Boğaziçi University, Department of Economics Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS MIDTERM I , Tuesday 11:00 Section 06 TYPE C

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1 NAME: NO: SECTION: Boğaziçi University, Department of Economics Spring 2016 EC 102 PRINCIPLES of MACROECONOMICS MIDTERM I , Tuesday 11:00 Section 06 TYPE C Do not forget to write your full name, student number and section on the top. Turn off your cell phone and put it away. During the exam if you are seen with a cell phone, on or off, your exam will be taken away instantaneously. Put away all your lecture notes, books, etc. There are 60 multiple choice questions and 8 pages in the exam. Make sure you have them all. Please put all your answers in your answer key. Do not forget to put your exam type on your answer key. You have 80 minutes. GOOD LUCK!! 1. Consider the production possibilities curve below for a country that can produce sweaters, apples (in bushels), or a combination of the two. 2. In the simple circular-flow diagram, (a) households own the factors of production. (b) households buy all the goods and services that firms produce. (c) land, labor, and capital flow from households to firms. (d) All of the above are correct. 3. A decrease in demand is represented by a (a) movement downward and to the right along a demand curve. (b) movement upward and to the left along a demand curve. The opportunity cost of moving from point U to point R is (a) 60 bushels of apples. (b) 80 bushels of apples. (c) 80 sweaters. (d) 160 sweaters. (c) rightward shift of a demand curve. (d) leftward shift of a demand curve. 4. Suppose that Amanda receives a pay increase. We would expect (a) to observe Amanda moving down and to the right along her given demand curve. 1

2 (b) Amanda s demand for inferior goods to decrease. (c) Amanda s demand for each of two goods that are complements to increase. (d) Amanda s demand for normal goods to decrease. 5. Which of the following sets of events must cause an increase in the price of a new house? (a) higher wages for carpenters, higher wood prices, increases in consumer incomes, higher apartment rents, increases in population, and expectations of higher house prices in the future (b) lower wages for carpenters, lower wood prices, increases in consumer incomes, higher apartment rents, increases in population and expectations of higher house prices in the future (c) lower wages for carpenters, higher wood prices, decreases in consumer incomes, higher apartment rents, decreases in population and expectations of higher house prices in the future (d) higher wages for carpenters, lower wood prices, decreases in consumer incomes, lower apartment rents, decreases in population and expectations of lower house prices in the future ANSWER: a (challenging) (d) Efficiency and equality can both be achieved if the economic pie is cut into equal pieces. 8. Cole is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Cole discovers that he needs to do an additional $200 worth of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should Cole do? (a) He should sell the cabinet now for $100. (b) He should keep the cabinet since it wouldnt be rational to spend $380 restoring a cabinet and then sell it for only $360. (c) He should complete the additional work and sell the cabinet for $360. (d) It does not matter which action he takes since the outcome will be the same either way. ANSWER: c (challenging) Assume that Japan and Korea can switch between producing cars and producing airplanes at a constant rate. Answer questions from 9 to 13 considering the table below. 6. Suppose the government has imposed a price ceiling on sliced sandwich bread. Which of the following events could transform the price ceiling from one that is binding to one that is not binding? (a) An increase in the price of flour, which is used to make bread. (b) A decrease in the price of lunch meat. (c) A decease in the price of unsliced bread, which people consider as a substitute for sliced bread. (d) An decrease in the price of peanut butter and jelly. ANSWER: d (challenging) 7. Which of the following is true? (a) Efficiency refers to the size of the economic pie; equality refers to how the pie is divided. (b) Government policies usually improve upon both equality and efficiency. (c) As long as the economic pie continually gets larger, no one will have to go hungry. 9. Japan s opportunity cost of one car is (a) 1/5 airplane and Korea s opportunity cost of one car is 1/3 airplane. (b) 1/5 airplane and Korea s opportunity cost of one car is 3 airplanes. (c) 5 airplanes and Korea s opportunity cost of one car is 1/3 airplane. (d) 5 airplanes and Korea s opportunity cost of one car is 3 airplanes. 10. Korea has an absolute advantage in the production of (a) cars and a comparative advantage in the production of cars. 2

3 (b) cars and a comparative advantage in the production of airplanes. (c) neither good and a comparative advantage in the production of cars. (d) neither good and a comparative advantage in the production of airplanes. 11. Assume that Japan and Korea each has 2400 hours available. Originally, each country divided its time equally between the production of cars and airplanes. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of cars increased by (a) 16. (b) 40. (c) 64. (d) 80. ANSWER: a (challenging) 12. Japan and Korea would not be able to gain from trade if Korea s opportunity cost of one car changed to (a) 1/5 airplane. (b) 1/3 airplane. (c) 3 airplanes. (d) 5 airplanes. ANSWER: a (challenging) 13. Without trade, Japan produced and consumed 50 cars and 6 airplanes and Korea produced and consumed 27 cars and 7 airplanes. Then, each country agreed to specialize in the production of the good in which it has a comparative advantage and trade 28 cars for 8 airplanes. As a result, Japan gained (a) 0 cars and 2 airplanes and Korea gained 1 car and 1 airplane. (b) 2 cars and 2 airplanes and Korea gained 1 car and 1 airplane. (c) 28 cars and 8 airplanes and Korea gained 28 cars and 8 airplanes. (d) 52 cars and 8 airplanes and Korea gained 28 cars and 8 airplanes. ANSWER: b (challenging) 14. When the price of a good or service changes, (a) the supply curve shifts in the opposite direction. (b) the demand curve shifts in the opposite direction. (c) the demand curve shifts in the same direction. (d) there is a movement along a given demand curve. 15. Production possibilities frontiers are usually bowed outward. This is because (a) the more resources a society uses to produce one good, the fewer resources it has available to produce another good. (b) the opportunity cost of producing a good decreases as more and more of that good is produced. (c) of the effects of technological change. (d) resources are specialized; that is, some are better at producing particular goods rather than other goods. ANSWER: d (challenging) 16. The law of demand states that, other things equal, an increase in (a) price causes quantity demanded to increase. (b) price causes quantity demanded to decrease. (c) quantity demanded causes price to increase. (d) quantity demanded causes price to decrease. 17. Which of the following observations would be consistent with the imposition of a binding price floor on a market? After the price floor becomes effective, (a) a smaller quantity of the good is bought and sold. (b) a larger quantity of the good is demanded. (c) a smaller quantity of the good is supplied. (d) the price falls below the equilibrium price. 18. Suppose the income of buyers in a market for an inferior good decreases and a technological advancement occurs also. What would we expect to happen in the market? (a) Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. (b) Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. (c) Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. 3

4 (d) None of the above is correct. Refer to the figure below for questions 19,20 and If toast and butter are complements, then which of the following would increase the demand for toast? (a) a decrease in the price of toast (b) a decrease in the price of butter (c) an increase in the price of butter (d) Both a and b are correct. 23. New oak tables are normal goods. What would happen to the equilibrium price and quantity in the market for oak tables if the price of maple tables rises, the price of oak wood rises, more buyers enter the market for oak tables, and the price of the glue used in the production of the new oak tables increased? 19. For a price ceiling to be binding in this market, it would have to be set at (a) any price below $3. (b) a price between $2 and $3. (c) a price between $3 and $4. (d) any price above $ For a price floor to be binding in this market, it would have to be set at (a) any price below $3. (b) a price between $2 and $3. (c) a price between $3 and $4. (d) any price above $ Suppose a price ceiling of $2 is imposed on this market. As a result, (a) the quantity of the good supplied decreases by 30 units. (b) the demand curve shifts to the left so as to now pass through the point (quantity = 30, price = $2). (c) buyers total expenditure on the good decreases by $75. (d) buyers total expenditure on the good falls by $15. ANSWER: d (challenging) (a) Price will fall, and the effect on quantity is ambiguous. (b) Price will rise, and the effect on quantity is ambiguous. (c) Quantity will fall, and the effect on price is ambiguous. (d) Quantity will rise, and the effect on price is ambiguous. ANSWER: b (challenging) 24. When a tax is imposed on the sellers of a good, the supply curve shifts (a) upward by the amount of the tax. (b) downward by the amount of the tax. (c) upward by less than the amount of the tax. (d) downward by less than the amount of the tax. 25. If the government removes a binding price floor from a market, then the price received by sellers will (a) decrease, and the quantity sold in the market will decrease. (b) decrease, and the quantity sold in the market will increase. (c) increase, and the quantity sold in the market will decrease. (d) increase, and the quantity sold in the market will increase. ANSWER: b (challenging) 26. A tax imposed on the buyers of a good will 4

5 (a) raise both the price buyers pay and the effective price sellers receive. (b) raise the price buyers pay and lower the effective price sellers receive. (c) lower the price buyers pay and raise the effective price sellers receive. (d) Neither when she babysits for her sister nor for someone else. Refer to the figure below for questions 30,31 and 32. (d) lower both the price buyers pay and the effective price sellers receive. 27. Ryan lives in an apartment where he pays $7,000 a year in rent. Sarah lives in a house that could be rented for $21,000 a year. How much do these housing services contribute to GDP? (a) $21,000 (b) $28,000 (c) $7,000 (d) $14, The value of the housing services provided by the economy s owner-occupied houses is (a) included in GDP, and the estimated rental values of the houses are used to place a value on these housing services. (b) included in GDP, and the actual mortgage payments made on the houses are used to estimate the value of these rental services. (c) excluded from GDP since these services are not sold in any market. (d) excluded from GDP since the value of these housing services cannot be estimated with any degree of precision. 29. Rachel babysits for her sister for no pay. When she babysits for someone else she charges $8 an hour. When is Rachel s babysitting included in GDP? (a) When she babysits for her sister and when she babysits for someone else. (b) When she babysits for her sister, but not when she babysits for someone else. (c) When she babysits for someone else, but not when she babysits for her sister. 30. The price paid by buyers after the tax is imposed is (a) $3. (b) $4. (c) $5. (d) $ The effective price received by sellers after the tax is imposed is (a) $3. (b) $4. (c) $5. (d) $ For every unit of the good that is sold, sellers are required to send (a) one dollar to the government, and buyers are required to send two dollars to the government. (b) two dollars to the government, and buyers are required to send one dollar to the government. (c) three dollars to the government, and buyers are required to send nothing to the government. (d) nothing to the government, and buyers are required to send two dollars to the government. ANSWER: c (challenging) 5

6 33. A farmer sells $25,000 worth of apples to individuals who take them home to eat, $50,000 worth of apples to a company that uses them all to produce cider, and $75,000 worth of apples to a grocery store that will sell them to households. How much of the farmer s sales will be included as apples in GDP? (a) $25,000 (b) $150,000 (c) $100,000 (d) $125, If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP (a) decreases. (b) increases. (c) doesn t change because both legal and illegal production are included in GDP. (d) doesn t change because these activities are never included in GDP. 35. A farmer sells five pounds of pecans to a Smith s Fresh Pecans for $10. Smith s Fresh Pecans resells three pounds for $4.50 per pound. The remaining pecans are shelled and canned and sold for a total of $8.00. Taking these transactions into account, how much is added to GDP? (a) $22.50 (b) $29.50 (c) $21.50 (d) $31.50 ANSWER: c (challenging) 36. Consumer goods that are produced, go into inventory, and are not sold during the current period are (a) counted as intermediate goods and so are not included in current period GDP. (b) counted in current period GDP only if the firm that produced them sells them to another firm. (c) included in current period GDP as inventory investment. (d) included in current period GDP as consumption. 37. Which of the following items is counted as part of government purchases? (a) The federal government pays the salary of a Navy officer. (b) The state of Nevada pays a private firm to repair a Nevada state highway. (c) The city of Las Vegas, Nevada pays a private firm to collect garbage in that city. (d) All of the above are correct. 38. Sheri, a U.S. citizen, works only in Germany. The value she adds to production in Germany is included (a) in both German GDP and U.S. GDP. (b) in German GDP, but is not included in U.S. GDP. (c) in U.S. GDP, but is not included in German GDP. (d) in neither German GDP nor U.S. GDP. 39. Quality Motors is a Japanese-owned company that produces automobiles; all of its automobiles are produced in American plants. In 2010 Quality Motors produced $30 million worth of automobiles, with $17 million in sales to Americans, $9 million in sales to Canadians, and $4 million worth of automobiles added to Quality Motors inventory. The transactions just described contribute how much to U.S. GDP for 2010? (a) $17 million (b) $21 million (c) $26 million (d) $30 million ANSWER: d (challenging) 40. If in some year real GDP was $5 trillion and the GDP deflator was 200, what was nominal GDP? (a) $2.5 trillion. (b) $10 trillion. (c) $40 trillion. (d) $100 trillion. 41. In the economy of Talikastan in 2015, consumption was $800, GDP was $2000, government purchases were $400, and investment was $600. What were Talikastan s net exports in 2015? 6

7 (a) -$200 (b) $200 (c) $1800 (d) Net exports cannot be calculated from the information given. 42. In the economy of Talikastan in 2015, consumption was 75% of GDP, government purchases were $200, imports were $50 and 125% of the value of exports, investment was one-sixth of the value of consumption. What was Talikastan s GDP in 2015? (a) $218 (b) $2500 (c) $1520 (d) $2100 ANSWER: c (challenging) 43. If you buy a burger and fries at your favorite fast food restaurant, (a) then neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at the restaurant. (b) then GDP will be higher, but consumption spending will be unchanged. (c) then GDP will be unchanged, but consumption spending will be higher. (d) then both GDP and consumption spending will be higher. 44. The Patersons bought a home that was newly constructed in 2007 for $275,000. They sold the home in 2015 for $255,000. Which of the following statements is correct regarding the sale of the house? (a) The 2015 sale increased 2015 GDP by $255,000 and had no effect on 2007 GDP. (b) The 2015 sale reduced 2015 GDP by $20,000 and had no effect on 2007 GDP. (c) The 2015 sale increased 2015 GDP by $255,000; and caused 2007 GDP to be revised downward by $20,000. (d) The 2015 sale affected neither 2007 GDP nor 2015 GDP. 45. The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result, (a) U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; and U.S. GDP is unaffected. (b) U.S. government purchases increase by $30,000; U.S. net exports are unaffected; and U.S. GDP increases by $30,000. (c) U.S. government purchases, net exports, and GDP are unaffected. (d) U.S. government purchases are unaffected; U.S. net exports decrease by $30,000; and U.S. GDP decreases by $30,000. ANSWER: a (challenging) 46. GDP is not a perfect measure of well-being; for example, (a) GDP excludes the value of volunteer work. (b) GDP does not address the distribution of income. (c) GDP does not address environmental quality. (d) All of the above are correct. 47. For an imaginary economy, the value of the consumer price index was 140 in 2013 and in The economy s inflation rate for 2014 was (a) 4.6 percent. (b) 6.5 percent. (c) 4.4 percent. (d) 46.5 percent. 48. For an imaginary economy, the value of the consumer price index was 140 in 2013, and the inflation rate was 5.0 percent between 2013 and The consumer price index in 2014 was (a) (b) (c) (d)

8 The table below pertains to Studious, an economy in which the typical consumer s basket consists of 5 books and 10 calculators. For questions 49,50 and 51, refer to the table below. (c) nominal GDP is $2000, real GDP is $1800, and the GDP deflator is 90. (d) nominal GDP is $2000, real GDP is $1800, and the GDP deflator is The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows: 49. The cost of the basket in 2012 was (a) $32. (b) $200. (c) $210. (d) $ If 2012 is the base year, then the consumer price index was (a) 100 in 2012, in 2013, and in (b) 100 in 2012, in 2013, and in (c) 210 in 2012, 260 in 2013, and 280 in (d) 100 in 2012, 150 in 2013, and 170 in The inflation rate was (a) 24.3 percent in 2013 and 22.5 percent in (b) 23.8 percent in 2013 and 9.5 percent in (c) 23.8 percent in 2013 and 7.7 percent in (d) 24.3 percent in 2013 and 7.3 percent in Suppose an economy produces only cranberries and maple syrup. In 2010, 50 units of cranberries are sold at $20 per unit and 100 units of maple syrup are sold at $8 per unit. In 2009, the base year, the price of cranberries was $10 per unit and the price of maple syrup was $15 per unit. For 2010, (a) nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 90. (b) nominal GDP is $1800, real GDP is $2000, and the GDP deflator is (a) Choose a base year, update the basket, find the prices, estimate the basket s cost, compute the index, and compute the inflation rate. (b) Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket s cost, and compute the index. (c) Fix the basket, find the prices, compute the basket s cost, choose a base year and compute the index, and compute the inflation rate. (d) Fix the basket, find the prices, compute the inflation rate, compute the basket s cost, and choose a base year and compute the index. ANSWER: c (easy) 54. If the nominal interest rate is 9 percent and the real interest rate is 3 percent, then the inflation rate is (a) -6 percent. (b) 3 percent. (c) 6 percent. (d) 12 percent. 55. Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate? (a) The real interest rate is the nominal interest rate times the rate of inflation. (b) The real interest rate is the nominal interest rate minus the rate of inflation. (c) The real interest rate is the nominal interest rate plus the rate of inflation. (d) The real interest rate is the nominal interest rate divided by the rate of inflation. ANSWER: b (easy) 56. Indexation refers to (a) a process of adjusting the nominal interest rate so that it is equal to the real interest rate. 8

9 (b) using a law or contract to automatically correct a dollar amount for the effects of inflation. (c) using a price index to deflate dollar values. (d) an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator. ANSWER: b (easy) 57. If the quality of a good improves while its price remains the same, then the value of a dollar (a) rises and the cost of living increases. (b) rises and the cost of living decreases. (c) falls and the cost of living increases. (d) falls and the cost of living decreases. 58. Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been selected as the base year. In 2012, the basket s cost was $50. In 2014, the basket s cost was $52. And in 2016, the baskets cost was $55. The value of the CPI in 2016 was (a) (b) (c) (d) When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth (a) more, and the cost of living increases. (b) more, and the cost of living decreases. (c) less, and the cost of living increases. (d) less, and the cost of living decreases. 60. The CPI was 96 in 1982, and the CPI was 230 in How much money would you have needed in 2012 in order to buy what you could have bought with $500 in 1982? (a) $ (b) $1, (c) $ (d) $1,