Spring_2010_-_Exam_1_BLUE_M5

1. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a

consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover’s 1931 salary was

equivalent to a 2007 salary of about

a) $5507. * b) $1,021,382. c) $1,140,000. d) $15,525,000.

2. Suppose that real GDP grew more in Country A than in Country B last year.

a) Country A must have a higher standard of living than country B.

b) Country A's productivity must have grown faster than country B's.

c) Both of the above are correct.

* d) None of the above is correct.

3. Other things the same, if a country increased its saving rate, in 40 years or so it would likely have

a) higher productivity, and a higher growth rate of real GDP.

* b) higher productivity, but not a higher growth rate of real GDP.

c) the same productivity and growth of real GDP it began with.

d) None of the above is correct.

4. Other things the same, which of the following best describes the response of output as time passes to

an improvement in technology?

a. The growth rate of output does not change.

b. The growth rate of output increases and gets even larger as time passes.

c. The growth rate of output increases to a higher level and remains at this higher level as time

passes.

* d. The growth rate of output increases, but diminishes to its former level as time passes.

5. On the basis of theory and empirical evidence, economists have reached several conclusions about

economic growth. Which of the following is not one of these conclusions?

* a) A relatively simple way to increase growth rates permanently is to increase a country's saving rate.

b) Growth is generally inhibited rather than promoted by policies like protective tariffs.

c) Well-established property rights that are enforced by fair and efficient courts are important to

economic growth.

d) Countries with few domestic natural resources still have opportunities for economic growth.

6. Arlo is offered a job in Des Moines, where the CPI is 80, and a job in New York, where the CPI is

125. Arlo's job offer in Des Moines is for $42,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?

a) $42,000 * b) $65,625 c) $68,880 d) $189,000

7. The consumer price index was 225 in 2006 and 236 in 2007. The nominal interest rate during this

period was 6.5 percent. What was the real interest rate during this period?

* a) 1.6 percent b) 2.8 percent c) 4.9 percent d) 11.4 percent

8. In the past there have been violent protests against the World Bank and the World Trade

Organization. The protesters argued that these institutions promote free trade and also encourage

corporations in rich countries to invest in poor countries. The protesters contended that these

practices make rich countries richer and poor countries poorer. An economist would

* a) disagree with the protesters because these practices will help make both rich and poor countries richer.

b) disagree with the protesters about free trade, but would agree with the protesters about corporate

investment.

c) disagree with the protesters about corporate investment, but would agree with the protesters about

free trade.

d) agree with the protesters.

9. In general, if a consumer good is produced domestically and consumed domestically, an increase in

its price will have which of the following effects?

* a) The consumer price index will increase relatively more than will the GDP deflator.

b) The consumer price index and the GDP deflator will increase by the same amount.

c) The consumer price index will increase relatively less than will the GDP deflator.

d) One cannot generalize about the increase in the consumer price index relative to the increase in

the GDP deflator.

10. Which of the following statements about real and nominal interest rates is correct?

a) When the nominal interest rate is rising, the real interest rate is necessarily rising; when the

nominal interest rate is falling, the real interest rate is necessarily falling.

b) If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate

is 7 percent.

c) An increase in the real interest rate is necessarily accompanied by either an increase in the

nominal interest rate, an increase in the inflation rate, or both.

* d) When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate.

11. Assume that consumers consider coffee and tea to be substitutes, so that when the price of tea rises,

consumers purchase less tea and more coffee. When the CPI is computed following the increase in the price of tea, it takes into account

* a) the increase in the price of tea.

b) the decrease in the quantity of tea purchased and the increase in the quantity of coffee purchased.

c) both (a) and (b).

d) None of the above is correct.

12. A wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located in

Connecticut that uses workers who live in Connecticut. As a result,

a) U.S. investment, GDP, and GNP all increase by the same amount.

b) U.S. investment increases, but GDP and GNP are unaffected by the purchase.

* c) U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller amount.

d) U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a smaller

amount.

13. Goods that 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.

14. In the economy of Wrexington in 2008, consumption was $3000, exports were $200, GDP was $8000,

government purchases were $1000, and imports were $600. What was Wrexington’s investment in 2008?

a) $3200 b) $3600 c) $3800 * d) $4400

15. Changes in nominal GDP reflect

a) only changes in prices.

b) only changes in the amounts being produced.

* c) both changes in prices and changes in the amounts being produced.

d) neither changes in prices nor changes in the amounts being produced.

16. In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4 trillion.

What was Wrexington’s GDP deflator in 2008?

a) 25 b) 40 * c) 250 d) 400

17. A country reported nominal GDP of $200 billion in 2008 and $180 billion in 2007. It also reported a

GDP deflator of 125 in 2008 and 105 in 2007. Between 2007 and 2008,

a) real output and the price level both rose.

b) real output rose and the price level fell.

* c) real output fell and the price level rose.

d) real output and the price level both fell.

18. Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs are sold at $3 per dozen

and 50 pounds of ham are sold at $4 per pound. In 2004, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2005,

a) nominal GDP is $400, real GDP is $500, and the GDP deflator is 80.

b) nominal GDP is $400, real GDP is $500, and the GDP deflator is 125.

c) nominal GDP is $500, real GDP is $400, and the GDP deflator is 80.

* d) nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.

19. A recession has traditionally been defined as a period during which

a) nominal GDP declines for two consecutive quarters.

b) nominal GDP declines for four consecutive quarters.

* c) real GDP declines for two consecutive quarters.

d) real GDP declines for four consecutive quarters.

20. 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.

In the countries of Ricardoville and Smithland two goods are produced: Wine and Cheese. The hours of labor required to produce bottles of wine and pounds of cheese in these countries are shown in the table below:

21. A free trade agreement between these two countries would be opposed by:

a) producers of wine in Smithland.

* b) producers of cheese in Smithland.

c) consumers of wine and cheese in Ricardoville.

d) All of the above.

22. When trade opens between these countries we would expect the terms of trade to lie between _____

and ______ bottles of wine per pound of cheese.

* a) 1/2; 2/3 b) 1/2; 3/2 c) 2/3;2 d) 3/2; 2

23. Which of the following is not correct?

a) The producer who requires a smaller quantity of inputs to produce a good is said to have an

absolute advantage in producing that good.

b) The producer who gives up less of other goods to produce Good X has the smaller opportunity

cost of producing Good X.

c) The producer who has the smaller opportunity cost of producing a good is said to have a

comparative advantage in producing that good.

* d) The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

24. Given the production possibilities frontier shown here we

can conclude that the opportunity cost in production of

guns is greatest at basket:

a) A * b) B c) C d) D

25. Given the production possibilities frontier shown here we

can conclude that the opportunity cost in production of guns

is smallest at basket:

a) A b) B c) C * d) D

26. The concept of scarcity is best represented in this production

Guns possibilities frontier by basket:

a) A b) B * c) C d) D