University of California, Santa Barbara

Econ 2 Spring 2012 Midterm 1

1)Diminishing returns to capital implies:

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.

____ 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.

____ 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.

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.