ECO1002FinalSpring2023_VA Solutions

1) Su ppose people only consume 3 goods. The following table shows the prices and quantities of each good consumed in each year. Year Price of Corn Quantity of Corn Price of Coffee Quantity of Coffee Price of Bread Quantity of Bread 2009 $7 400 $8 225 $10 175 2010 8 500 7 250 12 275 2011 9 900 6 275 15 275 Calculate Real GDP in 2011, using 2009 as the base year. a) $6,350 b) $11,250 c) $13,875 d) $8,600 Answer: B 2) If total consumption is $7 trillion, investment $6 trillion, government purchases $1 trillion, exports $1 trillion, and imports $3 trillion, then GDP must equal: a) $9 trillion. b) $12 trillion. c) $15 trillion. d) $18 trillion. Answer: B 3) Which of the following best describes a recession? a) Declining GDP and increasing unemployment. 1 Final Exam (Version A) ECO 1002: Principles of Macroeconomics Spring, 2023

b) Increasing GDP and declining unemployment. c) A period of significant increase in economic activity. d) An increase in the overall price level. Answer: A 4) The table below shows the Consumer Price Index (CPI) values for a country for four consecutive years: Year CPI 2019 100 2020 105 2021 110 2022 115 What was the inflation rate from 2021 to 2022 based on the CPI data? a) 4.55% b) 4.76% c) 5.00% d) 4.35% Answer: A 5) If the CPI in 1965 was 95 and the CPI today is 285, $100 today would purchase the same amount of goods and services as _________ would have purchased in 1965. a) $33 b) $300 c) $66 d) $100 Answer: A 2

c) the labor force participation rate is 5.5%. d) the labor force participation rate is 59.4% Answer: B 10) The table below shows data on the labor force, employment, and working-age population in a certain country for three years: 2019, 2020, and 2021. Year Labor Force Employed Working-Age Population 2019 10,000 9,000 15,000 2020 11,000 8,500 15,500 2021 12,000 9,800 16,000 Based on the data in the table, what is the unemployment rate in 2019? a) 9% b) 10% c) 25% d) We need more information to answer this question. Answer: B 11) Which of the following is an example of improvements in physical capital? a) A professor writes a new and improved economics textbook. b) The government is providing free health care to all its citizens. c) A worker receives on-the-job training. d) A manufacturer installs robots in its factory. Answer: D 12) Using the table below, calculate the growth rate in real GDP per capita from 2019-2020. Year Real GDP Population 2019 15 billion 20 million 2020 18 billion 20.8 million 4

a) 15% b) 13% c) 20% d) 9% Answer: A 13) Using the growth accounting equation, if the growth rate of output is 5 percent, the growth rate of labor is 2 percent, the growth rate of capital is 1 percent, and the share of GDP that goes to owners of capital is 0.25 ( α = 0.25 ), then the growth rate of innovation can be estimated to be: a) 3.25 percent. b) 4 percent. c) 6 percent. d) 4.75 percent. Answer: A 14) Which of following is NOT one of the four components of aggregate expenditure? a) Consumption b) Capital c) Investment d) Government spending Answer: B 15) In the country of Tanzania, planned aggregate expenditure (PAE) in the year 2021 was equal to $540 billion, while actual output in 2021 was $570 billion. Based on their experience in 2021, what would we expect businesses in Tanzania to do when planning for 2022? a) increase production. b) decrease production. 5

19) In the country of Baruchistan, equilibrium output is $10 billion below full-employment output. Marginal propensity to consume is 0.90. By how much would the Baruchistan government have to increase government spending to close the output gap? a) $1 billion b) $10 billion c) $9 billion d) $11.1 billion Answer: A 20) Consider the AS/AD model under perfect competition. In the long-run, changes in the prices of goods and services have no effect on: a) Household income b) Inflation c) Wages d) Output Answer: D 21) Refer to the image above. If fiscal policy moves the economy from equilibrium C to equilibrium D: a) full potential output will have been achieved in the economy. 7

b) the economy is still below its full potential output. c) the economy is overheated and the equilibrium has pushed output beyond its potential. d) inflation will decrease. Answer: C 22) Which fiscal policy would have a larger effect on aggregate demand: 1) a $100 million reduction in taxes or 2) a $100 million increase in government spending? a) Increase in government spending—the tax cut would cause an initial increase in consumption spending of less than $100 million b) Tax cut—the increase in government spending would cause an initial increase in consumption spending of less than $100 million. c) The impact will be the same—they would both increase consumption spending by $100 million. d) We can’t answer this question without knowing the MPC. Answer: A 23) Nicolas has been working a lot of overtime during the current economic expansion. As a result, his income has increased, moving him to a higher tax bracket. The increased amount Nicolas pays in taxes is an example of: a) discretionary fiscal policy slowing the economy. b) an automatic stabilizer slowing the economy. c) discretionary fiscal policy encouraging economic activity. d) automatic stabilizers encouraging economic activity. Answer: B 24) In finance, leverage ____. a) increases profits when asset prices rise. b) reduces losses when asset prices fall. c) is the ratio of a company’s assets relative to its earnings. d) is the amount of market power a company has. 8

b) Acting as a lender of last resort c) Making funds available to private banks d) Lending money to households. Answer: D 29) The Fed can pursue an expansionary monetary policy by _______. a) selling government bonds, decreasing the money supply and increasing the interest rate. b) selling government bonds, increasing the money supply and increasing the interest rate. c) purchasing government bonds, increasing the money supply and reducing the interest rate. d) purchasing government bonds, decreasing the money supply and reducing the interest rate. Answer: C 30) Which of the following transactions adds to the supply of money in the economy? a) Bank charging higher interest on loans than it pays on deposits. b) Approval of a mortgage, that will be used to buy a home. c) Depositing cash in a bank checking account. d) Taking out cash from an ATM. Answer: B 31) When there is an inflationary output gap, the recommended monetary policy would be to _________ interest rates, with the intention of __________ borrowing and spending. a) raise; boosting b) raise; reducing c) lower; boosting d) lower; reducing Answer: B 10

32) Suppose that an economy is currently at a long-run equilibrium, where unemployment is 4% and inflation is 3%. If the central bank decides to pursue expansionary monetary policy, in the long-run: a) unemployment will fall below 4% and inflation will rise above 3%. b) unemployment will be back at 4% and inflation will be back at 3%. c) unemployment will rise above 4% and inflation will be back at 3%. d) unemployment will be back at 4% and inflation will rise above 3%. Answer: D 33) Increase in oil prices causes inflation to increase. This phenomenon is called: a) Demand pull inflation b) Cost push inflation c) Core energy inflation d) Built-in inflation Answer: B 34) In the figure above, which of the equilibrium points on the graph are associated with a positive amount of cyclical unemployment? a) E1 11

38) Which of the following is a lesson that economists and policy makers learned from the COVID-19 pandemic? a) Understand the importance of global supply chain management and avoid significant reliance on other countries for essential goods such as medical goods. b) Fully rely on the principle of comparative advantage to determine which goods and services to provide. c) Fully rely on the principle of absolute advantage to determine which goods and services to provide. d) Become a fully self-sufficient economy. Answer: A 39) What action did the Federal Reserve take in response to the economic and financial market challenges caused by the COVID-19 pandemic? a) Temporarily tightened regulatory requirements for banks. b) Resumed purchasing massive amounts of debt securities. c) Raised the federal funds rate target. d) Suspended direct lending facilities for small- and mid-sized businesses and state and local governments. Answer: B 40) Which of the following increased as an immediate result of COVID-19. a) Imports b) Exports c) Savings d) Investment Answer: C 13