Economics 211 / Macroeconomic Principles
Exam #1 Time: 1h 15m / Date: 16 July 2012
Name ______ / Instructor: Brian B. Young
The value of this exam is 100 points plus 10 points for the Bonus Question. / Please show your work where appropriate!

Multiple Choice

2 points each

#1

One reason the demand for Chevrolet Malibus might increase is a

a. decrease in price of Chevrolet Malibus.

b. decrease in price of Ford Fusions.

c. very successful advertising campaign for Chevrolet Malibus.

d. poor quality performance record for Chevrolet Malibus.

#2

Because of the circular flows of expenditure and income in the economy, total ____ equals total ____ equals total ____.

a.expenditure; investment; income

b.expenditure; income; value of production

c.consumption; total expenditure; value of production

d.investment; income; consumption

#3

When supply decreases, there is a

a.movement down along the supply curve.

b.rightward shift of the entire supply curve.

c.leftward shift of the entire supply curve.

d.movement up along the supply curve.

#4

The law of supply states that, other things remaining the same, if the price of a good rises, then the

a.supply increases.

b.supply decreases.

c.quantity supplied decreases.

d.quantity supplied increases.

#5

The demand curve illustrates the law of demand because when the price increases, the

a.demand increases.

b.demand decreases.

c.quantity demanded decreases.

d.quantity demanded increases.

#6

If the CPI in one year is 150.000 and two years later, it rises to 165.375, estimate the annual rate of inflation.

  1. 10.25%
  2. 5%
  3. 15.375%
  4. 7.7%

#7

Economists use the term full employment to refer to an economy where

  1. unemployment is less than or equal to 5%.
  2. there is no cyclical unemployment.
  3. 100% of the labor force is gainfully employed.
  4. everyone who wants a job can get one.

#8

Potential GDP is the level of real GDP that would occur if an economy

  1. is at a peak in the business cycle.
  2. exports at least as much as it imports.
  3. is at full employment.
  4. pays a wage that is equal to the efficiency wage.

#9

The price of a General Electric jet engine would be included in

  1. the CPI.
  2. the PCE deflator.
  3. the GDP deflator.
  4. none of the above is correct because a GE jet engine is not a final good.

#10

Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then

a.the demand for hot dogs will increase.

b.the demand for hot dog buns will decrease.

c.the quantity demanded of hotdogs will decrease.

d.the demand for hot dog buns will increase.

#11

A price ceiling set below the equilibrium price leads to

a.a shortage.

b.a surplus.

c.an increase in the quantity bought and sold.

d.no change in either the equilibrium price or the equilibrium quantity

#12

A price floor set below the equilibrium price results in

a.a shortage.

b.a surplus.

c.an increase in the quantity bought and sold.

d.no change in either the equilibrium price or the equilibrium quantity.

#13

To be considered unemployed, a worker must have had

a.no employment during the week before the survey and be actively looking for a job.

b.part-time employment while actively looking for a full-time job.

c.no employment during the week before the survey and be actively looking for a job while a student.

d.no employment during the day before the survey and be actively looking for a job.

#14

BMW’s output at its South Carolina plant is

  1. included in U.S. GNP and German GDP.
  2. included in U.S. GDP and German GNP.
  3. included in U.S. GNP and U.S. GDP.
  4. included in German GNP and GDP.

#15

All of the following lead to economic growth EXCEPT

a.technological improvements.

b.expansion of human capital.

c.increased capital accumulation.

d.increased consumption.

#16

A person who advocates increased government expenditure to achieve full employment is most likely a proponent of

  1. Classical Macroeconomic Theory.
  2. the Theory of Wages and Employment.
  3. Keynesian Macroeconomic Theory.
  4. Maxwell’s Theory of Electromagnetism.

#17

One means of lowering the reported unemployment rate would be to

  1. draft unemployed persons into military service.
  2. put unemployed persons in prison until the economy improves.
  3. make it so difficult to find a job that the unemployed will stop looking.
  4. All of the above would lower the reported unemployment rate.

#18

Which of the following statements is correct for the United States?

a.Between 1962 and 2002, both the male and female labor force participation rates increased.

b.Between 1962 and 2002, the male labor force participation rate decreased rapidly, the female labor force participation rate decreased slowly, and the two rates are now equal.

c.Between 1962 and 2002, the male labor force participation rate decreased and the female labor force participation rate increased.

d.Between 1962 and 2002, both the male and female labor force participation rates decreased slowly

#19

Economic growth is defined as

a.a decrease in the rate of inflation.

b.an increase in employment.

c.a sustained expansion of production possibilities.

d.an increase in the wage rate.

#20

Growth in the standard of living is measured by the increase in

a.real GDP.

b.the Rule of 70.

c.employment.

d.real per capita GDP

#21

During a recession, when unemployment increases, a country is likely to produce a combination of goods and services illustrated by a point

a.inside its production possibilities frontier.

b.on its production possibilities frontier.

c.outside its production possibilities frontier.

d.either inside or outside but definitely not on its production possibilities frontier.

#22

In the real world, opportunity costs

a.increase because resources are not all equally productive at all activities.

b.are constant because resources are not all equally productive at all activities.

c.decrease because resources are not all equally productive at all activities.

d.are sometimes decreasing and sometimes increasing.

#23

As an economic expansion approaches its peak, it is very likely that real GDP will

a.exceed nominal GDP.

b.exceed potential GDP.

c.equal nominal GDP.

d.None of the above answers is correct.

#24

If the economy is fully employed, which of the following is true?

a.The price level equals 100.

b.Real and nominal GDP are equal.

c.Real and potential GDP are equal.

d.The unemployment rate is zero.

#25

In the absence of external intervention, when the quantity supplied is greater than the quantity demanded, there is a

a.shortage and the price will fall.

b.shortage and the price will rise.

c.surplus and the price will rise.

d.surplus and the price will fall.

Short Answer

10 points each

#1:

When the supply curve shifts to the left and the demand curve shifts to the right at the same time, is it always possible to determine the direction of change in both the equilibrium price and quantity? Use supply and demand curves to graphically explain your answer.

#2

What are the categories of expenditure used in the expenditure approach to measuring GDP?

#3

Explain, by citing at least one source of bias, why the CPI may be biased upward. Also, what are the consequences of such bias and what measures can be taken to account for the bias?

#3

Consider the following scenario. Initially the economy has 90 million people working, 10 mil-lion people unemployed, and 20 million people not in the labor force. Then prospects for the economy improve. Five million people who previously were not in the labor force now join the 10 million previously unemployed in looking for work. For now, the economy remains with 90 million workers. What happens to the unemployment rate?

#4

Suppose a farmer sells wheat to a mill for $30,000 and the mill makes the wheat into flour and sells it to a bakery for $40,000, then the bakery makes the wheat into bread and sells it to a grocer for $60,000. The grocer, then, sells the bread to the public for $70,000. What is the total contribution to GDP from this series of transactions?

#5

Over the ten year period from 1993 to 2003, a country experiences a significant increase in labor productivity.

a.Draw and label a labor market supply and demand diagram. Show how the equilibrium real wage rate and the equilibrium quantity of labor change as productivity increases.

b.Draw and label a production function. Show how potential GDP changes as labor productivity increases.

Bonus Question

10 points

Corn is fed to chickens to fatten them for the commercial market. Suppose a drought in the Midwest significantly reduces the supply of corn. In the market for chicken:

  1. Which curve(s) shift? Demand shifts to the right / Demand shifts to the left / Supply shifts to the right / Supply shifts to the left.
  1. Graph the situation in the market for chicken:

P

Q

3. As a result of the reduction in the supply of corn,

a. the price of chicken will increase / decrease / can’t tell

b. the quantity of chicken sold will increase / decrease / can’t tell

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