Economics 2410-009 Exam 2
You have 1 hour and 25 minutes to complete the following multiple choice examination. There are a total of 33 questions
worth 3 points each. Identify the letter of the choice that best completes the statement or answers the question. You are
expected to complete your work in accordance with the honor code.
____ 1. What basket of goods is used to construct the CPI?
a. the least expensive and the most expensive goods and services in each major category of
b. a random sample of all goods and services produced in the economy
c. only food, clothing, transportation, entertainment, and education
d. the goods and services that are typically bought by consumers as determined by
____ 2. Which of the following best illustrates the human capital of a survivor stranded on an island?
a. Her previous training in a survival course.
b. The fishing poles she has produced.
c. The fresh fruit and fish on and around the island.
d. The invention of a better fishing lure.
____ 3. Which of the following statements about GDP is correct?
a. GDP measures two things at once: the total income of everyone in the economy and the
total expenditure on the economy’s output of goods and services.
b. Money continuously flows from households to firms and then back to households, and
GDP measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s economic well-being.
d. All of the above are correct.
____ 4. A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes
a. a positive contribution to GDP, but it does not affect investment or consumption.
b. a positive contribution both to investment and to GDP.
c. a positive contribution both to consumption and to GDP.
d. a positive contribution to investment, but it does not affect GDP.
____ 5. Suppose that the government finds a major defect in one of a company's products and demands that it take it
off the market. We would expect that the
a. demand for existing shares of the stock and the price will both rise.
b. supply of existing shares of the stock and the price will both rise.
c. supply of existing shares of the stock and the price will both fall.
d. demand for existing shares of the stock and the price will both fall.
____ 6. If Canada increases its budget deficit, it will reduce
a. public saving and so shift the supply of loanable funds left.
b. private saving and so shift the supply of loanable funds left.
c. investment and so shift the demand for loanable funds left.
d. None of the above is correct.
____ 7. A steel company sells some steel to a bicycle company for $100. The bicycle company uses the steel to
produce a bicycle, which it sells for $200. Taken together, these two transactions contribute
a. $300 to GDP.
b. $200 to GDP.
c. $100 to GDP.
d. between $200 and $300 to GDP, depending on the profit earned by the bicycle company
when it sold the bicycle.
____ 8. Drug companies can usually obtain patents on new drugs. This turns new ideas into
a. public goods, and decrease the incentive to engage in research.
b. public goods, and increase the incentive to engage in research.
c. private goods, and increase the incentive to engage in research.
d. private goods, but decrease the incentive to engage in research.
____ 9. People who buy newly issued stock in a corporation such as Crate and Barrel provide
a. equity finance and so become part owners of Crate and Barrel.
b. equity finance and so become creditors of Crate and Barrel.
c. debt finance and so become creditors of Crate and Barrel.
d. debt finance and so become part owners of Crate and Barrel.
____ 10. The average amount of goods and services produced from each hour of a worker's time is called
a. per capita GNP
b. per capita GDP
c. human capital
____ 11. Suppose that an American opens and operates a candy factory in Finland. This is an example of
a. foreign direct investment. American saving is used to finance American investment.
b. foreign portfolio investment. American saving is used to finance Finish investment.
c. foreign portfolio investment. American saving is used to finance American investment.
d. foreign direct investment. American saving is used to finance Finish investment.
____ 12. Other things the same, which bond would you expect to pay the highest interest rate?
a. a bond issued by a new restaurant chain
b. a bond issued by the U.S. government
c. a bond issued by New York State
d. a bond issued by IBM
The table below pertains to an economy with only two goods -- books and calculators. The fixed basket
consists of 5 books and 10 calculators.
Year Price of books Price of calculators
2006 $24 $8
2007 30 12
2008 32 15
____ 13. Refer to Table 24-4. Using 2006 as the base year, the consumer price index is
a. 200 in 2006, 540 in 2007, and 620 in 2008.
b. 100 in 2006, 135 in 2007, and 155 in 2008.
c. 200 in 2006, 270 in 2007, and 310 in 2008.
d. 100 in 2006, 270 in 2007, and 310 in 2008.
____ 14. Refer to Table 24-4. Using 2006 as the base year, the inflation rate is
a. 35 percent for 2007 and 55 percent for 2008.
b. 35 percent for 2007 and 14.8 percent for 2008.
c. 135 percent for 2007 and 155 percent for 2008.
d. 13.3 percent for 2007 and 14.8 percent for 2008.
____ 15. The Peapod Restaurant uses all of the following to produce vegetarian meals. Which of them is an example of
a. The money in the owner's account at the bank she borrowed money from.
b. The land the restaurant was built on.
c. The tables and chairs in the restaurant.
d. The owner's knowledge of how to prepare vegetarian entrees.
____ 16. Economists use the term inflation to describe a situation in which
a. some prices are rising faster than others.
b. the economy's overall price level is high, but not necessarily rising.
c. the economy's overall price level is rising.
d. the economy's overall output of goods and services is rising faster than the economy's
overall price level.
____ 17. Suppose that a country increased its saving rate. In the long run it would have
a. lower productivity, but another unit of capital would increase output by less than before.
b. lower productivity, and another unit of capital would increase output by more than before.
c. higher productivity, and another unit of capital would increase output by more than before.
d. higher productivity, but another unit of capital would increase output by less than before.
Prices and Quantities
Year Price of Quantity of Price of Quantity of
Sandwiches Sandwiches Magazines Magazines
2006 $4.00 100 $2.00 180
2007 $5.00 120 $2.50 200
2008 $6.00 150 $3.50 200
____ 18. Refer to Table 23-3. Nominal GDP for 2007 is
____ 19. Refer to Table 23-3. Using 2006 as the base year, for 2007,
a. real GDP is $880 and the GDP deflator is 80.
b. real GDP is $950 and the GDP deflator is 95.
c. real GDP is $950 and the GDP deflator is 116.
d. real GDP is $880 and the GDP deflator is 125.
____ 20. The value of goods added to a firm's inventory in a certain year is treated as
a. investment, since GDP aims to measure the value of the economy's production.
b. spending on durable goods, since the goods could not be inventoried unless they were
c. saving, since the goods are being saved until they are sold in another period.
d. consumption, since the goods will be sold to consumers in another period.
____ 21. Suppose the price of gasoline increases rapidly, and that consumers respond by buying a smaller quantity of
gasoline. The consumer price index
a. overstates the price increase due to the so-called income bias.
b. overstates the price increase due to the so-called substitution bias.
c. understates the price increase due to the so-called income bias.
d. reflects this price increase accurately.
____ 22. If there are diminishing returns to capital, then
a. increases in the capital stock eventually decrease output.
b. capital produces fewer goods as it ages.
c. increases in the capital stock increase output by ever smaller amounts.
d. old ideas are not as useful as new ones.
____ 23. If Proctor and Gamble sells a bond it is
a. borrowing directly from the public.
b. lending indirectly to the public.
c. lending directly to the public.
d. borrowing indirectly from the public.
____ 24. If the nominal interest rate is 6 percent and the rate of inflation is 9 percent, then the real interest rate is
a. -15 percent.
b. -3 percent.
c. 3 percent.
d. 15 percent.
____ 25. Suppose that a government that taxed all interest income changed its tax law so that the first $5,000 of a
taxpayer’s interest income was tax free. This would shift the
a. supply for loanable funds right making interest rates fall.
b. demand for loanable funds left making the interest rate fall.
c. supply of loanable funds left making interest rates rise.
d. demand for loanable funds right making the interest rate rise.
____ 26. In a small closed economy investment is $20 billion and private saving is $22 billion. What is public saving
and national saving?
a. $2 billion and $24 billion
b. $20 billion and -$2 billion
c. -$2 billion and $20 billion
d. $24 billion and $2 billion
____ 27. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which
of the following statements is correct?
a. Ralph’s payments as well as the estimated value of Mike’s mowing services are included
b. Neither Ralph’s payments nor the estimated value of Mike's mowing services is included
c. Ralph’s payments are definitely included in GDP, while the estimated value of Mike’s
mowing services is included in GDP only if Mike voluntarily provides his estimate of that
value to the government.
d. Only Ralph’s payments are included in GDP.
____ 28. Stock in Precision Instruments is selling at $25 per share. It had earnings of $5 a share and a dividend yield of
5 percent. What is the dividend and the price-earnings ratio?
a. $1.25, 5
b. $.25, 6.7
c. $1.25, 6.7
d. $.25, 5
____ 29. Social Security payments are
a. excluded from GDP because they do not represent current government purchases of goods
b. included in GDP because they represent potential consumption.
c. included in GDP because they represent payments for work performed in the past.
d. excluded from GDP because they are not private pensions.
____ 30. The price of imported olives produced in Spain increases. By itself, what effect will this price increase have
on the U.S. GDP deflator and on the CPI?
a. The GDP deflator and the CPI will both be unaffected.
b. The GDP deflator and the CPI will both increase.
c. The GDP deflator will increase and the CPI will be unaffected.
d. The GDP deflator will be unaffected and the CPI will increase.
____ 31. If one wants to know how the material well-being of the average person has changed over time in a given
country, one should look at the
a. level of real GDP.
b. growth rate of real GDP.
c. growth rate of nominal GDP.
d. growth rate of real GDP per person.
____ 32. Suppose the CPI was 104 in 1967, and suppose currently the CPI is 390. According to the CPI, $10 in 1967
purchased the same number of goods and services as
a. $42.64 purchases today.
b. $37.50 purchases today.
c. $28.88 purchases today.
d. $104.00 purchases today.
____ 33. The primary advantage of mutual funds is that they
a. allow people with small amounts of money to diversify.
b. provide customers with a medium of exchange.
c. always make a return that "beats the market."
d. All of the above are correct.