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Economics 102 Student Name :
3/29/2007 Section # :
Second Midterm TA Name :
Version 1
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You have 50 minutes to complete the exam. The exam consists of 10 binary choice and 20 multiple
choice questions. Each binary choice question is worth 2 points and each multiple choice question is
worth 4 points for a total of 100 points. Please fill in your name, student ID number, number of your
discussion section, and version number correctly. Please answer all questions on the scantron sheet
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Discussion sections are as follows:
Nonarit Bisonyabut (South) Haixi Li Xiao Wang
302 3:30 W 6224 SOC SCI 301 3:30 W 6310 SOC SCI 303 12:05 W 6310 SOC SCI
311 8:50 F 6232 SOC SCI 304 12:05p W 6224 SOC SCI 305 1:20p W 6322 SOC SCI
313 9:55 F 114 INGRAHAM 308 2:25p W 6322 SOC SCI 316 12:05p F 6232 SOC
315 12:05p F 122 INGRAHAM 310 3:30p R 225 SCI
317 1:20p F 23 INGRAHAM INGRAHAM 318 1:20p F 4322 SOC SCI
Rebecca Lessem Yuya Takahashi
309 3:30p R 6232 SOC SCI 306 1:20p W 52 BASCOM
319 2:25p R 4322 SOC SCI 307 2:25p W 4322 SOC SCI
312 8:50 F 6112 SOC SCI
314 9:55 F 214
INGRAHAM
Binary Choice
1. An increase in the corporate profits tax rate will cause the interest rate to _____.
a. Increase
b. Decrease
2. When the wage equals $10, the demand for labor is 240 hours and the supply of labor
is 60 hours. When the wage rate is $20, the demand for labor is 120 hours and the supply
of labor is 200 hours. Based on this information, we can say that the equilibrium wage
rate is ______ than $10.
a. Higher
b. Lower
3. Which of the followings terms describes an economy with a decrease in the CPI from
one year to the next?
a. deflation
b. stagnation
4. If the capital stock in a country decreases and there is no change in technology, what
will happen to labor productivity?
a. It will decrease.
b. It will increase.
5. The Classical Model predicts that national savings will equal domestic investment in a
closed economy.
a. True
b. False
6. The labor demand curve indicates the minimum wage for which firms will hire
different quantities of labor.
a. True
b. False
7. Holding everything else constant, if government spending decreases, but tax revenues
do not change, then the interest rate will ________.
a. increase
b. decrease
8. What do we know for certain if we observe that the CPI in 2001 is equal to 100?
a. This CPI was calculated using 2001 as the base year.
b. The cost of the market basket in 2001 is the same as the cost of the market
basket in the base year.
9. Define the equilibrium aggregate price level to be a price such that the money demand
and money supply are equal. If the current price is lower than the equilibrium aggregate
price level, then spending will ________ and consequently prices will increase until they
reach the equilibrium level.
a. Increase
b. Decrease
10. If there is a decrease in labor supply, an increase in the capital stock, and labor
demand is held constant, then labor productivity will always increase.
a. True
b. False
Multiple Choice
11. Consider a labor market and an aggregate production function. In which of the
following situations can we absolutely determine the direction of the change in labor
productivity?
a. Labor supply shifts leftward and labor demand shifts to the right.
b. Labor supply shifts leftward, technological capability is lowered, and the
capital stock decreases.
c. Labor demand shifts to the right and the capital stock increases.
d. Labor supply shifts leftward and technology improves.
12. Assume that, when calculating the CPI, we use the consumption of the economy in
2004 as our market basket. Oranges were consumed in 2004 and therefore are part of the
market basket. In 2005, oranges in Florida were seriously damaged by insects. As a
result, between 2004 and 2005, the price of oranges increased by a factor of 10. Due to
this price increase, the quantity of oranges traded decreased by 98%. Let INF1 be the
inflation rate calculated using CPI values and let INF2 be the inflation rate calculated
using GDP deflators. Which of the following statements is true?
a. INF1 will overestimate the effect of inflation on people's standard of living,
while INF2 will underestimate the effect of inflation on people's standard of
living.
b. INF1 will underestimate the effect of inflation on people's standard of living,
while INF2 will overestimate the effect of inflation on people's standard of
living.
c. Both INF1 and INF2 will underestimate the effect of inflation on people's
standard of living.
d. Both INF1 and INF2 will overestimate the effect of inflation on people's
standard of living.
13. What is the most important determinant of long-run economic growth?
a. Inflation
b. The unemployment rate
c. Government spending
d. Labor productivity
14. If the aggregate production function for a country is Y f ( L) 2L , how will labor
productivity change as labor increases?
a. It will increase.
b. It will decrease.
c. There will be no change.
d. There is not enough information to determine the change in labor
productivity.
Use the following information to answer the next two questions:
Consider the market for loanable funds in a closed economy. The business demand for
funds is given by
1
r 12 I ,
2
where I is investment (measured in millions of dollars) and r is the interest rate
(percentage).
The private savings function is:
r SP ,
where Sp is private savings (measured in millions of dollars).
Assume that the US government passes a bill that increases government spending,
changing G-(T-Tr) from $0 to $6 million.
15. How much business investment is crowded out as a result of this increase in
government spending?
a. $0
b. $2 million
c. $4 million
d. $6 million
16. What is the change in consumption by households due to this increase in government
spending?
a. It increased by $2 million.
b. It decreased by $2 million.
c. It increased by $4 million.
d. It decreased by $4 million.
17. The US labor market is initially in equilibrium, but the US government imposes a
minimum wage that moves the economy out of equilibrium. The aggregate production
function is unchanged. What will happen to total output and labor productivity after the
imposition of the minimum wage?
a. Output and productivity will both decrease.
b. Output and productivity will both increase.
c. Output will increase and productivity will decrease.
d. Output will decrease and productivity will increase.
Use the information below to answer the next two questions.
Using 2001 as the base year, the CPI in 2002 equals 200. Using 2002 as the base year,
the CPI in 2003 equals 75. Using 2003 as the base year, the CPI in 2004 equals 200.
18. Which of the following statements is correct?
a. Using 2004 as the base year, the CPI in 2001 equals approximately 33.33.
b. Using 2001 as the base year, the CPI in 2004 equals approximately 33.33.
c. Using 2002 as the base year, the CPI in 2004 equals approximately 133.33.
d. Using 2004 as the base year, the CPI in 2003 equals approximately 66.67.
19. Which of the following statements is true?
a. The inflation rate from 2001 to 2002 was higher than the inflation rate from
2003 to 2004.
b. The inflation rate from 2001 to 2002 was equal to the inflation rate from
2003 to 2004.
c. The inflation rate from 2003 to 2004 was higher than the inflation rate from
2001 to 2002.
d. We cannot compare two inflation rates unless we know which base year we
are considering.
20. Assume that the labor demand function and the labor supply function are given by
the following 2 equations, where L is the quantity of labor, w is the wage, and P is the
price level:
Demand: L 260 2(w / P)
Supply: L (w / P) 20
Assume that the aggregate production function is given by Y f ( L ) 2 L .
Suppose that k (ratio of money to income that public desires) is equal to 0.25. If the
government sets the supply of money at 50, what is the nominal wage rate in this
economy?
a. $8
b. $80
c. $320
d. $800
21. Which of the following statements is false?
a. According to the Quantity Theory of Money, if the government increases the
money supply, then the nominal GDP will increase.
b. According to the Classical Model, all markets clear even if there is a limited
supply of some goods.
c. According to the Quantity Theory of Money, if the government increases the
supply of money by 100%, the price level will increase by more than 100%.
d. In the Classical Model, to determine the full employment level of output, we
need to know the equilibrium quantity in the labor market.
22. Assume that the value of capital stock in US economy was $100,000,000 at the end
of 2003. In 2004, there was no investment in the US economy because the US was in a
recession. Assuming the annual depreciation rate is 20%, how much investment is
needed during 2005 so that the capital stock level at the end of 2005 equals the capital
stock level at the end of 2003?
a. $20,000,000
b. $36,000,000
c. $40,000,000
d. $52,000,000
Use the following Classical Model to answer the next two questions.
Y C S P T TR
SG T TR G
NS S P SG
NS Y C G
KI M X
Y C I G (X M )
In equilibrium, leakages = injections
Suppose that the government runs a balanced budget and collects $100 million in net tax
revenue each year. Also assume that this economy runs a trade deficit of $300 million
and that national savings equal $400 million.
23. What is the level of investment in this economy?
a. $400 million
b. $500 million
c. $600 million
d. $700 million
24. If government transfers are 0 and imports equal $400 million, what is the value of
injections in equilibrium?
a. $700 million
b. $900 million
c. $1,000 million
d. $1,200 million
Use the information below to answer the next two questions.
There are 2 countries, Country A and Country B, that consume only 2 goods, hamburgers
and soda. They both face the same prices in different years for these goods, as given in
the following table.
Price per unit
Good 2003 2004 2005
Hamburger $4.50 $7.50 $10
Can of Soda $1 $1 $1
Consumers in these 2 countries have different preferences, and, correspondingly, when
calculating the CPI, economists use different market baskets in each country. Country
A’s market basket consists of 10 hamburgers and 5 cans of soda. Country B’s market
basket instead consists of just 20 hamburgers.
25. Which of the following statements is correct?
a. Using 2003 as the base year, the CPI in Country A in 2004 is 80.
b. Using 2003 as the base year, the CPI in Country A in 2004 is 160.
c. Using 2005 as the base year, the CPI in Country B in 2003 is 200.
d. Using 2005 as the base year, the CPI in Country B in 2003 is approximately
222.22.
26. Furthermore, Country A and Country B have different wage rates, as given in the
following tables. Some of the wage information is missing, however, as indicated by the
blank entries in the table.
Country A Country B
Nominal Real Wage Year Nominal Real Wage
Year Wage (in 2003 dollars) Wage (in 2003 dollars)
2003 10 2003 9
2004 24 2004 20
2005 20 2005 20
Which of the following statements is true?
I. The real wage of country A is increasing over time.
II. The real wage of country B is fluctuating over time.
a. I only
b. II only
c. I and II
d. None of the above statements are true.
27. Which of the following statements is not a benefit from knowing the value of the
CPI for two different years?
a. It gives us an estimate of the rate of inflation between those two years.
b. It allows us to roughly estimate the change in the cost of living between
those two years.
c. It tells us how the prices of individual goods change over those 2 years.
d. It allows us to calculate the real wage for either year once we know the
nominal wage.
Use the following information to answer the next two questions.
Consider the following aggregate production function:
Y f L, K 3K L
where K is capital and L is labor.
28. Assume that K 5 and L 4 . What is total output (Y), given these values for K and
L?
a. 30
b. 45
c. 60
d. 240
29. Now assume that labor supply is given by the equation W 2 4L , and labor
demand is given by the equation W 56 2L , where W is the wage and L is the quantity
of labor. Also assume that the capital stock changes and now K 10 . At full
employment, what is the value of labor productivity when K 10 ?
a. 6.67 units of output per unit of labor
b. 10 units of output per unit of labor
c. 15 units of output per unit of labor
d. 22.5 units of output per unit of labor
30. According to the Classical Model, which of the following changes will not increase
long-run economic growth?
a. An increase in government spending.
b. Technological improvements.
c. A reduction in the capital gains tax, which will provide an incentive for firms
to engage in a higher level of investment.
d. Increased accumulation of human capital
