University of California, Santa Barbara

Econ 2 Winter 2014 Midterm 1

1)Which of the following things would increase the value of Total Factor Productivity (TFP)?

1. 1. A tornado damages several pieces of new construction equipment.
   2. A new production method that can produce smaller, more efficient microchips.
   3. A company hires a large amount of  workers after building a brand new factory. d.     None of the above.
2. Chris owns and operates a small rocking chair business.  In 2012 he buys 20 logs of wood for $100 total. Using that wood he produces 10 rocking chairs, each worth $150.  By the end of 2012 he has sold 7 of the rocking chairs to happy customers.  The remaining 3 rocking chairs he manages to sell in 2013 .  What is his contribution to 2012 GDP? a.           $1,600
   2. $1,400
   3. $1,500
   4. None of the above
3. The consumer price index was 200 in 2008 and 190 in 2009.  The nominal interest rate during this period was 4.5 percent.  What was the real interest rate during this period?
   1. -  0.8%
   2. -  0.5%
   3. 9.8 %
   4. 9.5 %
4. In the Easterly podcast, William Easterly discusses that one of the problems with investments in education in poor countries is that
   1. we can build schools in poor countries but there is still a lack of qualified teachers and incentives to obtain schooling.
   2. those children who do receive the schooling will leave the country and therefore will not help its continued growth
   3. the government in the poor countries will not accept aid in the form of education/schooling investments
   4. None of the above
5. Your grandfather made $5/hour nominal wage in 1974. Likewise, your father made $9/hour in 1994, and you $17/hour today. If inflation is constant at +3.5% per year, or +41% per decade, who had the highest  real wage? a.     Grandfather
   2. Father
   3. You
   4. They’re all equal
6. Which of the following is included in GDP?
   1. the sale of stocks and bonds
   2. unpaid production of goods and services produced at home
   3. the estimated rental value of owner occupied housing
   4. none of the above are included in GDP
7. Suppose that the CPI in year 1 is 100 and that the CPI in year 2 is 103. Suppose also that the nominal interest rate is 5% in year 2. Approximately what is the real interest rate?
   1. 108 %
   2. 5 %
   3. 8 %
   4. None of the above
8. In a particular production process the quantities of all inputs used double and then the quantity of output increases by less than double.  This means that
   1. the relevant production function has the increasing returns property.
   2. the relevant production function has the constant returns property.
   3. the relevant production function has the diminishing returns property.
   4. no mathematical representation of the relevant production function can be formulated.
9. Which of the following ideas is NOT advocated by Lucas in his podcast?
   1. Sustained growth in living standards has occurred through the accumulation of physical capital.
   2. Economic growth is always associated with a movement out of agriculture and into the city environment.
   3. Globally, poverty has declined over the past half century.
   4. Emigration offers opportunities to get paid for skills less-valued in the home country.
10. If 2004 is the base year, then the inflation rate for 2005 equals

 

a.

b.

c.

d.

 

11. The country of Collegetown consumes only two goods: beer and pizza. There are currently 50 people living within the nation state of Collegetown. Suppose that the price of beer is $4, the price of a slice pizza is $2, and the price of an intermediate good, a bag of flour, used to make pizza is $1. The quantities that are traded in this economy are as follows: 100 beers, 200 pizza slices and 50 bags of flour. What is the per capita GDP of this economy?
    1. $800
    2. $850
    3. $17
    4. None of the above

Production Function for Apple Pies

12. Use the production function above to answer the following question. Let y be the output per worker and x be the capital (ovens) per worker  for apple pies in the economy.  Which of the following is true?
    1. The production function exhibits constant returns to capital at point C since it has flattened out by this point on the graph.
    2. The production function exhibits increasing returns to capital at point A since there are large gains to be made by adding another oven.
    3. Starting at C and moving to D there is a smaller increase in output per worker than starting at B and moving to C.
    4. Starting at C and moving to D there is a larger increase in output per worker than starting at B and moving to C.
13. Use the production function above to answer the following question.  Suppose that the owner of a bakery develops a new type of oven that can bake pies twice as fast.  It soon becomes the standard in the industry.  How will this affect the production function y=f(x) above?
    1. y=f(x) will move downward since the level of TFP in the economy has decreased.
    2. y=f(x) will stay the same since the number of ovens and capital per worker has not changed..
    3. y=f(x) will move upward since the level of TFP in the economy has increased. d.          None of the above.
14. GDP is not a perfect measure of well-being; for example,
    1. GDP excludes the value of volunteer work.
    2. GDP does not address the distribution of income.
    3. GDP does not address environmental quality.
    4. All of the above are correct.

Data for Country Z for 2010

Household purchases of durable goods	$1200
Inventory	$350
Household purchases of foreign goods	$100
Household purchases of new housing	$700
Purchases of capital equipment	$350
Social Security	$750
Purchases of new structures	$600
Household purchases of nondurable goods	$1750
Salaries of government workers	$1400
Government expenditures on public works	$550
Household purchases of services	$300
Foreign purchases of domestically produced goods	$50

15. Use the table for Country Z above to answer the following question.  What was Country Z’s investment in 2010? a. $2,000
    2. $1,300
    3. $3,200
    4. None of the above
16. Use Data for Country Z in 2010 to answer the following question. Suppose that in 2011, everything remains the same for Country Z except that Government Expenditures are twice as much.  What is nominal GDP in 2011? a. $7,250
    2. $9,300
    3. $9,650
    4. None of the above
17. According to the economic model put forth by Thomas Malthus if the population, L, is greater than the stable level of L*,
    1. the average product of labor is lower than that for zero population growth and the population increases towards L*.
    2. the average product of labor is higher than that for zero population growth and the population increases towards L*.
    3. the average product of labor is higher than that for zero population growth and the population decreases towards L*.
    4. the average product of labor is lower than that for zero population growth and the population decreases towards L*.
18. You pay $500 a month in rent to live in an apartment in Isla Vista.  Which of the following statements is true?
    1. Your rent is not included in GDP because nothing has been produced.
    2. Your rent is not included in GDP because this type of transaction doesn't occur in the market.
    3. Rent is included in GDP and is considered to be consumption.
    4. Rent is included in GDP and is considered to be investment.
19. Bo has $200 and is considering two different investment opportunities for his money.  The first option is a savings account that will yield $264.50 after 2 years of compound annual interest.  The second option is a short-term bond that will yield $234 after only 1 year.  If the annual inflation rate is 3%, which of these two options has a higher real interest rate? a.     Option 1
    2. Option 2
    3. They are equal and negative
    4. They are equal and positive
20. The city of Santa Barbara buys a police car manufactured in Japan.  In the GDP accounts this transaction is included in a.    in government expenditures and exports.
    2. government expenditures and imports.
    3. exports, but not government expenditures.
    4. imports, but not government expenditures.
21. The country of Rupertopia has one factory for all its workers in 2011 and 2012.  There were 100 workers in 2011 and 150 workers in 2012.  Additionally, there were 200 people living in Rupertopia in 2011 and 1,000 people in 2012.  Real GDP was one million dollars in 2011 and two million dollars in 2012.  Which of the following statements regarding labor productivity is true:
    1. Labor productivity in Rupertopia exhibits diminishing returns.
    2. Labor productivity in Rupertopia exhibits constant returns.
    3. Labor productivity in Rupertopia exhibits increasing returns.
    4. More information is needed to determine whether labor productivity in Rupertopia exhibits diminishing, constant, or increasing returns.

Table of data for Fisherville.  The base year is 2010.

Year	Nominal GDP	GDP Deflator
2010	$2000	100
2011	$3000	120
2012	$3750	150
2013	$6000	200

22. Use the above table for Fisherville.  What is the rate of inflation across the entire period from 2010-2013? a. 100 %
    2. 25 %
    3. 20 %
    4. None of the above
23. Use the above table for Fisherville to answer the following question.  Which of the following is NOT correct?
    1. This economy experienced growth from 2010 to 2011.
    2. This economy experienced growth from 2011 to 2012.
    3. This economy experienced growth from 2012 to 2013.
    4. All of the above are correct.
24. In computing GDP, market prices are used to value final goods and services because
    1. market prices do not change much over time, so it is easy to make comparisons between years.
    2. market prices reflect the values of goods and services.
    3. market prices reflect the quantity sold.
    4. None of the above is correct; market prices are not used in computing GDP.
25. Over the last decade, the price of a dishwasher has remained relatively constant while the quality of dishwashers has improved.

The CPI

1. 1. is increased monthly to reflect the increased quality of dishwashers.
   2. has an upward bias if it is not adjusted to take account of the higher quality.
   3. is adjusted monthly to reflect the improvement in quality.
   4. has an upward bias because it does not reflect the increased production of dishwashers.

Total Production

		1999			2000
	Price		Total Production	Price		Total Production
Hotdogs	1		1000	2		2000
T-Shirts	1		2000	4		4000
Factories	100		10	100		20

26. The chart above shows total production in an economy and the prices of each good produced in 1999 and 2000. Let 1999 be

the base year, and let the market basket for  the CPI be 1 hotdog and 1 T-shirt. Which of the the following statements is true? a.           The inflation rate calculated by using the CPI is lower than the inflation rate calculated by using the GDP deflator.

26. 2. The inflation rate calculated by using the CPI is higher than the inflation rate calculated by using the GDP deflator.
    3. The inflation rate calculated by using the CPI is equal to the inflation rate calculated by using the GDP deflator.
    4. More information is required to compare the inflation rates calculated by using the CPI vs. using the GDP deflator.
27. Which of the following changes would help to improve a country's productivity level?
    1. Improvements in the health of workers
    2. Tuition increases at local Universities
    3. Decreasing the amount of capital per worker
    4. None of the above
28. Is it possible for real GDP to fall while nominal GDP increases?
    1. Yes. Real GDP falls if output of goods and services falls. Nominal GDP can increase if output of goods and services falls and prices rise.
    2. Yes. Real GDP falls if output of goods and services falls. Nominal GDP can increase if output of goods and services falls and prices fall
    3. No. Real GDP falls if output of goods and services falls. Nominal GDP can increase if output of goods and services falls and prices fall
    4. No. Nominal GDP and real GDP always move in the same direction
29. In the small island nation of Carribeau, there are three economic agents. One is a company that does the fishing; second is a restaurant that makes sushi; and lastly there is the government. The fishing company collects 10 tons of fish and sells 8 tons to the restaurant and 2 tons to customers at $3 million per ton, and pays wages of $10 million and taxes of $5 million. The restaurant buys 8 tons of fish as noted before and has $50 million in revenue from selling sushi. The fish is the only cost and they pay $10 million for wages and $10 million for taxes. The government spends all its tax revenue on wages for its employees. Using the expenditure approach, what is the “consumption” of C+I+G+NX and what is the total GDP? a.        C=$80 million; GDP=$115 million
    2. C=$56 million; GDP=$95 million
    3. C=$80 million; GDP=$95 million
    4. C=$56 million; GDP=$71 million
30. Suppose employment in Blueland was 9,553,800 in December and 9,574,800 in January. What was the annualized monthly percentage change in employment between December and January?
    1. -0.21 %
    2. 0.22 %
    3. 1.22 %
    4. 2.67 %
31. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because a. the CPI is easier to measure.
    2. the CPI is calculated more often than the GDP deflator is.
    3. the CPI is a better measure of cost of living.
    4. the GDP deflator cannot be used to gauge inflation.
32. Which of the following statements regarding inflating away a debt burden is NOT true?
    1. The United States essentially inflated its way out of much of its debt during the Great Depression, and again in the 1970s.
    2. Inflating away a debt burden has the effect of reducing the purchasing power of consumers.
    3. Going forward, inflation is not a viable way to deal with the US debt burden, because most of it is indexed to inflation, either explicitly or implicitly.
    4. Inflation is the ideal way to deal with a debt burden and has no disadvantages.
33. Other things the same, which of the following could explain an increase in productivity?
    1. either an increase in human capital or an increase in physical capital
    2. an increase in human capital but not an increase in physical capital
    3. an increase in physical capital but not an increase in human capital
    4. neither an increase in human capital nor an increase in physical capital
34. Last year the Republic of Econ had real GDP of 27.0 billion.  This year it had real GDP of 31.5 billion.  Which of the following changes in population is consistent with a 5 percent growth rate of real GDP per person over the last year? a.       The population decreased from 88 million to 84 million.
    2. The population decreased from 75 million to 73 million.
    3. The population increased from 45 million to 50 million.
    4. The population increased from 60 million to 62 million.
35. The nation can see sustained increases in _________ through increases in ____________.
    1. Inflation; output produced by the country
    2. Real GDP; the population growth rate
    3. Inflation; labor force participation
    4. Real GDP; total factor productivity
36. Which of the following items would NOT be included in basket of goods used to calculate the Core Consumer Price Index? a. Gasoline
    2. A new truck
    3. Clothing
    4. All of the above items are included in Core Consumer Price Index
37. Suppose that Bob loans Bill $200 at an interest rate of 8% for the year. Both Bob and Bill anticipate that the inflation rate during the year will be 5%. However, at the end of the year they discover that the inflation rate in the economy was only 2%. What did Bob and Bill expect the real interest rate to be and what did it turn out to be?
    1. Expected Real Interest Rate = 3%, Actual Real Interest Rate = 6%
    2. Expected Real Interest Rate = 6%, Actual Real Interest Rate = 3%
    3. Expected Real Interest Rate = 8%, Actual Real Interest Rate = 6%
    4. Expected Real Interest Rate = 6%, Actual Real Interest Rate = 6%
38. Suppose that U.S. construction companies purchase Japanese-made  heavy duty trucks at a reduced price compared to last year.

What effect will this purchase have on the U.S. GDP deflator and on the U.S. consumer price index? a.         The consumer price index and the GDP deflator will both fall.

38. 2. The consumer price index will fall, and the GDP deflator will be unaffected.
    3. The consumer price index and the GDP deflator will both be unaffected.
    4. The consumer price index will be unaffected, and the GDP deflator will fall.
39. If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?
    1. both real GDP and nominal GDP
    2. real GDP but not nominal GDP
    3. nominal GDP but not real GDP
    4. neither nominal GDP nor real GDP
40. Changes in the GDP deflator reflect
    1. only changes in prices.
    2. only changes in the amounts being produced.
    3. both changes in prices and changes in the amounts being produced.
    4. neither changes in prices nor changes in the amounts being produced.