School of Business and Social Sciences

ECO 2301: PRINCIPLES OF MACROECONOMICS

Professor: Dr. Mambo P. Belinda

Office Hours: Tuesdays & Thursdays 2:00 pm – 4:00 pm or by appointment
Office: Room 16
Email: mambo.b@iugb.edu.ci

FINAL EXAM STUDY GUIDE

I- MULTIPLE CHOICE QUESTIONS

1- Disposable income is income earned by households in factor markets:

(A) Minus taxes and government transfers.
(B) Plus taxes and government transfers.
(-C) Minus taxes plus government transfers.
(D) Plus taxes minus government transfers.

2- Which of the following transactions does NOT represent an addition to U.S. GDP?
(A) A U.S. firm manufactures a bicycle sold to a U.S. consumer.
(B) A U.S. firm manufactures a bicycle sold to a Canadian consumer.
(C) A U.S. firm hires construction workers to expand its manufacturing facility.
(-D) A German citizen buys stock in a U.S. company.

3- A bond is
(A) -a promise to pay back a loan over an unspecified period
(B) allows the firm to access funds with more liabilities
(C) the only way a firm can raise funds
(D) a document that promises to pay back a loan under specified terms over a specified
period of time

4- Which of the following statements is TRUE?

(A) GDP overstates the true level of production, because goods that are sold as inputs to
other firms are counted twice.
(B) Inventories of finished goods are not counted as investment, because they do not
allow for future consumption.
(C) Changes in GDP tell us about economic growth, but they do not reveal anything
about the pattern of the business cycle.

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 (-D) Since GDP is equal to the total value of final goods and services produced in the
economy in a given period, it must also equal the flow of money received by firms from
their sales in the product market during the same time period.
5- GDP measured in current-year prices is:
(A) Potential GDP.
(B) Real GDP.
(C) Per capita GDP.
(-D) Nominal GDP.

6- Real GDP per capita is:

(A) An excellent measure of a country's standard of living.
(B) Always equal to nominal GDP per capita.
(-C) Not a sufficient measure of human welfare in a country.
(D) All that economists care about.

7- Employment tends to _______ when aggregate output ______

(A) Rise, falls
(B) - Rise; rises
(C) Falls; rises
(D) Not change; falls

8- All of the following except one would increase the amount of a particular model of a Ford
automobile that buyers would like to buy. Which is the exception?
(A) An increase in buyers' incomes
(B) Increased prices of other Ford models
(C) An expected future increase in the price
(D) An increase in the U.S. population
(E) -A decrease in the price of steel

9- If the price of orange juice rises, the demand for grapefruit juice will
(A) Increase because the two goods are substitutes
(B) Increase because it is a complement
(C) Decrease because the two goods are substitutes
(D) Decrease because the two goods are complements
(E)- Not change unless the price of grapefruit juice also changes

10- Which of the following indexes are used to measure the overall price level?
(A) Consumer Price Index (CPI)
(B) -Producer Price Index (PPI)
(C) GDP Deflator
(D) All of the above

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11- The difference between the interest rate on a loan and the inflation rate is the
(A) Nominal interest rate.
(B) Inflation premium.
(C) Real interest rate.
(D) Expected interest rate.

12- Given the following data for an economy, compute the investment component of GDP: 
Consumption expenditures-1000
Imports-600
Government purchases-700
Construction of new homes and flats-500
Sales of existing homes and flats-600
Exports-500
Government payments to retirees-200
Household purchases of durable goods-300
Beginning-of-year inventories-500
End-of-year inventories-600
Business fixed investment-300

(A) 300
(B) 400
(C) 800
(D)- 900

13- Per capital output will not grow if:

(A) The population is not growing.
(B) The growth rate of output per person increases.
(C) Output growth is exactly keeping up with population growth.
(D) Both the population and output are growing.

14- Households earn income in the form of:

(A) Stocks, taxes, and savings.
(B) Savings and interest.
(C) -Wages, dividends, interest, and rent.
(D) Market baskets.

15- Using the same amount of resources, Beta land can produce 80 tons of corn or 80 tons of
wheat and Alpha land can produce 40 tons of corn or 20 tons of wheat. Which of the following
statements is true?
(A-)The opportunity cost of producing a ton of corn in Beta land is two tons of wheat.

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 (B)The opportunity cost of producing a ton of corn in Beta land is a ton of wheat.
(C)The opportunity cost of producing a ton of corn in Alpha land is two tons of wheat.
(D) Beta land has both the absolute and comparative advantage in producing corn.
(E) Alpha land has the comparative advantage in producing wheat.

16- Assume that C=100+0.9Y. What is the value of the spending multiplier?
(A) 0.75
(B) 2
(C) 4
(D) 10

17- Which of the following factors can be counted as the determinants of aggregate
consumption?
(A) Household wealth
(B) Borrowing
(C) Household’s expectations about future.
(D) All of the above

18- The United States Department of Labor defines an individual as unemployed if the person
(A) Does not hold a paying job
(B) Has been recently fired
(C) Works part time but needs full time work
(D) Is without a job but is looking for work

19- If people are made unemployed because of a fall in aggregate demand this is known as:
(A) Frictional unemployment
(B) Seasonal unemployment
(C) Cyclical unemployment
(D) Structural unemployment

20- Which of the following workers is most likely to be classified as structurally unemployed?
(A) A high school teacher who is unemployed during the summer months
(B) A recent college graduate who is looking for her first job
(C) A teenager who is seeking part-time employment at a fast-food restaurant
(D) A worker who is unemployed because his skills are obsolete

21- As income level increases from $500 to $1,000, Saving increases from -$200 to -$100. The
marginal propensity to consume is equal to
(A) 1.10
(B) 0.80
(C) 0.70
(D) 0.50

22- Which of the following groups is most likely to benefit from unanticipated inflation?
(A) Creditors

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 (B) Fixed income earners
(C) Consumers
(D) Debtors

23- Suppose a panel of economists predicts that a nation's real GDP per capita will double in
approximately 20 years. Based upon the rule of 70, what must be the predicted annual growth
rate of real GDP per capita?
(A) 140 percent
(B) 3.5 percent
(C) 2.85 percent
(D) 14 percent

24- Transfer payments are:

(A) The total number of inputs used in production.
(B) The amount of capital that has been used in a year.
(C) Government payments to individuals that are not made in exchange for goods or
services supplied.
(D) All of the above.

25- Which of the following is a form of capital as the term is used in economics?
(A) Houses owned by individuals
(B) Factories owned by businesses
(C) Education
(D) Money

26- A firm is considering three investment projects which we will refer to as A, B, and C. Each
project has an initial cost of $10 million. Investment A offers an expected rate of return of 16%,
B of 8%, and C of 12%. The firm's cost of capital is 6% if it borrows $10 million, 10% if it
borrows $20 million, and 15% if it borrows $30 million. Which project(s) should the firm invest
in?
(A) Just A, because it offers the highest rate of return and is the only investment that has
a rate of return higher than 15%
(B) All three should be undertaken, because the rate of return on B is above 6%, on C is
above 10%, and on A is above 15%.
(C) Only A and C should be undertaken because both have rates of return that are greater
than 10%.
(D) None of the above is correct.

27- The natural rate of unemployment can be defined as the unemployment rate that exists when
the economy
(A) Is neither growing nor shrinking
(B) Has no trade deficit or government deficit
(C) Has only cyclical and structural unemployment
(D) Produces at the full-employment output level

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28- The real interest rate for a consumer loan is 5 percent, and the expected inflation rate is 2
percent. What is the nominal interest rate on the consumer loan?
(A) 2.5 percent
(B) 3 percent
(C) 5 percent
(D) 7 percent
(E) 10 percent

29- A key statistic to measure economic growth is:

(A) The Dow Jones stock market index.
(B) Life expectancy.
(C) Real GDP per capita.
(D) The size of the government's budget.

30- Which of the following is not a category of consumption expenditures?

(A) Durable goods
(B) Nondurable goods
(C) Services
(D) Imports

31- Which of the following policies will most likely lead to a reduction in the natural rate of
unemployment?
(A) Increasing government purchases of goods and services
(B) Providing more job-training programs to help the less skilled
(C) Increasing the duration of unemployment compensation
(D) Raising the minimum wage

32- All are examples of government policies aimed at promoting economic growth EXCEPT:
(A) Building infrastructure and providing public goods.
(B) Implementing a monetary policy that increases inflation.
(C) Subsidizing education.
(D) Providing political stability and protecting property rights.

33- Which of the following is true about economic growth?

(A)It occurs in big countries more often than it does in small countries.
(B) It is negatively related to a country's standard of living.
(C)It is positively related to a country's investment in human capital.
(D)It is negatively related to a country's capital stock.

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34- Refer to the figure below depicting the relationship between income (Y) and consumption
spending (C) for a given household. Assume there is no government spending and taxes. This
household's saving will be zero when income is:
(A) 1,400.
(B) 1,200.
(C) 1,000.
(D) 800.
(E) 600

35- Assume that an economy produces only two goods, computers and gasoline. The quantity
and price of each are given in the table below.

Year Price of Quantity of Price of Quantity of

Computers Computers (in Gasoline Gasoline (in
millions) millions)
2000 $1,000 5 $1 500
2004 $500 10 $2 250

If the base year is 2000, how do nominal and real gross domestic product (GDP) change between
2000 and 2004?

Nominal GDP Real GDP

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 (A) No change Increase
(B) No change Decrease
(C) Increase No change
(D) Increase Increase
(E) Increase Decrease

II- Problems
Problem 1:

The country “Hope” has published the following macroeconomics data.

Table 1
Employed 240,000
Unemployed 100,000
Not in the Labor Force 160,000

a) Refer to table 1 and calculate labor force and labor force participation rate
b) What is the unemployment rate according to the table 1?
c) Suppose that 10, 000 unemployed people who have been actively looking for a job get
discouraged because of lack of new job positions and stop looking for work. Calculate the
new labor force and unemployment rate after this discouraged worker effect.
d) Knowing that the natural rate of unemployment is 20%, how is actual output compared to
Potential output in this economy?

Problem 2:

Part I: Classify the following as consumption, investment, or government expenditure from

national accounting point of view:

a) Mr. Jenkins buys a new family van

b) Farmer buys a new tractor

c) Mr. Novak hires a limo for his daughter‘s wedding

d) Bakery buys a side-load truck

e) President‘s administration rents an apartment for foreign consultant

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f) Tesco has bought a lot of copies of Star Wars books that are laying among other warehouse
inventories.

Part II: 6

a) Draw a line chart of GDP development.

b) Find GDP growth rates.

c) What can you say about the economic situation in Hungary? What phase of business cycle
the Hungarian economy is in?

Year 2004 2005 2006

GDP, $B 47 49 51

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