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Your name:______/ Ecn. 120
Fall 2007
Todd Easton
Midterm Exam #1
Please write your name in the space provided above, so that you receive credit for your work.
Part IMultiple Choice Questions
Answer the questions below on the answer sheet provided, using a #2 pencil. You should take a maximum of 25 minutes for this section. Each question is worth 3 points; the entire section is worth 45 points.
1) Keynes believed that the level of total employment in an economy is determined by
a) the wage level.
b) the aggregate (overall) price level.
c) aggregate expenditure.
d) the level of interest rates.
2) One way to calculate real GDP is to focus on purchases of final output. When we do this, we include imports in the GDP calculation because
a) we want to avoid counting goods produced outside the US and purchased by American households.
b) we want to avoid counting in GDP machines that merely replace machines that have worn out.
c) goods produced outside the US by American companies are included in GDP.
d) all foreign produced goods consumed by Americans are included in GDP.
3)Ap In 2003, Congress passed a substantial cut in income taxes. The Federal Reserve also substantially lowered interest rates. How can these two actions be categorized?
a) Both actions can be categorized as fiscal policy.
b) Both actions can be categorized as monetary policy.
c) The tax cut can be categorized as monetary policy and the lowering of interest rates can be categorized as fiscal policy.
d) The tax cut can be categorized as fiscal policy and the lowering of interest rates can be categorized as monetary policy.
4) An economist who couldn't care less about the price of beans is probably a
a) macroeconomist.
b) microeconomist.
5) The marginal propensity to consumer (MPC) is ______divided by ______
a) consumption, income.
b) change in consumption, income.
c) change in consumption, change in income.
d) consumption, change in income.
6)Ap Aggregation refers to:
a) Combining many individual markets into one economy-wide market
b) Studying the individual prices of various goods and services
c) Analyzing how firms decide how much to produce and charge for their goods and services
d) Measuring the distribution of income
7) For the United States, on average, business cycles before World War II were ______than business cycles since World WarII.
a) more gentle than
b) similar to
c) more extreme than
8)Ap Which of the following is most likely to increase labor productivity?
a) Increasing the number of workers
b) Reducing the quantity of machinery per worker
c) Providing on-the-job training
9)Ap In 2002, the Johnsons buy a home from the Black family for $175,000. The house was built in 1985 by the Black family for $90,000. What is the impact of this sale on GDP for 2002? Assume no realtor is involved in the sale.
a) GDP in 2002 rises by $175,000.
b) GDP in 2002 rises by $90,000.
c) GDP in 2002 rises by $85,000.
d) GDP in 2002 does not change.
10) During a particular year, the Consumer Price Index rose from 80 to 88. The inflation rate for that yearwas
a) / 8.0%b) / 9.1%
c) / 10.0%
d) / 80.0%
e) / 88.0%
11) The change in inventories is
a) production minus sales.
b) sales minus production.
c) a value equal to or greater than zero, but cannot be negative.
d) consumption minus saving.
12) Saving is a _____ variable and savings is a _____ variable.
a) flow; flow
b) stock; stock
c) stock; flow
d) flow; stock
13) Oliver Sudden discovers that if he cuts the price of his tomatoes at the farmers’ market, his sales revenue increases substantially. Expecting similar results, all the other tomato sellers follow his example. They are guilty of committing
a) the fallacy of composition.
b) the fallacy of post hoc, ergo propter hoc.
c) the fallacy of correlation.
d) ceteris paribus.
14) If real GDP decreases from 2001 to 2002, we can conclude that
a) production levels are lower in 2002.
b) price levels are lower in 2002.
c) there is less unemployment in 2002.
d) To be able to answer with certainty, we need more information.
15) Advocates comparing the performance of a laissez-faire system with that of a command economy would claim that a laissez-faire system would do all of the following except
a) promote efficiency.
b) stimulate innovation.
c) be directed by the decisions of individual buyers and sellers.
d) achieve an equal income distribution.
Part II Short Answer and Essay Questions
Write concise answers to each question in the space provided. Please use complete sentences. You should take a maximum of 25 minutes for the whole section. The entire section is worth 30 points.
1) [12 points] Think about the way the price in a supply and demand market adjusts. Below you can find two descriptions of how a shortage might lead to a price increase in such a market. Pick the one you think is better. Then, explain the strong points of your chosen description and the weak points of the other.
i) “Producers will take advantage of a shortage by raising their prices. The rise in price will bring quantity demanded and quantity supplied back into balance.”
ii) “In the case of a shortage, the market price will be adjusted to lower demand and raise supply until a new equilibrium is reached.”
2) Primero and Segundo are economies (imaginary ones). They are the same in most respects, including their unemployment rate. Both have an unemployment rate of 6%. However, Primero and Segundo differ in the form unemployment takes. In Primero, the unemployed are evenly split among frictional, structural, and cyclical unemployment. In Segundo, however, there are no structurally unemployed. One-third of the unemployed are frictionally unemployed and two thirds are cyclically unemployed.
a) [4 points] Explain what it means to say an economy has “an unemployment rate of 6%”.
b) [14 points] Which economy is in the better situation, Primero or Segundo? Explain.