Name:

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Midterm Exam 1
Econ 2020-010 Spring 2010 Date: Feb. 12 Instructor: Soojae Moon

Version B
Instruction: On the scantron, fill out your name (both the bubbles and the write-in portion) and place your recitation section number in the boxes labled `1234` Recitation Number 0011 0012 0013 0014 Day of week T T R R Time 12:30 5:00 12:30 3:30 TA McMahan McMahan McMahan McMahan Location CHEM 145 ECON 119 HLMS 259 EDUC 138

You have 50 minutes to complete the exam. There are total 30 questions. Please read carefully and choose the choice that best completes the statement or answers the question. Answer All. Try your best! Good luck!

Name: ____________________________________ 1. Which of the following represents the equation for capital inflow? A) KI = S M (Saving-Import) B) KI = X M (Export-Import) C) KI = M X (Import-Export)(KI=-NX=M-X) D) KI = M S (Import-Saving) 2. A business will want to borrow to undertake an investment project when the rate of return on that project is: A) less than the interest rate. B) greater than the interest rate.(will invest if rate of return>interest rate) C) greater than the exchange rate. D) equal to the inflation rate. 3. The paradox of thrift highlights: A) the role which investment plays in the macro economy. B) how individual decisions to save more may worsen a recession C) how an increase in spending occurs during recessions D) the irrational behavior on the part of households 4. Long-run growth is the sustained upward trend in: A) aggregate output per person over several decades. B) nominal GDP over time. C) interest rates over time. D) aggregate output per person over the business cycle. 5. In 2008, consumption spending is $7,000, government purchases is $2,000 and investment spending is $1,500. If GDP for 2008 is $10,300, then: A) export is $400 and import is $200. B) export is $100 and import is $200. C) export is $600 and import is $800. D) export is $500 and import is $300. GDP=C+I+G+(X-M) 10,300=7,000+1,500+2,000+(X-M) (X-M)=10,300-7,000-1,500-2,000=-200 6. Deflation is when there is: A) a decrease in unemployment. B) a decreasing aggregate price level. C) a decline in wages. D) a recession.

Name: ____________________________________ Use the following to answer question 7: Table: Pizza Economy II

7. (Table: Pizza Economy II) Based on the accompanying table, GDP in this economy is: A) $74,000. B) $45,000. C) $29,000. D) $16,000. Total value added=(25,000-20,000)+(7,000-5,000)+(8,000-1,000)+(5,0003,000)=5,000+2,000+7,000+2,000=16,000 Use the following to answer questions 8-9: Table: Peanut Butter and Jelly Economy

8. (Table: Peanut Butter and Jelly Economy) A simple economy produces only peanut butter and jelly. Using the data in the attached table, nominal GDP in 2009 was ____ and real GDP in 2009 was _____. A) $450; $400 B) $525; $450 C) $525; $400 D) $450; $575 Nominal GDP in 2009=P2009*Q2009=(1.10*250)+(2.50*100)=275+250=525 Real GDP in 2009=P2008*Q2009=(1*250)+(2*100)=250+200=450 9. (Table: Peanut Butter and Jelly Economy) A simple economy produces only peanut butter and jelly. Using the data in the attached table, from 2008 to 2009 real GDP ____ by _____%. A) increased; 12.5 B) decreased; 50 C) increased; 43.75 D) decreased; 12.5 Real GDP in 2008=P2008*Q2008=(1*200)+(2*100)=200+200=400 Growth rate of Real GDP=[Real GDP of 2009-Real GDP of 2008]/[Real GDP of 2008]*100={[450400]/400}*100=12.5% 3

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10. Which of the following portfolios is the most diversified in terms of risk? A) $100,000 worth of stock in ten different companies in two different industries B) $100,000 worth of stock in ten different companies in five different industries(more diversification) C) $100,000 worth of stock in ten different companies in the same industry D) $100,000 worth of stock in one company that sells ten different products 11. Fiscal policy refers to: A) the control of interest rates. B) the control of government spending and taxations. C) the control of the quantity of money. D) the control of interest rates and of government spending. 12. According to the efficient markets hypothesis, if you are trying to find out what a stock is really worth, you should: A) look up the current stock price.(Stock prices embody all publicly available information) B) study the fundamentals of the firm. C) study the underlying determinants of the company's future profits. D) examine its recent price changes. 13. Crowding out is a phenomenon: A) where an increase in government's budget deficit causes the overall investment spending to fall. B) where an increase in imports causes the overall domestic production to fall. C) where an increase in government's budget surplus decreases the overall investment spending. D) where overproduction in the goods market leads to a sharp drop in the aggregate price level. 14. Financial intermediaries that manage a stock portfolio and sell shares of the stock portfolio itself to individual investors are: A) mutual funds. B) pension funds. C) life insurance companies. D) banks.

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15. Financial markets make the process of borrowing large amounts of money easier because they simplify the negotiation process between borrowers and lenders. This is an example of: A) providing liquidity. B) reducing risk. C) reducing transaction costs. D) acting as a lender of last resort. 16. Stagflation is a combination of: A) increasing unemployment and increasing inflation.(negative supply shock) B) decreasing unemployment and decreasing inflation. C) increasing unemployment and decreasing inflation. D) decreasing unemployment and increasing inflation. 17. The short-run aggregate supply curve is positively sloped because: A) wages and other costs of production respond immediately to changes in prices. B) profit is lower when prices increase, so output decreases. C) workers are willing to work for lower wages rather than be laid off. D) higher prices lead to higher profit and higher output.(sticky prices) 18. If a country sold more goods and services to the rest of the world than they purchased from the other countries, then the country has a: A) trade deficit. B) budget deficit. C) trade surplus.(X>M( D) budget surplus. 19. According to the long-run aggregate supply curve, when _________, the quantity of aggregate output supplied _________. A) nominal wages rise; falls B) the aggregate price level rises; does not change C) the aggregate price level rises; rises D) the price of commodities falls; rises LR-AS, an increase in price has no effect on aggregate output

Name: ____________________________________ 20. Suppose that political instability in the Middle East temporarily interrupts the supply of oil to the United States. Which of the following is most likely to occur? A) The short-run aggregate supply curve shifts right, output increases, and prices decrease. B) The short-run aggregate supply curve shifts left, output decreases, and prices increase. C) The aggregate demand curve shifts left, output decreases, and prices decrease. D) The aggregate demand curve shifts right, output increases, and prices increase. Negative supply shock: price of oil increases=>cost of production increase=>SR-AS decreases and shifts left 21. Aggregate demand will shift to the right, if: A) the aggregate price level increases. B) there is a decrease in money supply. C) there is an increase in taxes. D) the government purchases increase. A) lead to move along the curve, C) lead to AD shifting left, D) lead to AD shift left Use the following to answer question 22: Scenario: Closed Economy S = I In a closed economy suppose that GDP is $15 trillion. Consumption is $10 trillion and government spending is $2 trillion. Taxes are $1.5 trillion and government transfers are $1 trillion. 22. (Scenario: Closed Economy S = I) How much is national saving? A) $3.5 trillion B) $3 trillion C) $2.5 trillion D) $2 trillion NS=Sp+SG=GDP-C-G=15-10-2=3 23. A share in the ownership of a company held by a shareholder is considered a(n): A) Bond. B) Dividend. C) Stock. D) IOU.

Name: ____________________________________ Use the following to answer question 24: Figure: Market for Loanable Funds

24. (Figure: Market for Loanable Funds) Other things being equal, an increase in taxes on savings and investment income will: A) shift demand to the right and increase the interest rate. B) shift demand to the left and decrease the interest rate. C) shift supply to the right and decrease the interest rate. D) shift supply to the left and increase the interest rate. Tax on saving will lead to less saving. Supply of loan will decrease and shift left. At new equilibrium: r increases.

Name: ____________________________________ Use the following to answer question 25: Figure: Macroeconomics Equilibrium

25. (Figure: Macroeconomic Equilibrium) In the accompanying figure, curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____. A) long-run aggregate supply; short-run aggregate supply; aggregate demand B) aggregate demand; short-run aggregate supply; long-run aggregate supply C) short-run aggregate supply; long-run aggregate supply; aggregate demand D) aggregate demand; long-run aggregate supply; short-run aggregate supply 26. If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then in the long run, one will find: A) nominal wages will rise shifting the AD curve to the right and restoring real GDP to its potential level. B) nominal wages will fall and the SRAS curve will shift right bringing the economy back to its potential real GDP. C) nominal wages will fall shifting the AD curve to the left and bringing the economy back to its potential real GDP. D) nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP. Actual output>potential output=>inflationary gap=>high production=>high employment or low unemployment=>nominal wage increase=>SRAS shifts left

Name: ____________________________________ 27. If an economy is currently operating at an output level below its potential real GDP, if the Federal Reserve (Fed) wishes use monetary policy to bring the economy back to its potential real GDP, it will: A) increase the money supply. B) increase government spending. C) increase taxation. D) decrease the money supply. Actual output<potential output=> recessionary gap=>Fed can intervene by increasing Qm (move AD back to LR eqb.) 28. Gross domestic product or GDP is: A) the total dollar value intermediate goods and services produced in the economy in a given time period. B) the total dollar value of wages paid to producing workers in a given time period. C) the total dollar value of final goods and services produced in the economy in a given time period. D) the total dollar value of government production in a given time period. Use the following to answer question 29: Table: Calculating GDP

29. (Table: Calculating GDP) Using the information in the table provided, which of the following is the correct calculation for GDP in 2008? A) $47,475 B) $12,200 C) $21,485 D) $34,085 GDP=C+I+G+X-M=7,900+2,100+2,600+800-1,200=12,200

Name: ____________________________________ 30. Which of the following questions is appropriate to the study of macroeconomics? A) How does the aggregate price level affect overall consumer spending? B) How does the level of interest rates affect Delta's decision to buy a new airplane? C) How much will Sony charge for the new game system to be introduced later this year? D) What determines whether Wachovia opens a new office in Beijing? Macro: overall economy, not particular firm

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