ECO 2013 – 01 First Midterm, 8 October 2001. Correct answers are marked in bold, comments in
italics. Neither the order of the questions nor the order of the responses is likely to be the same as on the
form you took, but the questions and responses are the same.
1) An example of a question studied by macroeconomics is:
A) Why does national economic activity fluctuate over time?
B) Why do people choose to study business rather than theater?
C) Why do some firms go out of business during a recession?
D) What is the best investment opportunity in the stock market?
2) The characteristic from which all economic problems arise is
A) political decisions.
B) providing a minimal standard of living for every person.
C) how to make a profit.
You learnt scarcity – this was the only question on the test that everybody got right!
3) Which of the following newspaper headlines deals with a macroeconomic issue?
A) Unemployment Rate Rises for Third Consecutive Quarter
B) Yahoo.com Warns Investors That Next Quarter's Earnings Will Be Weak
C) America Online and Time Warner Merge to Create World's Largest Media Corporation
D) Surpluses of Apples Lead Washington State Apple Growers to Slash Prices
4) When production and jobs are increasing, the economy is
A) experiencing a decline in the standard of living.
B) in a business cycle expansion.
C) in a recession.
D) experiencing a decline in the cost of living.
5) Which of the following people is unemployed?
A) a retiree
B) a telemarketer who is willing to work is contacting employers but unable to find suitable work
C) a mother who voluntarily stays home with her children
D) all of the above
To count as unemployed, you have to both have no gainful activity and be seeking gainful activity [and
available and willing to work].
6) Which of the following is a normative statement?
A) Health care costs are rising.
B) Fifteen percent of Americans do not have health insurance.
C) All Americans deserve to have access to adequate healthcare.
D) Many employers offer healthcare benefits.
7) The dollar value of a nation's production increases
A) only if prices rise.
B) only if prices rise and the number of people employed increases.
C) only if more goods are produced.
D) if prices rise, the number of people employed increases, or production per person increases.
8) Which of the following is most likely to increase the nation's standard of living?
A) an increase in the quantity of money
B) a decrease in the quantity of money
C) an increase in productivity
D) a decrease in productivity
9) If the quantity of the variable on the y-axis increases by 6 when the quantity of a variable on the x-axis
decreases by 3, then the slope of the curve equals
A) 2. B) -6. C) 3. D) -2.
Slope is change in y [vertical] divided by change in x [horizontal] that accompanies it; so (-6)/3 = -2.
10) When the total U.S. production of goods and services is divided into consumption, investment,
government, and exports of goods and services, the largest component by far is
A) consumption goods and services.
B) investment goods.
C) government goods and services.
D) exports of goods and services.
11) People earn their incomes by
A) increasing their human capital.
B) increasing the quantity of their factors of production.
C) selling the services of the factors of production they own.
D) supplying labor only.
12) In the circular flow model, rent, wages, interest, and profit paid flow from ____ through ____ to ____.
A) households; goods markets; firms as payment for goods
B) firms; factor markets; households
C) firms; goods markets; households
D) households; factor markets; firms
Only 40% of you got this right – it was in the top five most difficult questions; it is not obvious to me why
you found it so hard.
13) If the population grows at a faster rate than the quantities of goods and services being produced, then
as defined in the textbook the
A) standard of living increases. B) cost of living increases.
C) standard of living decreases. D) cost of living decreases.
You found this hard too; only 46% got it right. If population grows faster than production, production per
person is falling, and your text defines that as a decrease in the standard of living. It was more popular to
say the cost of living increases – but you are told nothing about prices, so you don‟t know what happened
14) If country A produces only food and cars, and if it increases production of food from 15 to 20 units and
car production decreases from 60 to 35 units, then the opportunity cost of a unit of food is
A) 25 cars. B) 5 cars.
C) 1/5 of a car. D) 4 cars.
Food goes up 5 units, cars go down 25 [60 – 35]; so the opportunity cost of a unit of food – how many cars
you have to give up to get another unit of food – is 25/5 = 5 cars.
15) As we move down the PPF depicted in the figure above from A to B to C, the opportunity cost of
A) burritos increases. B) burritos decreases.
C) burritos remains constant. D) tacos increases.
Opportunity cost of burritos is how many tacos you have to give up for another burrito – and that increases
as you go from A to B to C.
16) A country produces only cans of soup and ink pens. If the country produces on its PPF and increases
the production of cans of soup, the opportunity cost of the
A) cans of soup is increasing.
B) cans of soup is decreasing.
C) cans of soup remain unchanged.
D) ink pens is decreasing.
Oddly enough, although two thirds of you got number 15 right, only 46% got number 16, which is
essentially the same question without the diagram.
17) If Nancy's opportunity cost of producing 1 bottle of wine is 1 loaf of bread and Tom's opportunity cost
for 1 bottle of wine is 2 loaves of bread, then
A) Tom should produce twice as much wine as Nancy and then trade it for Nancy's bread.
B) Nancy should specialize in producing bread and then trade it for Tom's wine.
C) Nancy should specialize in producing wine and then trade it for Tom's bread.
D) Nancy should produce twice as much bread as Tom and then trade it for Tom's wine.
You should specialize in the thing that you are low opportunity cost producer of, i.e. for Nancy wine
[opportunity cost 1 bread as opposed to Tom‟s 2 bread], and trade for the other good.
18) Which of the following is true?
A) If a person has a comparative advantage in the production of a good, then they must have an absolute
advantage in the production of that good.
B) If a person does not have an absolute advantage in production then they cannot have a comparative
C) If a person has an absolute advantage in all goods then they should not specialize and trade.
D) A person always has a comparative advantage in at least one good as long as opportunity costs are
different between people.
19) Scott and Cindy both produce only pizza and tacos. In one hour, Scott can produce 20 pizzas or 40
tacos. In one hour, Cindy can produce 30 pizzas or 40 tacos. Based on these data,
A) Cindy has a comparative advantage at producing tacos.
B) Scott has a comparative advantage at producing tacos.
C) Cindy and Scott have the same comparative advantage when producing tacos.
D) neither Cindy nor Scott has a comparative advantage when producing tacos.
Check the opportunity costs; 40 tacos cost Scott 20 pizzas, Cindy 30 pizzas, so Scott is the low opportunity
cost producer of tacos and thus has comparative advantage at producing tacos.
Possibility Investment Goods Consumption Goods
A 0 And 300
B 50 And 200
C 100 And 0
20) If a country can produce consumption and investment goods according to the table above, what is the
cost of producing 50 investment goods rather than 0?
A) 0 because investment is good for economic growth
B) 100 consumption goods
C) 0 because economic growth has no cost
D) 300 consumption goods
21) The PPF shows economic growth when the PPF
A) shifts outwards, away from the origin.
B) shifts inwards, towards the origin showing lower costs.
C) changes from a bowed out PPF to a flatter PPF.
D) changes from a flatter PPF to a more bowed out curve.
22) According to the law of demand, when the price of gas rises,
A) oil refining companies record financial losses.
B) car sales increase.
C) people will drive more.
D) people decrease the quantity of gas demanded, perhaps by driving less.
23) All of the following are factors that will change demand and shift the demand curve, EXCEPT
A) the prices of related goods. B) income.
C) preferences. D) the price of the good itself.
24) Tortilla chips and salsa are complements in consumption. Consider the demand for tortilla chips. When
the price of salsa increases, there is a(n)
A) upward movement along the demand curve for tortilla chips.
B) downward movement along the demand curve for tortilla chips.
C) leftward shift of the demand curve for tortilla chips.
D) rightward shift of the demand curve for tortilla chips.
25) One reason supply curves have an upward slope is because
A) increased supply will require increased technology.
B) people will pay a higher price when less is supplied.
C) a higher price brings a greater return than before, so suppliers want to sell more of that good.
D) None of the above because supply curves have a downward slope.
Only 40% got this right; more people responded B, which seems weird to me. What people are willing to
pay has to do with their demand, it cannot be a reason for something to do with how much people are
willing to sell, which is what the supply curve is about.
26) Suppose the price of leather used to produce shoes increases. As a result, there is a(n) ____ in the
supply of shoes and the supply curve of shoes shifts ____.
A) increase; rightward B) increase; leftward
C) decrease; rightward D) decrease; leftward
27) Restaurant meals are a normal good and consumers' incomes increase. Simultaneously an increase in
the minimum wage increases costs for restaurants. As a result of these two changes, the equilibrium price
of a restaurant meal will ____ and the equilibrium quantity will ____.
A) increase; change in an ambiguous unknown direction
B) increase; decrease
C) change in an ambiguous unknown direction; increase
D) decrease; increase
When you get stories like this, draw yourself a little scratch diagram. Income up means demand increases,
shifts to right; costs increase means supply decreases, shifts left. If you draw that, it is clear price must go
up, quantity might change either way.
28) Which of the following is the best explanation for why the price of gasoline increases during the
A) Oil producers have higher costs of production in the summer.
B) Sellers have to earn profits during the summer to cover losses in the winter.
C) There is increased driving by families going on vacation, people going to the beach, etc.
D) There is less competition among oil refineries in the summer.
29) The graph illustrates the market for computers. If the number of buyers of computers increases and
technology advances, you predict that the ____.
A) equilibrium quantity of computers will increase.
B) equilibrium quantity of computers will decrease.
C) equilibrium price of a computer will rise.
D) equilibrium price of a computer will fall.
This one even gives you a diagram to sketch on; both supply and demand increase, shift right, so quantity
must increase [also move right].
30) The following are all final goods except
A) flour used by the baker to make cup cakes.
B) bread eaten by a family for lunch.
C) pencils used by a 6th grader in class.
D) Nike shoes used by a basketball player.
31) Production by Honda, a Japanese firm, in the United States is included in ____ GDP and production by
Nike Corporation, a U.S. firm, in Vietnam is included in ____ GDP.
A) Japanese; U.S. B) U.S.; Vietnamese
C) U.S.; U.S. D) Japanese; Vietnamese
GDP is geographic -- production is counted in the GDP of the country where the output happens, not
according to who owns it [who owns it is GNP, not GDP].
32) Total expenditure in the United States is equal to consumption expenditure plus investment
A) plus government purchases of goods and services plus imports of goods and services.
B) minus government purchases of goods and services minus imports of goods and services.
C) plus government purchases of goods and services plus exports of goods and services.
D) plus government purchases of goods and services plus net exports of goods and services.
33) In 1995 in the United States, consumption expenditure was $5,152 billion, investment was $1,164
billion, government purchases of goods and services were $1,407 billion, and total exports were $855
billion. GDP equaled
A) $7,624 billion.
B) $7,723 billion.
C) $8,578 billion.
D) some amount, but there is not enough information given to calculate GDP.
This is the only question that is arguably „tricky‟; you are not told imports, so you don‟t have enough
information to calculate GDP.
Compensation of Employees 500
Net Interest 75
Rental income of persons 50
Corporate Profits 100
Proprietors’ income 125
Indirect taxes 150
34) The table above gives some information about a small economy. Based on the table, GDP is equal to
A) $500. B) $1,000. C) $850. D) $950.
This was another top five difficult question. To get GDP from the income approach, you must add all the
incomes – the first five rows – then correct from factor cost to market prices by adding indirect taxes and
subtracting subsidies, and then correct to gross from net by adding depreciation.
35) Suppose GDP is $10 billion, consumption expenditure is $7 billion, investment is $2 billion, and
government purchases of goods and services is $2 billion. Net exports must be
A) $1 billion. B) -$1 billion. C) $2 billion. D) -$2 billion.
36) In the United States in 1997, nominal GDP was $8,300.8 billion and real GDP was $8,165.3 billion.
The GDP deflator in 1997 was approximately
A) 98.4 B) 101.7 C) 67.8 D) 164.7
The deflator is (nominal GDP)/(real GDP) times 100. You don‟t need a calculator! 8,300 is a little bit
bigger than 8,165, so this must be more than 100; but it is not nearly two thirds bigger, so it has to be
37) You hire some of your friends to help you move to a new house and pay them a total of $200 and buy
them dinner at Pizza Hut. Which of the following is true?
A) The $200 should be counted as part of GDP but not the dinner at Pizza Hut.
B) If your friends do not report the $200 on their tax forms, it becomes part of the underground
C) The dinner at Pizza Hut should be counted as part of GDP but not the $200.
D) Hiring your friends is an illegal activity and hence should not be counted in GDP.
38) Phillip is a 22-year old who has no job and is available for work, but has not actively looked for a job
in the last month. The Current Population Survey identifies Phillip as
B) part of the labor force, though not unemployed.
C) part of the working-age population but not part of the labor force.
D) being in neither the labor force nor the working-age population.
39) Suppose the population of Toon Town is 100 people and the working-age population is 70. If 10 of
these people are unemployed, the unemployment rate in Toon Town is
A) 10 percent.
B) 1/7 þ 100.
C) 1/8 þ 100.
D) There is not enough information provided to calculate the unemployment rate.
You have to know the labor force [employed plus unemployed] to be able to calculate the unemployment
rate. You don‟t know how many of the working age population is not in the labor force.
Total Population Currently Employed Not working and Want to work but no
looking for work longer looking for
80 40 2 4
40) In the table above, the size of the labor force is
A) 80 million. B) 46 million. C) 42 million. D) 40 million.
Category Number of People [millions]
Discouraged workers 5
Unemployed workers 12
Employed workers 48
Working age population 100
41) From the table above, which gives data about the U.S. labor market in 1933, the labor force
participation rate is
A) 12 percent. B) 48 percent. C) 60 percent. D) 95 percent.
42) From the table above, which gives data about the U.S. labor market in 1933, the unemployment rate is
A) 2 percent. B) 18 percent. C) 20 percent. D) 25 percent.
43) During a recession, the unemployment rate ____ and the percentage of part-time workers who are
involuntary part-time workers ____.
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
Labor Market Flows during 2001 Number of People
Hires and recalls 1000
Job losers 500
Job leavers 300
44) On December 31, 2000, on a remote northern island there were 18,000 people employed, 2,000 people
unemployed, and 5,000 people not in the labor force. The table above gives information taken from a labor
survey on this island. The unemployment rate between December 2000 and December 2001
A) increases B) decreases
C) increases then decreases D) does not change
The flows tell you more people got jobs than became unemployed [hires and recalls exceed losers and
leavers by 200], so the number of unemployed went down; entrants and reentrants exceed withdrawals by
200, so the labor force went up by 200. Since the unemployment rate is unemployed divided by labor force,
it must have gone down.
45) Who of the following is best classified as cyclically unemployed?
A) Casey, who lost his job because the technology changed and he was no longer needed.
B) Sam, an assistant manager who quit her job to search for a better job closer to home.
C) Kathy, a steelworker who was laid off but has stopped looking for a new job because she can't find a
D) David, a new car salesman who lost his job because the economy went into a recession.
46) At full employment, there is no
B) frictional unemployment.
C) structural or seasonal unemployment.
D) cyclical unemployment.
47) When the unemployment rate is ____the natural unemployment rate, real GDP is ____.
A) above; increasing B) above; above potential GDP
C) below; above potential GDP D) below; increasing
This was in the hardest five questions, only 39% got it right. A third of you answered “below, increasing”
which sounds reasonable, but is not necessarily correct – if unemployment is below the natural rate, real
GDP must be above potential GDP, but it does not have to be increasing – it could be not changing.
48) Suppose a basket of consumer goods and services costs $180 using the base period prices, and the
same basket of goods and services costs $300 using the current period prices. The CPI for the current year
A) 166.7. B) 66.7. C) 160.0. D) 60.0.
49) If a country has a CPI of 105.0 in 2000 and a CPI of 102.0 in 2001, this set of CPIs suggests that
A) the average prices of goods and services increased between 2000 and 2001.
B) the average prices of goods and services decreased between 2000 and 2001.
C) the average quantity of goods and services decreased between 2000 and 2001.
D) there was an error when calculating the CPI in 2001.
50) Joe buys chicken and beef. If the price of beef rises and the price of chicken does not change, Joe will
A) buy more beef and thus help create a new goods bias for the CPI.
B) buy more chicken and thus help create a commodity substitution bias for the CPI.
C) buy the same quantity of beef and chicken and thus help create a commodity substitution bias for the
D) buy less chicken and beef and thus help create a quality change bias for the CPI.
51) You can put your savings into an account that earns 5 percent per year or you can put your savings into
an account that earns 1 percent plus the rate of inflation per year. Which of the following is true?
A) If inflation is less than 4 percent, you prefer the 1 percent plus account.
B) If inflation is greater than 4 percent, you prefer the 5 percent account.
C) If inflation is 3 percent, you prefer the 5 percent account.
D) You are always better off with the 5 percent account.