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					Econ 202
                                              Midterm Answers

1. In broad terms the difference between microeconomics and macroeconomics is that
A) they use different sets of tools and ideas.
B) microeconomics studies decisions of individual people and firms and macroeconomics studies the entire
national economy.
C) macroeconomics studies the effects of government regulation and taxes on the price of individual
goods and services whereas microeconomics does not.
D) microeconomics studies the effects of government taxes on the national unemployment rate.
Answer: B


2. The production possibilities frontier is
A) upward sloping and reflects unlimited choices.
B) upward sloping and reflects tradeoffs in choices.
C) downward sloping and reflects unlimited choices.
D) downward sloping and reflects tradeoffs in choices.
Answer: D




3. Refer to the production possibilities frontier in the figure above. Which point indicates that resources are
NOT fully utilized or are misallocated?
A) Point a.
B) Point b.
C) Point c.
D) Point e.
Answer: C

4. Refer to the production possibilities frontier in the figure above. Which point is unattainable?
A) Point a.
B) Point b.
C) Point c.
D) Point e.
Answer: D


5. After Hurricane Mitch devastated part of Central America in October 1998, we can be reasonably
sure that the production possibilities frontier for that area temporarily



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A) shifted inward, toward the origin.
B) shifted outward, away from the origin.
C) became flatter.
D) became steeper.
Answer: A


6. A key factor that leads to economic growth is
A) human capital accumulation.
B) increasing current consumption.
C) avoiding the opportunity cost of investment.
D) both answers A and B are correct.
Answer: A


7. In goods markets
A) households sell to firms. In factor markets firms sell to households.
B) firms sell to households. In factor markets households sell to firms.
C) and in factor markets households sell to firms.
D) and in factor markets firms sell to households.
Answer: B

8. Which of the following are examples of long-term economic policy issues?
A) Inflation and recessions.
B) Inflation and slow economic growth.
C) Persistent unemployment and curing a depression.
D) Slow economic growth and recessions.
Answer: B

9. One of the costs of more rapid growth in GDP is that
A) people must give up current consumption.
B) more money is available for research and development.
C) it does not increase the wealth available for all.
D) too many goods eventually are available for consumption.
Answer: A


10. The current account
A) measures our exports minus our imports taking into account interest payments paid to and received from
the rest of the world.
B) measures our imports minus our exports.
C) does not account for interest payments paid to and received from the rest of the world.
D) is part of GDP.
Answer: A


11. All of the following are part of fiscal policy EXCEPT
A) setting tax rates.
B) setting government spending.
C) choosing the size of the government deficit.
D) controlling the money supply.
Answer: D


12. Which of the following is a policy tool of the Federal Reserve?
A) Changes in interest rates.



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B) Changes in government spending.
C) Changes in the government deficit.
D) Changes in tax rates.
Answer: A


13. If the economy is in a recession, the Fed might
A) reduce interest rates to stimulate the economy.
B) cut tax rates to stimulate the economy.
C) increase government spending.
D) increase interest rates.
Answer: A

14. One of the aims of fiscal policy is to
A) reduce interest rates to stimulate the economy.
B) increase money supply to stimulate the economy.
C) combat unemployment in the economy through government spending or encouragement of private
spending.
D) increase interest rates.
Answer: C

15. Gross domestic product is the total ____ produced within a country in a given time period.
A) market value of all final and intermediate goods and services
B) market value of all final and intermediate goods and services plus investment and depreciation
C) amount of final and intermediate goods and services
D) market value of all final goods and services
Answer: D

16. The circular flow diagram indicates that
A) households sell the services of factors of production to firms.
B) firms buy the services of factors of production from the government.
C) households sell goods and services to the government.
D) firms buy goods and services from households.
Answer: A

17. The government’s budget deficit is the excess of government
A) purchases of goods and services over its interest payments on the government debt.
B) purchases of goods and services over its net taxes.
C) net taxes over its purchases of goods and services.
D) interest payments on the government debt over its net taxes.
Answer: B

18. If U.S. imports are less than U.S. exports, the
A) rest of the world borrows from the U.S. economy.
B) U.S. economy borrows from the rest of the world.
C) U.S. government has a budget surplus.
D) U.S. government has a budget deficit.
Answer: A

19. Which of the following are equal to one another?
I. aggregate production
II. aggregate expenditure
III. aggregate income
A) I equals II, but not III.
B) I equals III, but not II.
C) II equals III, but not I.



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D) I equals II equals III.
Answer: D


20. If national saving (S) is $100,000, net taxes (T) equal $100,000 and government purchases of
goods and services (G) are $25,000, how much are households and businesses saving?
A) $25,000.
B) $225,000.
C) –$25,000.
D) None of the above.
Answer: A

21. Which of the following is not included in the investment component of GDP?
A) A household purchases a new washing machine.
B) Purchase of new equipment by a business.
C) A firm builds a new warehouse.
D) A business fails to sell all of its output and therefore experiences an increase in inventories.
Answer: A

22. The Acme Stereo Company had a capital stock of $24 million at the beginning of the year. At the end
of the year, the firm had a capital stock of $20 million. Thus its
A) net investment was some amount but we need more information to determine the amount.
B) net investment was $4 million for the year.
C) gross investment was zero.
D) net investment was –$4 million for the year.
Answer: D

23. In the nation of Nirvana, depreciation is $22 billion, GDP is $260.4 billion, and national income is
$215.2 billion. Net domestic product is
A) smaller than national income.
B) $215.2 billion.
C) $238.4 billion.
D) $445.2 billion.
Answer: C


Government purchases of goods
                                        $240
and
services
Depreciation                              240
Gross private domestic investment         400
Personal income taxes                     140
Net taxes                                 120
Net exports of goods and services          80
Personal consumption expenditures         640
Net interest                              100

24. From the data in the above table, GDP equals
A) $1,120.
B) $1,280.
C) $1,290.
D) $1,360.
Answer: D




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25. Using the data in the above table, net domestic product equals
A) $1,120.
B) $1,280.
C) $1,290.
D) $1,360.
Answer: A

Corporate profits                    $200
Net interest                          150
Indirect taxes less subsidies         230
Depreciation                          250
Compensation of employees            1,350
Proprietor’s income                   150
Rental income                         70
Personal consumption expendi-        1,400
tures
Government purchases of goods         500
and services
Net exports of goods and
                                      40
services

26. Using the data in the table above, gross domestic product equals
A) $1,920.
B) $1,940.
C) $2,150.
D) $2,400.
Answer: D

27. Using the data in the above table, gross private domestic investment equals
A) $250.
B) $260.
C) $460.
D) some amount that cannot be determined without more information.
Answer: C

28. Using the data in the above table, net private domestic investment equals
A) $210.
B) $260.
C) $510.
D) some amount that cannot be determined without more information.
Answer: A


29. In years with inflation, nominal GDP increases ____ real GDP.
A) faster than
B) slower than
C) at the same rate as
D) sometimes faster, sometimes slower, and sometimes at the same rate as
Answer: A

30. The traditional base-year method of calculating real GDP compares
A) the quantities of goods produced in consecutive years using prices in both years and averaging the
percentage changes in the value of output.
B) quantities produced in different years using prices from a year chosen as a reference period.



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C) quantities produced in different years with the prices that prevailed during the year in which the output
was produced.
D) prices at different points in time using a sample of goods that is representative of goods purchased by
households.
Answer: B

31. Which of the following is NOT included in real GDP?
A) Production of services, such as the services of doctors.
B) Production of goods that last more than one year, such as television sets.
C) Production of goods that do not last more than one year, such as gasoline.
D) Production in the home.
Answer: D

32. Purchasing power parity prices are used to construct GDP data that
A) do not omit the underground economy.
B) can be used to make more valid comparisons between one country and another.
C) is a proper measure of economic welfare.
D) adjust for differences in population.
Answer: B

33. A business cycle is the
A) pattern of short-run upward and downward movements in production and jobs.
B) increase in consumer spending that accompanies an increase in disposable income.
C) cyclical change in the nation’s balance of trade.
D) cyclical movement in the interest rates.
Answer: A

34. Which type of unemployment increases during a recession?
A) Cyclical unemployment.
B) Frictional unemployment.
C) Structural unemployment.
D) The natural rate of unemployment.
Answer: A

                             Inflation rate
   Year       Price index      (percent)
     1            100
     2            117              A
     3            125              B
     4            120              C
     5             D              8.3
     6            150              E

35. In the table above, what inflation rate belongs in space A?
A) 17.0 percent.
B) 6.8 percent.
C) 8.3 percent.
D) –4.0 percent.
Answer: A

36. In the table above, what inflation rate belongs in space B?
A) 17.0 percent.
B) 6.8 percent.
C) 8.3 percent.



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D) –4.0 percent.
Answer: B

37. In the table above, what price level belongs in space D?
A) 125.
B) 130.
C) 140.
D) 145.
Answer: B

38. In the table above, what inflation rate belongs in space E?
A) 17.0 percent.
B) 6.8 percent.
C) 8.3 percent.
D) 15.4 percent.
Answer: D

39. The quantity of real GDP supplied at full employment is called
A) hypothetical GDP.
B) short-run equilibrium GDP.
C) potential GDP.
D) all of the above.
Answer: C

40. The long-run aggregate supply curve illustrates the
A) relationship of prices with the level of GDP when real GDP equals potential GDP.
B) relationship of aggregate supply and aggregate demand.
C) amount of products producers offer at various prices when money wages and other resource prices do
not change.
D) surpluses, shortages and equilibrium level of GDP.
Answer: A

41. The long-run aggregate supply curve
A) is negatively sloped.
B) is positively sloped.
C) is vertical at the level of potential GDP.
D) is horizontal at the level of potential GDP.
Answer: C

42. For movements along the long-run aggregate supply curve,
A) potential GDP is dependent on the price level.
B) the prices of goods and services change while the prices of productive resources hold steady.
C) the price level and the money wage rate change in the same proportion.
D) All of the above are correct.
Answer: C

43. In the macroeconomic short run,
A) actual real GDP may be less than or more than potential GDP.
B) the unemployment rate is zero.
C) the economy is always moving away from full employment.
D) actual real GDP always equals potential GDP.
Answer: A




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44. In the figure above, potential GDP equals
A) $9.5 trillion.
B) $10.0 trillion.
C) $10.5 trillion.
D) None of the above answers is correct.
Answer: B

45. In the figure above, the economy is at point A when the price level rises to 120. Money wages and other
resource prices remain constant. Firms are willing to supply output equal to
A) $9.5 trillion.
B) $10.0 trillion.
C) $10.5 trillion.
D) None of the above answers is correct.
Answer: C

46. In the figure above, the economy is at point A when the price level falls to 100. Money wages and all
other resource prices remain constant. Firms are willing to supply output equal to
A) $9.5 trillion.
B) $10.0 trillion.
C) $10.5 trillion.
D) None of the above answers is correct.
Answer: A




47. In the above figure, which part corresponds to a destruction of part of the nation’s capital stock?
A) Figure A.



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B) Figure B.
C) Figure C.
D) Figure D.
Answer: A

48. In the above figure, which point corresponds to an increase in technology?
A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.
Answer: C

49. In the above figure, which part corresponds to an increase in the money wage rate?
A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.
Answer: B

50. In the above figure, which part corresponds to a fall in the money wage rate?
A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.
Answer: D

51. Other things equal, along the aggregate demand curve, a higher price level is associated with
A) an increase in the quantity of real GDP demanded.
B) a decrease in the quantity of real GDP demanded.
C) a decrease in the quantity of nominal GDP demanded.
D) higher income levels.
Answer: B




52. In the above figure, the economy is initially at point B. If the government decreases transfer payments,
there is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: C

53. In the above figure, the economy is initially at point B. If taxes increase, there is
A) a movement to point C.



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B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: C

54. In the above figure, the economy is initially at point B. If the Fed decreases the quantity of money, there
is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: C

55. In the above figure, the economy is initially at point B. If the Fed increases the quantity of money, there
is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: D

56. In short-run macroeconomic equilibrium
A) real GDP equals potential GDP and aggregate demand determines the price level.
B) the price level is fixed and short-run aggregate supply determines real GDP.
C) real GDP and the price level are determined by short-run aggregate supply and aggregate demand.
D) real GDP is less than potential GDP.
Answer: C

57. Full-employment equilibrium occurs when
A) real GDP exceeds potential GDP.
B) real GDP equals potential GDP.
C) potential GDP exceeds real GDP.
D) a result of an increase in long-run aggregate supply.
Answer: B

58. In long-run macroeconomic equilibrium,
A) real GDP equals potential GDP.
B) the price level is fixed and aggregate demand determines real GDP.
C) real GDP and the price level are determined by short-run aggregate supply and aggregate demand and
long-run aggregate supply is irrelevant.
D) real GDP is less than potential GDP.
Answer: A




59. In the above figure, point A represents
A) a recessionary gap.



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B) a full-employment equilibrium.
C) an inflationary gap.
D) an increase in aggregate demand.
Answer: A

60. In the above figure, point B represents
A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) a decrease in aggregate demand.
Answer: B

61. In the above figure, point C represents
A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) a decrease in aggregate demand.
Answer: C




62. In the above figure, if the economy moves from point a to point b,
A) the natural rate of unemployment increases.
B) there has been a decrease in the quantity of real GDP supplied.
C) there has been a decrease in the quantity of real GDP demanded.
D) there has been an increase in the quantity of real GDP demanded.
Answer: D




63. In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curve is AD.
A recessionary gap exists
A) if the long-run aggregate supply curve is LAS1.
B) if the long-run aggregate supply curve is LAS2.
C) if the long-run aggregate supply curve is LAS3.
D) All of the above answers are correct.
Answer: C



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64. In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curveis AD.
An inflationary gap exists
A) if the long-run aggregate supply curve is LAS1.
B) if the long-run aggregate supply curve is LAS2.
C) if the long-run aggregate supply curve is LAS3.
D) All of the above answers are correct.
Answer: A




65. In the above figure, if the economy is at point A, which of the following is true?
A) Point A is the long-run equilibrium point.
B) The economy is in a recession.
C) Money wages can be expected to fall.
D) The economy might be at point A as a result of a recent cut in the tax rate.
Answer: D

66. In the above figure, if the economy is at point A, which of the following is true?
A) There is a recessionary gap.
B) There is an inflationary gap.
C) Point A is the long-run equilibrium point.
D) None of the above answers are correct.
Answer: B




67. In the above figure, if the economy is at point A, which of the following is true?
A) Point A is the long-run equilibrium point.
B) The economy is in a recession.
C) Money wages can be expected to fall.
D) The economy might be at point A as a result of
a recent cut in the tax rate.
Answer: D

68. Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that
foreign incomes rise. U.S. aggregate demand ____ , and eventually the money wage rate ____.
A) increases; rises



                                                                                                       12
B) increases; falls
C) decreases; rises
D) decreases; falls
Answer: A
69. Suppose there is a rise in the price level, but no change in the money wage rate. As a result, the quantity
of labor demanded
A) increases.
B) decreases.
C) does not change because there is no change in
the real wage rate.
D) decreases only if the money wage rate also decreases.
Answer: A

70. Which of the following statements is correct?
A) When the real wage increases, the labor supply curve shifts rightward.
B) When the real wage increases, the labor supply curve shifts leftward.
C) When the real wage decreases, the labor supply curve shifts leftward.
D) None of the above statements are correct.
Answer: D




71. In the above figure, at the wage rate of $50
A) there is a surplus of 100 billion hours per year.
B) there is a shortage of 100 billion hours per year.
C) there is a surplus of 60 billion hours per year.
D) there is shortage of 20 billion hours per year.
Answer: C

72. In the above figure, what is the full-employment real wage rate and quantity of hours per year?
A) $40 and 60 billion hours per year
B) $50 and 100 billion hours per year
C) $35 and 100 billion hours per year
D) $50 and 40 billion hours per year
Answer: A

73. If the real interest rate is above the equilibrium real interest rate,
A) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest
rate will fall.
B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will
rise.
C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest
rate will rise.
D) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will
fall.
Answer: A



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