Principles of Macroeconomics - Fall 2008, Exam 1

Correct Answer is followed by a **

1. The major reason for an increase in the price of oil during this decade is:

1. OPEC has purposely restricted the supply of oil to global markets.
2. The war in Iraq has greatly reduced the global supply of oil.
3. Rapid growth in developing countries like China has increased global demand. **
4. Slower economic growth in the U.S. and Western Europe has increased the price of oil.

2. Based on 2007 Energy Information Administration (EIA) data:

1. The U.S. produces more oil than is consumed domestically, and the surplus is exported.
2. Although the U.S. does produce oil, about 2/3 of domestic consumption comes from imports. **
3. The U.S. imports 100% of the oil that it consumes.
4. The U.S. is rapidly increasing domestic output and within the next 3 years, domestic production will equal domestic consumption.

3. When considering real GDP, beginning in 1948 and through 2007:

1. Real GDP was at a lower level in 2007 in 1948.
2. Average annual real GDP growth has grown at a faster rate when there was a Democrat in the White House than when there was a Republican president. **
3. Average annual real GDP growth has grown at a faster rate when there was a Republican in the White House than when there was a Democratic president.
4. Average annual real GDP growth has grown at the same rate regardless if there was a Democrat or Republican in the White House.

4. The primary role of Fannie Mae and Freddie Mac is to:

1. Make home loans directly to first time home buyers.
2. Purchase home loans from banks and package the loans into mortgage backed securities (MBS). **
3. Purchase mortgage backed securities (MBS) from investment banks.
4. Insure bank deposits up to a $100,000 limit.

5. All of the follow statements are correct regarding Mortgage backed securities (MBS) except:

1. The federal government guarantees that all the securities will maintain their full value. **
2. They derive their value from combining individual home mortgage loans.
3. The value of the securities depend on mortgage payments by homeowners.
4. Many were issued by investment banking firms such as Bears Sterns.

6. The goal of the government bailout proposed by Secretary of the Treasury Paulson:

1. Is to purchase bonds from American automobile manufacturers in order to keep them from going bankrupt.
2. To increase bank reserves and the money available to finance business investment. **
3. To purchase stocks that are part of the S&P 500 to make sure the stock market does not crash.
4. To make sure the FDIC is fully funded.

7. The primary reason for the rapid appreciation of home values between 2002 and 2006 was:

1. Low interest rates and a decrease in lending standards by banks. **
2. A significant increase in the supply of housing.
3. The economic boom that took place in the years of 2001 and 2002.
4. A substantial increase in real median family income.

8. At the present time, the economic outlook is rather poor for all of the following reasons except:

1. Falling housing values reduce the ability of homeowners to refinance.
2. Stagnant consumption as many Americans are seeing little increase in their real income.
3. Large government budget deficits reduce the probability of a tax cut.
4. The Federal Reserve has been reducing spending on government programs in an attempt to reduce the budget deficit.

9. Which of the following is not accurate in regards to the home mortgage market:

1. When banks originate loans they can quickly sell the loans to investment banking firms.
2. Investment banking firms buy loans to create mortgage backed securities.
3. When the price of a home increases, homeowners can refinance their mortgage and have additional money to spend.
4. When a homeowner refinances a mortgage any extra money that is received can only be spent on housing-related items. **

10. Which of the following is accurate regarding the August Labor Report:

a. In August, the economy created enough net new jobs to keep up with the growth rate of the labor force.

b. In August, the economy created a positive number of net new jobs but not enough to keep up with the growth rate of the labor force.

c. In August, net new jobs were negative and failed to keep up with the growth rate of the labor force. **

d. In August, net new jobs increased at a rate that is substantially greater than the amount needed to keep up with the growth rate of the labor force.

11. If the inflation rate is equal to 3% and mean (average) wages increase by 2%, which of the following is true:

a. The real wage has increased and total wages for American workers have decreased.

b. The real wage has increased and total wages for American workers have increased.

c. The real wage has decreased and total wages for American workers have increased. **

d. The real wage has decreased and total wages for the typical American worker has increased.

12. If the inflation rate is equal to 2% and median wages increase by 4%, which of the following is true:

a. The real wage for the typical (middle) American worker has increased. **

b. The real wage for highly paid workers has increased but we can not tell if wages for the typical (middle) American worker have increased.

c. The real wage has decreased and total wages for American workers have increased.

d. The real wage has decreased and total wages for the typical American worker has increased.

13. If there is a decrease in the median real wage:

a. Total consumption for the typical American worker will have to decline as well.

b. Total consumption for highly paid American workers will have to decline as well.

c. Gains in purchasing power offset a decline in real income, allowing the typical American worker to maintain a constant level of consumption.

d. Although losing purchasing power, the typical American worker can maintain a constant level of consumption by reducing savings. **

14. In 2008, the Census Bureau reported that real median household income:

a. Decreased, and has decreased every year since 2000.

b. Decreased, but remains above the level of 2000.

c. Increased, and has increased every year since 2000.

d. Increased, but remains below the level of 2000. **

15. Assume that we have a PPF. Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier and Point D is located outside (to the right) the frontier. Which point(s) represent feasible (attainable) production point(s):

1. All points (A, B, C and D) are feasible.
2. Points A, B and C are feasible. **
3. Points B and C are feasible.
4. None of the points are feasible.

16. Assume that we have a PPF. Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier and Point D is located outside (to the right) the frontier. Which point(s) represent efficient production point(s):

1. All points (A, B, C and D) are efficient.
2. Points A, B and C are efficient.
3. Points B and C are efficient. **
4. Points B, C and D are efficient.

17. Assume that we have a PPF. Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier and Point D is located outside (to the right) the frontier. Which point(s) represents an inefficient production point(s):

1. All points (A, B, C and D) are inefficient.
2. Points A, B and C are inefficient.
3. Points B and C are inefficient.
4. Point A is inefficient. **

18. Assume that we have a PPF. Point A lies inside (to the left) of the frontier. Point B and C are located along the frontier and Point D is located outside (to the right) the frontier. Which point(s) is an unattainable production point(s) given the current resources available in the economy?

1. All points (A, B, C and D) are unattainable.
2. Points A and D are unattainable.
3. Point D is unattainable. **
4. All of the points are feasible and none unattainable.

19. Which of the following will lead to an expansion of the PPF:

a. An income tax cut.

b. An increase in worker productivity. **

c. A violent civil war.

d. A change in consumer preferences.

	England		Scotland
	Wool	Cotton	Wool	Cotton
All Time Devoted to producing wool	60 tons	0 tons	30 tons	0 tons
All Time Devoted to producing cotton	0 tons	20 tons	0 tons	30 tons

Use the table shown here for the following questions. There are two countries and two goods: wool and cotton.

20. Based on the table above we can conclude that:

1. England has an absolute advantage in both wool and cotton production.
2. Scotland has an absolute advantage in both wool and cotton production.
3. England has an absolute advantage in wool and Scotland in cotton production. **
4. England has an absolute advantage in cotton and Scotland in wool production.

21. Based on the table above we can conclude that:

1. England has a comparative advantage in both wool and cotton production.
2. Scotland has a comparative advantage in both wool and cotton production.
3. England has a comparative advantage in wool and Scotland in cotton production. **
4. England has a comparative advantage in cotton and Scotland in wool production.

22. Based on the table above we can conclude that with specialization and trade:

a. England will produce 60 tons of wool and Scotland 30 tons of cotton. **

b. England will produce 20 tons of wool and Scotland 30 tons of cotton.

c. England will produce 60 tons of wool and 20 tons of cotton and Scotland will import both.

d. Scotland will produce 30 tons of wool and 30 tons of cotton and England will import both.

23. Based on the table we can conclude that with specialization and trade a mutually agreeable exchange of wool and cotton will involve:

a. England will be willing to trade 2 tons of cotton for 1 ton of wool from Scotland.

b. England will be willing to trade 2 tons of wool for 1 ton of cotton from Scotland. **

c. England will be willing to trade 1 ton of cotton for 3 ton of wool from Scotland.

d. England will be willing to trade 6 tons of wool for 1 ton of cotton from Scotland.

24. Free trade between countries:

a. Would be based on absolute advantage.

b. Is consistent with a policy of autarky.

c. Will rotate the domestic production possibilities frontier inward.

d. Will allow for greater levels of consumption than without trade. **

25. Monetary policy attempts to stabilize the economy by changes in:

1. Taxes.
2. Taxes and spending.
3. Taxes and interest rates.
4. Interest rates and the quantity of money. **

26. Which of the following is NOT included in investment spending in the calculation of GDP?

1. New residential construction.
2. The purchase of machinery and other productive physical capital.
3. The purchase of stocks and bonds by a business. **
4. Spending on inventories.

GDP = C(Y – T) + I(r) + G + NX

27. Using the equation above, a tax increase will lead to:

1. An increase in disposable income, an increase in consumption and an increase in GDP.
2. An increase in disposable income, a decrease in consumption and a decrease in GDP.
3. A decrease in disposable income, an increase in consumption and an increase in GDP.
4. A decrease in disposable income, a decrease in consumption and a decrease in GDP. **

28. Using the equation above, an increase in exports will:

1. An increase in income resulting in a decrease in income and a decrease in GDP.
2. A decrease in interest rates resulting in an increase in investment and an increase in GDP.
3. An increase in government spending and an increase in GDP.
4. An increase in net exports and an increase in GDP. **

29. In a perfect world, the Federal Reserve would:

1. Have the economy at full employment and aggregate demand growth will equal the growth rate of aggregate supply. **
2. Have the unemployment and inflation rates at zero and aggregate demand growth will equal the growth rate of aggregate supply.
3. Have the economy at full employment and aggregate demand exceeds the growth rate of aggregate supply.
4. Have the economy below full employment and aggregate demand growth will exceed the growth rate of aggregate supply.

30. During the business cycle, we can expect supply side economic growth:

a. To increase if the Federal Reserve reduces interest rates.

b. To decrease if the Federal Reserve raises interest rates.

c. To grow at a steady level equal to the growth rate of aggregate demand.

d. To grow at a steady level equal to gains in worker productivity and the increase in the labor force. **

31. A recession is best described by:

a. Negative GDP growth, a high unemployment rate, low inflation. **

b. Positive GDP growth, a falling unemployment rate that is still above full employment, low inflation.

c. Positive GDP growth, a falling unemployment rate that is still above full employment, high inflation.

d. Positive GDP growth, an unemployment rate that is at full employment, low inflation.

32. A goldilocks economy is best described by:

a. Negative GDP growth, a high unemployment rate, low inflation.

b. Positive GDP growth, a falling unemployment rate that is still above full employment, low inflation.

c. Positive GDP growth, a falling unemployment rate that is still above full employment, high inflation.

d. Positive GDP growth, an unemployment rate that is at full employment, low inflation. **

33. An economic recovery (non-inflationary growth) economy is best described by:

a. Negative GDP growth, a high unemployment rate, low inflation.

b. Positive GDP growth, a falling unemployment rate that is still above full employment, low inflation. **

c. Positive GDP growth, a falling unemployment rate that is still above full employment, high inflation.

d. Positive GDP growth, an unemployment rate that is at full employment, low inflation.

34. Your purchase of a brand new toaster oven for your apartment that was made in the same year will be counted in GDP as:

1. Consumption – service.
2. Consumption – durable. **
3. Consumption – nondurable.
4. Investment – capital.

35. The Solow economic growth model is used to show:

a. How a decrease in taxes increase the annual budget deficit.

b. The effect of a change in the monetary base on long term interest rates.

c. How a change in government spending impacts the government spending multiplier.

d. How changes in the labor force and worker productivity relate to a nation’s supply side growth. **

Use the equation below for the following questions:

DK = sY – (d + n + a) K

36. If DK is positive:

a. The capital-to-labor (K/L) ratio will increase. **

b. The capital-to-labor (K/L) ratio will decrease.

c. Depreciated capital will not be fully replaced.

d. Economic growth will equal to the labor force growth rate plus gains in worker productivity.

37. If DK will be negative if:

a. Depreciated capital is not fully replaced.

b. The existing capital stock is upgraded for new technology.

c. New workers are equipped with their share of capital.

d. The capital-to-labor (K/L) ratio is increasing.

38. Which of the following conditions is not consistent with growth in a wealthy steady state country:

a. Depreciated capital is fully replaced.

b. The existing capital stock is upgraded for new technology.

c. New workers are equipped with their share of capital.

d. The capital-to-labor (K/L) ratio is increasing. **

39. In comparison to a wealthy steady state country, which of the following is true only for a high savings developing country:

a. Depreciated capital is fully replaced.

b. The existing capital stock is upgraded for new technology.

c. New workers are equipped with their share of capital.

d. The capital-to-labor (K/L) ratio is increasing. **

40. According to the convergence hypothesis:

1. Wealthy countries will eventually suffer from economic depressions and falling living standards until they converge with the poor economies.
2. Over time, all countries in the world will have an equal GDP per capita.
3. High savings developing countries will see rapid growth and reach living standards comparable to wealthy countries. **

d. High savings developing countries will grow at a rate that exceeds the wealthy countries forever.

41. When comparing supply side growth in the United States to China:

1. China’s growth rate of GDP will equal to the U.S. GDP growth rate over time.
2. Growth for both countries will equal to labor force growth plus increases in worker productivity. **
3. Growth for the US will equal to labor force growth plus increases in worker productivity and for China growth will equal to labor force growth plus increases in worker productivity plus annual real GDP growth.
4. Growth for the US will equal to labor force growth plus increases in worker productivity and for China growth will equal to labor force only.