn to Tasty Cereal Company, which makes corn flakes.  Tasty Cereal Company produces $6 million worth of corn flakes in 2007, with sales to households during the year of $4.5 million.  The unsold $1.5 million worth of corn flakes remains in Tasty Cereal Company’s inventory at the end of 2007. The transactions just described contribute how much to GDP for 2007? a. $4.5 million
    2. $6 million
    3. $6.5 million
    4. $8 million

  

38. According to the podcast Easterly on Growth, Poverty, and Aid, what is true about poverty traps?
    1. There is no evidence of poverty traps in the data, the poorest group of countries have the same growth rate as the richest countries.
    2. Poverty traps exist in the data, the poorest group of countries have the same growth rate as the richest countries.
    3. There is no evidence of poverty traps in the data, the poorest group of countries have

relatively lower growth rates.

1. 4. Poverty traps exist in the data, the poorest group of countries have relatively lower growth rates.

  

39. The consumser price index attempts to measure the true cost of living. Which of the following issues is NOT considered a problem with the CPI? a. Introduction of new goods
    2. Substitution bias
    3. Inflation rate ambiguity
    4. Unmeasured quality change

  

40. The country of Isla Vista produces two goods each year; burritos and beach cruiser bicycles.  Over three

years, the country’s output was as follows:

 

Year	2009		2010		2011
Good     Burritos       Beach Cruiser Bicycles	P          Q		P         Q		P       Q
	10         100	50         25	10         125	55         30	8         200	60         20

 

Using 2009 as a base year, what is the real GDP in 2010 and 2011?

 

 

1. 1. 4,300 and 2,600
   2. 3,550 and 2,600
   3. 3,000 and 4,300
   4. 2,600 and 4,300