Midterm Exam – Macroeconomics (45 points)
Name: Major: Student Number:
Answers to the multiple choice questions:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
21. 22. 23. 24. 25. 26. 27. 28. 29. 30.
1 Write the quantity equation. Use the quantity equation to explain the classical dichotomy and monetary
neutrality. (5 points)
2. In the long run, how does the demand for the economy’s output of goods and services become equal to
the supply? Explain what happens to consumption, investment, and the real interest rate when the
government increases taxes. (5 points, Please write your answer in the back page.)
Answer the following multiple-choice questions. (1 point each)
1. Real GDP ___________ over time and the growth rate real GDP ___________ .
A. grows; fluctuates B. is steady; is steady
C. grows; is steady D. is steady; fluctuates
2. Endogenous variables are
A. fixed at the moment they enter the model. B. determined within the model.
C. the inputs of the model. D. from outside the model
3. Which of the following statements 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 questions.
4. The assumption of flexible prices is a more plausible assumption when applied to price changes that
A. from minute to minute. B. from year to year.
C. in the long run. D. in the short run.
5. In the national income accounts, consumption expenditures include all of the following except
household purchases of
A. durable goods. B. nondurable goods C. new residential housing D. services
6. Which of the following is not a stock variable?
A. Government debt B. The labor force C. M1 D. Gross domestic product
7. Suppose that a farmer grows wheat and sells it to a baker for $2, the baker makes bread and sells it to a
store for $4, and the store sells it to the customer for $6. This transaction increases GDP by
A. $2. B. $4. C. $6. D. $12.
8. If production remains the same and all prices double, then real GDP
A. and nominal GDP are both constant. B. is constant and nominal GDP is reduced by half.
C. is constant and nominal GDP doubles. D. doubles and nominal GDP is constant.
9. Which of the following statements about the CPI and the GDP deflator is true?
A. The CPI refers to a base year; the GDP deflator always refers to the current year.
B. The GDP deflator measures the price of a basket of goods and services that constantly changes as the
composition of consumer spending changes.
C. The weights given to prices are not the same.
D. The GDP deflator takes the price of imported goods into account; the CPI does not.
10. Okun's law expresses a relationship between a change in
A. the price level and a change in real GDP.
B. the price level and a change in nominal GDP.
C. real GDP and change in the unemployment rate.
D. nominal GDP and a change in the unemployment rate.
11. If the supplies of capital and labor are fixed and technology is unchanging, then real output is
A. constant. B. determined by demand.
C. uncertain. D. subject to wide fluctuations.
12. Suppose that a consumer has a marginal propensity to save of 0.2. If this consumer earns an extra $2,
her consumption spending would be expected to increase by
A. $0.40. B. $0.80. C. $1.40. D. $1.60.
13. In a closed economy, the components of GDP are
A. consumption, investment, government purchases, and exports.
B. consumption, investment, government purchases, and net exports.
C. consumption, investment, government purchases.
D. consumption and investment.
14. The real interest rate is the
A. rate of interest actually paid by consumers. B. rate of interest actually paid by banks.
C. rate of inflation minus the nominal interest rate. D. nominal interest rate minus the rate of inflation.
15. In a closed economy with fixed output, an increase in government spending without any change in
taxes will lead to a(n)
A. increase in the real interest rate and a decrease in private saving.
B. decrease in the real interest rate and an increase in private saving.
C. decrease in the real interest rate and no change in private saving.
D. increase in the real interest rate and no change in private saving.
16. In the full model of the economy presented in chapter 3, the variable that adjusts to equilibrate the
supply and demand for goods and services is
A. government spending. B. consumption. C. taxes. D. the real interest rate.
17. One purpose of money is to be the item we use to buy and sell things. This function of money is
A. store of value. B. index of inflation. C. medium of exchange. D. unit of account.
18. All of the following assets are included in M1 except
A. currency. B. demand deposits. C. savings deposits. D. traveler’s checks.
19. According to the quantity equation, if M increases by 5 percent and V decreases by 2 percent, then
A. real income increases by approximately 3 percent.
B. nominal income increases by approximately 7 percent
C. the price level increases by approximately 3 percent.
D. the price level increases s by approximately 7 percent
20. The Fisher equation states that a 1 percent rise in the rate of inflation causes a 1 percent rise in the
A. money supply. B. wage rate. C. real interest rate. D. nominal interest rate.
21. Which of the following statements is false?
A. If inflation is higher than the real interest rate, then the nominal interest rate must be negative.
B. If inflation is higher than the nominal interest rate, then the real interest rate must be negative.
C. If the nominal interest rate is higher than the real interest rate, then inflation must be positive.
D. If the nominal interest rate is higher than inflation, then the real interest rate must be positive.
22. When the government raises revenue by printing money, it imposes an "inflation tax" because the
A. real value of money holdings falls.
B. interest rate falls.
C. difference between nominal and real interest rates becomes smaller.
D. nominal value of money holdings falls.
23. Hyperinflation usually starts when
A. people start spending too much money.
B. firms demand higher and higher prices for their goods.
C. fiscal deficits are large and governments are forced to print money to finance their spending.
D. governments are forced to collect more and more taxes.
24. According to the classical dichotomy, which of the following variables is affected by monetary
A. The price level B. The real wage C. The real interest rate D. The rate of growth of real GDP
25. If the natural rate of unemployment is to remain constant, the number of people finding jobs must
equal the number of people
A. unemployed. B. losing or leaving jobs. C. looking for jobs. D. leaving the labor force.
26. Unemployment insurance schemes mainly increase
A. frictional unemployment. B. discouraged workers. C. structural unemployment. D. wage rigidity.
27. Which of the following is not a cause for real wage rigidity?
A. Minimum-wage laws B. Unemployment insurance
C. Collective bargaining D. Efficiency wages
28. Many economists believe that the rise in European unemployment is caused by
A. generous unemployment insurance.
B. the decreased influence of union insiders.
C. an increase in the number of younger workers who have higher rates of unemployment.
D. economic inequality.
29. Which of the following statements, which are about the present Korean economy, is not true.
A. The inflation rate at present is almost 10 percent per year in Korea.
B. The GDP per person was more than US$ 10,000 in 2002.
C. The largest portion of GDP is investment
D. The portion of consumption is greater than the portion of government purchases.
30. Which of the following statements, which are about the present labor market in Korea, is not true.
A. The rate of unemployment at present is about 3.8 percent.
B. The participation rate of women is lower than that of men.
D. The legal minimum wage is less than 2000 won per hour.
D. You must be 15 years old or over to be counted in the labor force.