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Econ 202 Principle of Macroeconomics Fall 2006
Midterm Examination 1 Jing Cai
Form A
1. In a market economy,
a. supply determines demand and, in turn, demand determines prices.
b. demand determines supply and, in turn, supply determines prices.
c. the allocation of scarce resources determines prices and, in turn, prices determine
supply and demand.
d. supply and demand determine prices and, in turn, prices allocate scarce resources.
2. A competitive market is a market in which
a. an auctioneer helps set prices and arrange sales.
b. there are only a few sellers.
c. the forces of supply and demand do not apply.
d. no individual buyer or seller has any significant impact on the market price.
3. In a competitive market, each seller has limited control over the price of his product because
a. other sellers are offering similar products.
b. buyers exert more control over the price than do sellers.
c. these markets are highly regulated by government.
d. sellers usually agree to set a common price that will allow each seller to earn a
comfortable profit.
4. Which of the following would not be a determinant of the demand for a particular good?
a. prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good
5. You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has
been wiped out by drought, and that this will cause the price of peanuts to double by the end of
the year. As a result,
a. your demand for peanut butter will increase, but not until the end of the year.
b. your demand for peanut butter increases today.
c. your demand for peanut butter decreases as you look for a substitute good.
d. you will wait for the price of jelly to change before altering your demand for peanut
butter.
6. Ford Motor Company announces that it will offer $3,000 rebates on new Mustangs starting next
month. As a result of this information, today’s demand curve for Mustangs
a. shifts to the right.
b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction of the
shift from the given information.
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d. will not shift; rather, the demand curve for Mustangs will shift to the right next
month.
7. Suppose Spencer and Kate are the only two demanders of lemonade. Each month, Spencer buys
six glasses of lemonade when the price is $1.00 per glass, and he buys four glasses when the price
is $1.50 per glass. Each month, Kate buys four glasses of lemonade when the price is $1.00 per
glass, and she buys two glasses when the price is $1.50 per glass. Which of the following points
is on the market demand curve?
a. (quantity demanded = 4, price = $2.50)
b. (quantity demanded = 16, price = $2.50)
c. (quantity demanded = 3, price = $1.50)
d. (quantity demanded = 10, price = $1.00)
8. Which of the following events could cause an increase in the supply of ceiling fans?
a. The number of sellers of ceiling fans increases.
b. There is an increase in the price of air conditioners, and consumers regard air
conditioners and ceiling fans as substitutes.
c. There is an increase in the price of the motor that powers ceiling fans.
d. All of the above are correct.
9. Which of the following events could shift both the demand curve and the supply curve for a
good?
a. A technological advance pertaining to the production of the good is observed.
b. Incomes of all buyers of the good increase.
c. The number of sellers of the good increases.
d. Everyone revises upward their expectation of next month’s price of the good.
10. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal
government increases the minimum wage by $1.00 an hour it is likely that the
a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.
Figure 1
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11. Refer to Figure 1. Suppose the supply curves that are drawn represent supply curves for single-
family residential houses. Then the movement from S to S1 could be caused by
a. an increase in the price of apartments (a substitute for single-family houses for many
people looking for a place to live).
b. a newly-formed expectation by house-builders that prices of houses will increase
significantly in the next six months.
c. a decrease in the price of lumber.
d. All of the above are correct.
Figure 2
12. Refer to Figure 2. At a price of $27.50,
a. there is an excess supply of 50 units of the good and the law of supply and demand
predicts that the price will rise from $27.50 to a higher price.
b. there is an excess supply of 100 units of the good and the law of supply and demand
predicts that the price will fall from $27.50 to a lower price.
c. there is an excess demand of 100 units of the good and the law of supply and demand
predicts that the price will fall from $27.50 to a lower price.
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d. there is a surplus of 75 units of the good and the law of supply predicts that the price
will fall from $27.50 to a lower price.
Figure 3
13. Refer to Figure 3. Which of the four graphs represents the market for pizza delivery in a college
town as we go from summer to the beginning of the fall semester?
a. A
b. B
c. C
d. D
Table 1. The demand schedule below pertains to sandwiches demanded per week.
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Quantity
Price
Demanded
$3.00 3
Alfred
$5.00 1
$3.00 4
Belinda
$5.00 2
$3.00 3
Charissa
$5.00 x
14. Refer to Table 1. Suppose x = 1. Then the slope of the market demand curve is
a. -1/3.
b. -1/2.
c. -2.
d. -3.
15. During the last few decades in the United States, health officials have argued that eating too much
beef might be harmful to human health. As a result, there has been a significant decrease in the
amount of beef produced. Which of the following best explains the decrease in production?
a. Beef producers, concerned about the health of their customers, decided to produce
relatively less beef.
b. Government officials, concerned about consumer health, ordered beef producers to
produce relatively less beef.
c. Individual consumers, concerned about their own health, decreased their demand for
beef, which lowered the relative price of beef, making it less attractive to produce.
d. Anti-beef protesters have made it difficult for both buyers and sellers of beef to meet
in the marketplace.
16. Which of these statements does not apply to market economies?
a. Prices guide economic decisions and thereby allocate scarce resources.
b. Prices ensure that quantity supplied and quantity demanded are in balance.
c. Prices ensure that anyone who wants a product can get it.
d. Prices influence how much of a good buyers choose to purchase and how much
sellers choose to produce.
17. If a nation’s GDP rises, then it must be the case that the nation’s
a. income and expenditure both rise.
b. income and saving both rise.
c. income rises, but expenditure may rise or fall.
d. saving rises, but income may rise or fall.
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18. GDP is defined as
a. the market value of all goods and services produced within a country in a given period of time.
b. the market value of all goods and services produced by the citizens of a country, regardless of
where they are living in a given period of time.
c. the market value of all final goods and services produced within a country in a given period of
time.
d. the market value of all final goods and services produced by the citizens of a country, regardless
of where they are living, in a given period of time.
19. Which of the following is not included in GDP?
a. unpaid cleaning and maintenance of houses
b. services such as those provided by lawyers and hair stylists
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States
20. A professional gambler moves from a state where gambling is illegal to a state where gambling is
legal. Most of his income was, and continues to be, from gambling. His move
a. necessarily raises GDP.
b. necessarily decreases GDP.
c. doesn't change GDP because gambling is never included in GDP.
d. doesn't change GDP because in either case his income is included.
21. Which of the following items is included in GDP?
a. the sale of stocks and bonds
b. the sale of used goods
c. the sale of services such as those performed by a doctor
d. All of the above are included in GDP.
22. In the nation of Paolaland, quarterly GDP is always higher in the second quarter than in other
quarters. In order to account systematically for this predictable second-quarter jump in GDP, Paolaland's
government statisticians will
a. employ a statistical procedure called seasonal adjustment.
b. report a four-quarter moving average of GDP rather than the one-quarter figure.
c. report GNP rather than GDP.
d. report personal income rather than GDP.
23. A transfer payment is
a. a payment for moving expenses a worker receives when he or she is transferred by an employer
to a new location.
b. a payment that is automatically transferred from your bank account to pay a bill or some other
obligation.
c. a form of government spending that is not made in exchange for a currently produced good or
service.
d. the benefit that a person receives from an expenditure by government minus the taxes that were
collected by government to fund that expenditure.
24. In a certain economy in 2005, GDP amounted to $5,000; consumption amounted to $3,000;
government purchases were equal to investment; and the value of imports exceeded the value of exports
by $200. It follows that government purchases amounted to
a. $900.
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b. $1,100.
c. $1,250.
d. $1,325.
25. If total spending rises from one year to the next, then
a. the economy must be producing a larger output of goods and services.
b. prices at which goods and services are sold must be higher.
c. either the economy must be producing a larger output of goods and services, or the prices at
which goods and services are sold must be higher, or both.
d. employment or productivity must be rising.
26. Real GDP
a. evaluates current production at current prices.
b. evaluates current production at the prices that prevailed in some specific year in the past.
c. is not a valid measure of the economy's performance, since prices change from year to year.
d. is a measure of the value of goods only; it excludes the value of services.
Table 2. The information in the table pertains to the country of Ophir.
Year Nominal GDP GDP Deflator
2004 $4000 100
2005 $4100 105
2006 $4200 110
27. Refer to Table 2. From this information we can conclude that
a. real GDP was higher in 2006 than in 2005, and real GDP was higher in 2005 than in 2004.
b. real GDP was higher in 2005 than in 2004, and real GDP was higher in 2005 than in 2006.
c. real GDP was higher in 2004 than in 2005, and real GDP was higher in 2005 than in 2006.
d. real GDP was higher in 2004 than in 2006, and real GDP was higher in 2005 than in 2004.
28. Refer to Table 2. Which of the following statements do we know to be correct?
a. Total spending in Ophir increased throughout the period.
b. Household spending in Ophir increased throughout the period.
c. The production of goods and services increased in Ophir throughout the period.
d. All of the above are correct.
29..A country reported a nominal GDP of $115 billion in 2006 and $125 billion in 2005; it reported a
GDP deflator of 85 in 2006 and a deflator of 100 in 2005. Between 2005 and 2006,
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.
30. Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200,
and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of
150. What happened to the real GDP per person?
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a. It more than doubled.
b. It increased, but it less than doubled.
c. It was unchanged.
d. It decreased.
31. GDP is not a perfect measure of well-being; for example,
a. GDP incorporates a large number of non-market goods and services that are of little value to
society.
b. GDP places too much emphasis on the value of leisure.
c. GDP fails to account for the quality of the environment.
d. All of the above are correct.
32. When the consumer price index rises, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
33. The inflation rate is defined as the
a. price level.
b. change in the price level from one period to the next.
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.
34. What basket of goods is used to construct the CPI?
a. a random sample of all goods and services produced in the economy
b. the goods and services that are typically bought by consumers as determined by government
surveys
c. only food, clothing, transportation, entertainment, and education
d. the least expensive and the most expensive goods and services in each major category of
consumer expenditures
In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of
bread, 3 robes and 2 gallons of gasoline. The per-unit prices of these goods have been as follows:
Table 3
Year Apples Bread Robes Gasoline
2002 $1.00 $2.00 $10.00 $1.00
2003 $1.00 $1.50 $9.00 $1.50
2004 $2.00 $2.00 $11.00 $2.00
2005 $3.00 $3.00 $15.00 $2.50
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35. Refer to Table 3. Using 2002 as the base year, what was the inflation rate between 2003 and 2004?
a. 28.5 percent
b. 34.2 percent
c. 47 percent
d. It is impossible to determine without knowing the base year.
36. For any given year, the CPI is the price of the basket of goods and services in the
a. given year divided by the price of the basket in the base year, then multiplied by 100.
b. given year divided by the price of the basket in the previous year, then multiplied by 100.
c. base year divided by the price of the basket in the given year, then multiplied by 100.
d. previous year divided by the price of the basket in the given year, then multiplied by 100.
37. By far the largest category of goods and services in the CPI basket is
a. housing.
b. transportation.
c. food and apparel.
d. food and beverages.
38. One of the widely-acknowledged problems with the consumer price index (CPI) as a measure of the
cost of living is that the CPI
a. fails to account for consumer spending on housing.
b. accounts only for consumer spending on food, clothing, and energy.
c. fails to account for the fact that consumers spend larger percentages of their incomes on some
goods and smaller percentages of their incomes on other goods.
d. fails to account for the introduction of new goods.
39. Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in
the economy causes the CPI to overestimate the cost of living. This is so because
a. new goods and services are always of higher quality than existing goods and services.
b. new goods and services cost less than existing goods and services.
c. new goods and services cost more than existing goods and services.
d. when a new good is introduced, it gives consumers greater choice, thus reducing the amount they
must spend to maintain their standard of living.
40. When the quality of a good improves, the purchasing power of the dollar
a. increases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
b. increases, so the CPI understates the change in the cost of living if the quality change is not
accounted for.
c. decreases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
d. decreases, so the CPI understates the change in the cost of living if the quality change is not
accounted for.
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41. Most, but not all, athletic apparel sold in the United States is imported from other nations. If the price
of athletic apparel increases, the GDP deflator will
a. increase less than will the consumer price index.
b. increase more than will the consumer price index.
c. not increase, but the consumer price index will increase.
d. increase, but the consumer price index will not increase.
42. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for
1931 and 195 for 2005. Ruth's 1931 salary was equivalent to a 2005 salary of about
a. $536,000.
b. $828,000.
c. $1,026,000.
d. $1,216,000.
43. A COLA automatically raises the wage rate when
a. GDP increases.
b. taxes increase.
c. the consumer price index increases.
d. the producer price index increases.
44. Ms. Smith borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that
year the price level went up by 15 percent. Which of the following statements is correct?
a. Ms. Smith will repay the bank fewer dollars than she initially borrowed.
b. Ms. Smith's repayment will give the bank less purchasing power than it originally loaned her.
c. Ms. Smith's repayment will give the bank greater purchasing power than it originally loaned her.
d. Ms. Smith's repayment will give the bank the same purchasing power that it originally loaned her.
45. The amount of the good buyers are willing and able to purchase is called the
a. demand.
b. quantity demanded.
c. supply.
d. quantity supplied.
46. An increase in the price of rubber coincides with an advance in the technology of tire production. As a
result of these two events,
a. the demand for tires increases and the supply of tires decreases.
b. the supply of tires decreases and the demand for tires is unaffected.
c. the supply of tires increases and the demand for tires is unaffected.
d. none of the above is necessarily correct.
47. When we compare an increase in supply with an increase in quantity supplied, we know that
a. the former is depicted by a movement along the supply curve and the latter is depicted by a shift
of the curve.
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b. the former could be caused by a decrease in input costs and the latter would be caused by an
increase in the price of the good.
c. both are always caused by a change in demand.
d. both are always caused by a change in the number of market participants.
48. To encourage formation of small businesses, the government could provide subsidies; these subsidies
a. would be included in GDP because they are part of government expenditures.
b. would be included in GDP because they are part of investment expenditures.
c. would not be included in GDP because they are transfer payments.
d. would not be included in GDP because the government raises taxes to pay for them.
49. A farmer produces the same output in 2004 as in 2003. His input prices increase by 50 percent, but so
does his product price. We can conclude that
a. the farmer is better off in 2004.
b. the farmer was better off in 2004.
c. the farmer is equally well off in 2004 as in 2003.
d. we cannot tell whether the farmer is better off in 2004 or in 2003 without additional information.
50. The consumer price index and the GDP deflator are two alternative measures of the overall price
level. Which of the following statements about the two measures is correct?
a. The two measures are constructed differently, but they will always indicate the same inflation
rate.
b. The substitution bias applies equally to both measures.
c. A change in the price of Japanese-made televisions shows up in the consumer price index but not
in the GDP deflator.
d. All of the above are correct.
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