Midterm1_solution

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Student’s Name: 410, # Yuzhe Zhang, LASB 221 Midterm 1, Solution 1. Multiple Choices (2.5 points each, 100 points total): 1) Recessions are periods when real gross domestic product (GDP): A) increases slowly. B) increases rapidly. C) decreases mildly. D) decreases severely. c 2) In a simple model of the supply and demand for pizza, when buyers’ income increases, the price of pizza and the quantity purchased . A) increases; decreases B) increases; increases C) decreases; increases D) decreases; decreases b 3) Macroeconomic models: A) assume that all wages and prices are sticky. B) assume that all wages and prices are flexible. C) make different assumptions to explain different aspects of the macroeconomy. D) focus primarily on the optimizing behavior of households and firms. c 4) All of these EXCEPT are important macroeconomic variables. A) real gross domestic product (GDP) B) the unemployment rate C) the marginal rate of substitution D) the inflation rate c 5) In a simple model of the supply and demand for pizza, the endogenous variables are: A) the price of pizza and the price of cheese. 1

B) aggregate income and the quantity of pizza sold. C) aggregate income and the price of cheese. D) the price of pizza and the quantity of pizza sold. d 6) The unemployment rate: A) was zero during the 1990s in the United States. B) was zero on average between 1900 and 1950 in the United States. C) has never been zero in the United States. D) is usually zero when the economy is not in a recession or depression. c 7) The assumption of continuous market clearing means that: A) sellers can sell all that they want at the going price. B) buyers can buy all that they want at the going price. C) in any given month, buyers can buy all that they want and sellers can sell all that they want at the going price. D) at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price. d 8) Which statement about economic models is TRUE? A) There is only one correct economic model. B) All economic models are based on the same assumptions. C) The purpose of economic models is to show how endogenous variables affect exogenous variables. D) Economists use different models to address different economic phenomena. d 9) Real gross domestic product (GDP) over time, and the growth rate of real GDP . A) grows; fluctuates B) is steady; is steady C) grows; is steady D) is steady; fluctuates a 10) All of these statements about sticky prices are true EXCEPT: 2

A) in the short run, some wages and prices are sticky. B) the sticky-price model describes the equilibrium toward which the economy slowly grav- itates. C) for studying year-to-year fluctuations, most macroeconomists believe that price stickiness is a better assumption than is price flexibility. D) magazine publishers tend to change their newsstand prices only every three or four years. b 11) Macroeconomics does NOT try to answer the question of: A) why some countries experience rapid growth. B) what is the rate of return on education. C) why some countries have high rates of inflation. D) what causes recessions and depressions. b 12) The ability of macroeconomists to predict the future course of economic events: A) is no better than a meteorologist’s ability to predict the next month’s weather. B) is much better than a meteorologist’s ability to predict the next month’s weather. C) has gotten worse over time. D) is less precise than it was in the 1920s. a 13) Macroeconomic models are used to explain how variables influence variables. A) endogenous; exogenous B) exogenous; endogenous C) microeconomic; macroeconomic D) macroeconomic; microeconomic b 14) Compared with real gross domestic product (GDP) during a recession, real GDP during a depression: A) increases more rapidly. B) increases at approximately the same rate. C) decreases at approximately the same rate. D) decreases more severely. d 15) In an economic model: 3

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A) exogenous variables and endogenous variables are both determined outside the model. B) endogenous variables and exogenous variables are both determined within the model. C) endogenous variables affect exogenous variables. D) exogenous variables affect endogenous variables. d 16) The consumer price index (CPI) is determined by computing: A) an average of prices of all goods and services. B) the price of a basket of goods and services that changes every year, relative to the same basket in a base year. C) the price of a fixed basket of goods and services, relative to the price of the same basket in a base year. D) nominal gross domestic product (GDP) relative to real GDP. c 17) Gross domestic product (GDP) is the market value of all goods and services produced within an economy in a given period of time. A) used B) intermediate C) consumer D) final d 18) In the national income accounts, the purchases of durables, nondurables, and services by households are classified as: A) consumption. B) investment. C) government purchases. D) net exports. a 19) Real gross domestic product (GDP) is a better measure of economic well-being than nominal GDP because real GDP: A) excludes the value of goods and services exported aboard. B) includes the value of government transfer payments. C) measures changes in the quantity of goods and services produced by holding prices con- stant. 4

D) adjusts the value of goods and services produced for changes in the foreign exchange rate. c 20) Assume that a firm buys all the parts that it puts into an automobile for 10,000, pays its workers 10,000 to fabricate the automobile, and sells the automobile for 22,000. In this case, the value added by the automobile company is: A) 10,000. B) 12,000. C) 20,000. D) 22,000. b 21) Which of these is a stock variable? A) wealth B) consumption C) investment D) income a 22) The gross domestic product (GDP) deflator is equal to: A) the ratio of nominal GDP to real GDP. B) the ratio of real GDP to nominal GDP. C) real GDP minus national GDP. D) nominal GDP minus real GDP. a 23) If the gross domestic product (GDP) deflator in 2009 equals 1.25 and nominal GDP in 2009 equals 15 trillion, what is the value of real GDP in 2009? A) 12 trillion B) 12.5 trillion C) 15 trillion D) 18.75 trillion a 24) According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the labor force if that person: A) is going to school full time. 5

B) is temporarily absent from a job because of illness. C) has been temporarily laid off. D) is out of a job and was looking for work during the previous four weeks. a 25) A woman marries her butler. Before they were married, she paid him 60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns 1,000,000 per year both before and after her marriage. The marriage: A) does not change gross domestic product (GDP). B) decreases GDP by 60,000. C) increases GDP by 60,000. D) increases GDP by more than 60,000. b 26) If an increasing proportion of the adult population is retired, then the labor-force participation rate: A) will increase. B) will decrease. C) will remain constant. D) may increase, decrease, or remain constant. b 27) The economic statistic used to measure the level of prices is: A) gross domestic product (GDP). B) consumer price index (CPI). C) gross national product (GNP). D) real GDP. b 28) Assume that the market basket of goods and services purchased in 2004 by the average family in the United States costs 14,000 in 2004 prices, whereas the same basket costs 21,000 in 2009 prices. However, the basket of goods and services actually purchased by the average family in 2009 costs 20,000 in 2009 prices, whereas this same basket would have cost 15,000 in 2004 prices. Given these data, a Paasche index for 2009 using 2004 prices would be: A) 1.05. B) approximately 1.07. C) approximately 1.33. D) 1.50. 6

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c 29) When a firm sells a product out of inventory, investment expenditures , and consump- tion expenditures . A) increase; decrease B) decrease; increase C) decrease; remain unchanged D) remain unchanged; increase b 30) If the number of employed increases while the number of unemployed does not change, the unemployment rate: A) will increase. B) will decrease. C) will not change. D) may either increase or decrease. b 31) If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise. d 32) The marginal product of labor is: A) output divided by labor input. B) additional output produced when one additional unit of labor is added. C) additional output produced when one additional unit of labor and one additional unit of capital are added. D) value of additional output when one dollar’s worth of additional labor is added. b 33) If a technological advancement increases productivity, the neoclassical theory of distribution predicts that: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. 7

C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise. c 34) According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed: A) only to the labor used in production. B) partly between labor and capital used in production, with the surplus going to the owners of the firm as profits. C) equally between the labor and capital used in production. D) between the labor and capital used in production, according to their marginal produc- tivities. d 35) A production function is a mathematical relationship between: A) factor prices and the marginal product of factors. B) factors of production and factor prices. C) factors of production and the quantity of output produced. D) factor prices and the quantity of output produced. c 36) Accounting profit is: A) economic profit minus the return to capital. B) equal to economic profit. C) economic profit plus the return to capital. D) equal to the economic return to capital. c 37) In a Cobb–Douglas production function, the marginal product of capital will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) labor’s share of output increases. D) average capital productivity decreases. a 38) According to the neoclassical theory of distribution, in an economy described by a Cobb– Douglas production function, workers should experience high rates of real wage growth when: A) real interest rates are high. 8

B) real interest rates are low. C) labor productivity is growing rapidly. D) capital’s share of income is growing rapidly. c 39) In the circular flow diagram, firms receive revenue from the market, which is used to purchase inputs in the market. A) goods; financial B) factor; financial C) goods; factor D) factor; goods c 40) Over the last five decades, the wage of workers has grown relative to the wage of workers. A) essential; non-essential B) non-essential; essential C) skilled; unskilled D) unskilled; skilled c 9

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