Econ 002 Midterm Review

Summer 2009 Page 1

Craig McLaren

ECONOMICS 2: 2009 SUMMER SESSION II

MIDTERM REVIEW

Please answer the following questions on a SCANTRON form. Use either the green or blue
forms (with 50 questions on a side) available from the bookstore.

1. Ex-London School of Economics student Mick Jagger sang, “You can’t always get what you
want, but if you try sometime you just might find you can get what you need.” Another
statement of the basic economic principle expressed in this lyric is that
a. rational decisions are not always possible.
b. you can allocate your resources to what gives you the highest value.
c. you can create the supply to meet your own demand.
d. you can maximize social welfare by making optimal decisions.

2. A student has a chance to see Eric Clapton in concert. The student also has a major
economics exam in the morning. If the student goes to the concert,
a. she will get a lower grade on the economics exam.
b. the opportunity cost of the concert is time spent studying.
c. this decision implies a trade-off.
d. All of the above are correct.

3. As the term “opportunity cost” is defined in the text, the opportunity cost of going to college
includes
a. both tuition and the value of the student’s time.
b. tuition but not the value of the student’s time, which is a cash cost.
c. the value of the student’s time but not tuition, which is a monetary cost.
d. neither tuition nor the value of the student’s time, since obtaining a college degree
makes one’s income higher in the future.
e. neither tuition nor the value of the student’s time, at least at subsidized state
universities.

4. Which of the following is likely to affect the position and shape of society’s production
possibilities frontier?
a. volume of physical resources
b. level of labor skills
c. level of technology
d. amount of factories on hand
e. All of the above are correct.

5. The total amount of consumption of a society can be increased if

a. firms allow each worker to perform multiple tasks.
b. resources are allocated by a central planning group.
c. individuals engage in specialization and voluntary trade.
d. barter exchange is used in place of money.
Econ 002 Midterm Review
Summer 2009 Page 2
Craig McLaren

Table 1
Combination Cotton Corn
A 12 16
B 17 15
C 21 13
D 23 9
E 24 5

6. From the data given in Table 1, the opportunity cost of increased cotton in moving from A to
B is
a. 16 units of corn.
b. 31 units of corn.
c. 15 units of corn.
d. 4 units of corn.
e. 1 unit of corn.

FIGURE 1

7. According to Figure 1, the opportunity cost of one more bushel of wheat is

a. higher at B than at D.
b. lower at B than at D.
c. equal at B and D.
d. impossible to determine from the information given.

8. The curvature of the production possibilities frontier in Figure 1 implies that

a. some resources are better suited for producing wheat than for producing barley.
b. the opportunity cost of producing more wheat falls as wheat production rises.
c. the farmer’s technology is not subject to the principle of increasing costs.
d. the financial cost of producing wheat is higher than the financial cost of producing
barley.
Econ 002 Midterm Review
Summer 2009 Page 3
Craig McLaren

FIGURE 2

9. In Figure 2, a point such as A

a. is preferable over B.
b. is an efficient use of resources.
c. represents a misallocation of resources.
d. is not obtainable.

10. In Figure 2, a point such as D

a. can be obtained through new technology.
b. can never be obtained.
c. can only be obtained by a capitalist society.
d. represents a misallocation of resources.

11. Which of the following is a good example of efficient specialization and voluntary
exchange?
a. A college professor hires someone to rototill a garden for spring planting.
b. A college professor works on the engine of a car for a neighbor who is a mechanic.
c. A lawyer decides to babysit his young child and agrees to do so for others for cash.
d. A physician agrees to help a neighbor work on her income tax return in exchange for
her bookkeeping services.

12. The slope of a demand curve is almost always

a. positive (upward), because when people buy more of a good the cost of producing it
will rise.
b. positive (upward),, because the more money a person has, the more of a particular
good will be bought.
c. negative (downward), because when people buy more of a good the cost of producing
it will fall.
d. negative(downward), because with everything else equal, the same people will buy
more of a good when its price is lower.
e. positive (upward), because as the price rises, people want to sell more of the good.
Econ 002 Midterm Review
Summer 2009 Page 4
Craig McLaren

FIGURE 3

13. At present, faculty in the Economics Department teach introductory and upper-level
courses. Which graph in Figure 3 represents the change in the production possibilities of
the Economics Department after a policy of using graduate students in addition to faculty to
teach introductory sections was implemented?
a. 1
b. 2
c. 3
d. 4

FIGURE 4

14. If the government has stated that it will pay whatever it must to obtain 1,000 units of good X,
which demand curve in Figure 4 is appropriate?
a. 1
b. 2
c. 3
d. 4

15. Why does quantity demanded decrease when price increases?

a. People choose to reduce consumption of the item.
b. People “drop out” of the market for the item.
c. People find substitutes for the item.
d. All of the above are correct.
Econ 002 Midterm Review
Summer 2009 Page 5
Craig McLaren

16. Firms often seek to borrow money to expand their capital stock, and the price they pay for
that money is the interest rate. What happens to quantity of money demanded if the interest
rate increases?
a. It increases.
b. It decreases.
c. It does not change.
d. Uncertain—the law of demand does not apply to money.

17. If consumers is sensitive to changes in the price of a good, the good’s

a. elasticity is between 0 and -1
b. elasticity is between 0 and +1
c. elasticity is less than -1
d. elasticity is greater than +1.

18. If orange juice prices double next year, there will be a

a. rightward shift in the demand for grapefruit juice.
b. rightward shift in the supply of grapefruit juice.
c. leftward shift in the supply of grapefruit juice.
d. leftward shift in the demand for grapefruit juice.

19. A shift in the demand curve for sailboats resulting from an increase in incomes will lead to
a. higher prices of sailboats.
b. lower prices of sailboats.
c. a corresponding shift in the supply curve for sailboats.
d. lower output of sailboats.
e. no change in the price of sailboats.

20. We observed that the price of a good rises and the quantity purchased also rises.
Everything else being equal, it is consistent that
a. the price of a substitute good fell.
b. the price of a complement rose.
c. income rose.
d. costs of inputs increased.

21. The price of coal fell and the quantity sold also fell. Everything else being equal, it is
consistent that
a. the price of oil fell.
b. coal miners received large wage increases.
c. more efficient mining equipment was installed.
d. consumer incomes rose.
e. the supply of coal fell.

22. When GM advertises its cars, the company is trying to cause a

a. rightward shift in the supply.
b. rightward shift in the demand.
c. leftward shift in the supply.
d. leftward shift in the demand.
Econ 002 Midterm Review
Summer 2009 Page 6
Craig McLaren

FIGURE 5

23. In Figure 5, an increase in population will change demand from

a. D1 to D2.
b. D2 to D1.
c. D3 to D2.
d. D3 to D1.

24. A shift in the supply curve of bicycles resulting from higher steel prices will lead to
a. higher prices of bicycles.
b. lower prices of bicycles.
c. a shift in the demand curve for bicycles.
d. larger output of bicycles.
e. no change in the price of bicycles.

25. The demand for computers has risen dramatically at the same time that the unit cost of
production has decreased. As a result, we can expect
a. a decrease in price and no predictable impact on output.
b. a definite decrease in price and increase in output.
c. an increase in output with no predictable change in price.
d. no predictable changes in either price or output.

26. The quantity of newspapers sold will decline if

a. newsprint becomes more expensive.
b. the printers’ union makes wage concessions.
c. prices are reduced.
d. magazine prices rise.
Econ 002 Midterm Review
Summer 2009 Page 7
Craig McLaren

FIGURE 6

27. “Moonshine” is illegal home brew made by adding sugar to accelerate corn fermentation.
Ten pounds of sugar are necessary to make a gallon of moonshine. In the mid-1970s, the
price of sugar tripled and the price of moonshine skyrocketed from $6 to $15 a gallon.
Which graph in Figure 6 best illustrates this?
a. 1
b. 2
c. 3
d. 4

FIGURE 7

28. Recycling of newspapers has been undermined by its success. The supply of old papers,
gathered diligently by those concerned with the environment, has increased dramatically, as
has the number of firms that convert the material into recycled newsprint. Demand has
remained stable despite falling prices because newspapers consider recycled newsprint an
inferior substitute for regular newsprint. Consequently, the price of recycled newsprint has
fallen below the cost of production; recycling firms are going out of business; mountains of
old newspapers are left behind. Which graph in Figure 7 best illustrates this situation?
a. 1
b. 2
c. 3
d. 4
Econ 002 Midterm Review
Summer 2009 Page 8
Craig McLaren

FIGURE 8

29. In Figure 8, an increase in the number of producers will shift supply from
a. S1 to S2.
b. S2 to S1.
c. S3 to S2.
d. S3 to S1.

FIGURE 9

30. In Figure 9, there would be a surplus of T-shirts if the price were

a. $10.
b. $8.
c. below $8.
d. between $8 and $6.
Econ 002 Midterm Review
Summer 2009 Page 9
Craig McLaren

Use this table for the following questions.

Quantity Quantity
Price Demanded Supplied
$10 1,000 5,500
9 2,000 5,000
8 3,000 4,500
7 4,000 4,000
6 5,000 3,500
5 6,000 3,000
4 7,000 2,500
3 8,000 2,000
2 9,000 1,500
1 10,000 1,000

31. What is the equilibrium price in the example above?

a. $9
b. $8
c. $7
d. $6
e. $5

32. At $10, what is the surplus?

a. 4,500
b. 3,000
c. 1,500
d. 0

33. In economics, aggregation refers to

a. collecting sample specimens for reclassification.
b. using small stones to pave an artistic walkway.
c. combining many markets into one overall economy.
d. using large computers to solve economic problems.

34. Combining various goods and services into a convenient grouping is called
a. conglomeration.
b. blending.
c. congregation.
d. agglomeration.
e. aggregation.

35. If aggregate demand shifts inward over a long period of time, with aggregate supply held
constant, the economy should experience
a. unemployment.
b. recession.
c. stagflation.
d. inflation.
e. budget surpluses.
Econ 002 Midterm Review
Summer 2009 Page 10
Craig McLaren

36. One major effect of the Great Depression was

a. it reaffirmed everyone’s faith that capitalism was a self-correcting system.
b. it encouraged voters to limit the role of government.
c. the creation of the rational expectations school of economic theory.
d. a decreased faith in the ability of economies to automatically correct major problems.

37. The Great Depression of the 1930s led to a revolution in macroeconomic thinking, following
the work of
a. Arthur Laffer.
b. Milton Friedman.
c. Adam Smith.
d. John Maynard Keynes.
e. David Ricardo.

38. The Great Recession of 1973–1975 was unusual in that both inflation and unemployment
increased at the same time. This suggests that the primary cause of the recession was an
a. inward (upward) shift of the aggregate demand curve.
b. outward shift of the aggregate supply curve.
c. inward (upward) shift of the aggregate supply curve.
d. outward shift of the aggregate demand curve.

39. The significantly high rates of inflation in the 1970s occurred, in part,
a. because of increased petroleum prices.
b. due to high wage increases.
c. despite falling gasoline prices.
d. due to restrictive monetary policies.
Econ 002 Midterm Review
Summer 2009 Page 11
Craig McLaren

40 Environmentalists worry that economic growth imposes costs on society. Among these
costs are
a. pollution.
b. crowding.
c. waste disposal.
d. All of the above are costs.

41. Potential GDP is an estimate of the economy’s ability to produce goods and services if the
a. labor force is fully employed.
b. price level is stable.
c. trade balance is zero.
d. federal budget is balanced.

42. If the rate of technical progress decreases, then the growth

a. of the labor force will decrease.
b. of the capital stock will decrease.
c. rate of potential GDP will decrease.
d. rate of unemployment will decrease.

43. The growth rate of potential GDP is the sum of two other growth rates. These other growth
rates are
a. population and resource base.
b. goods output and services output.
c. labor input and labor hours worked.
d. labor input and labor productivity.

44. GDP per capita is the best measure of an economy’s

a. size.
b. standard of living.
c. productivity.
d. population.

45. If the population increase in India is smaller than the increase in Indian real GDP, then GDP
per capita will
a. decrease.
b. increase.
c. remain constant.
d. increase more slowly than real GDP.
46. If the capital stock increases, then the economy can produce _____output with the
_____amount of labor.
a. same, same
b. less, same
c. more, same
d. less, less
Econ 002 Midterm Review
Summer 2009 Page 12
Craig McLaren

47. The growth rate of potential GDP depends on

a. the rate of technical progress. Compositor! 6/26/02 12:24 PM
b. the growth rate of the capital stock. Formatted: Bullets and Numbering
c. the growth rate of the labor force.
d. all of the above.

48. GDP equals hours of work times

a. labor force.
. b. output per hour.
c. population.
d. capital stock.

49. The growth rate of potential GDP is the sum of the growth rates of
a. labor force and population.
b. labor force and labor productivity.
c. labor force and capital stock.
d. labor productivity and capital stock.

50. If part of the labor force is unemployed, the foregone goods and services are
a. lost until the unemployed find jobs.
b. are replaced by unemployment insurance.
c. are lost forever.
d. are replaced by an equal amount of imports.

51. Which of the following groups would have the lowest unemployment rates?
a. high-school dropouts
b. married women
c. nonwhite teenagers
d. nonwhite women

52. Discouraged workers are included in the

a. labor force category.
b. unemployed category.
c. not in the labor force category.
d. employed category.

53. The term frictional unemployment refers to persons who are out of work
a. due to technological change.
b. due to strikes or lockouts.
c. and have given up looking for work.
d. for a short period.
54. When some firms fail because their output is not demanded by society, workers may suffer
a. structural unemployment.
b. frictional unemployment.
c. seasonal unemployment.
d. cyclical unemployment.
Econ 002 Midterm Review
Summer 2009 Page 13
Craig McLaren

55. Which of the following scenarios best illustrates the concept of cyclical unemployment?
a. Grace loses her job because of new automated machinery.
b. Sean quits his job to look for work that is more fun.
c. Ellen quits looking for work because she doesn’t think she can find a suitable job.
d. Marian loses her job because of a recession.

56. When inflation occurs,

a. real wages must necessarily fall.
b. real wages must necessarily rise.
c. workers will experience falling real incomes.
d. workers’ real income may rise or fall.

57. Older people often reminisce about the “good old days” when prices were much lower. This
is misplaced nostalgia primarily because in the “good old days,”
a. prices were not really that low.
b. wages were much lower also.
c. people worked longer hours.
d. people had more leisure time.

58. If the price of pizzas has risen from $4 to $5 at the same time that the price of an hour of
spinning class has risen from $20 to $30, then
a. pizzas have become relatively more expensive.
b. aerobics’ classes have become relatively more expensive.
c. the relative prices of pizzas and aerobics classes have remained constant.
d. workers’ real income must have decreased.

59. Last year your job at the university cafeteria paid you $9 an hour and the price of a ten-
minute long distance call to your girlfriend in California was $4. This year your cafeteria job
pays $9.90 per hour and the ten-minute phone call now costs $4.10. You are clearly
a. worse off because of inflation.
b. worse off because the phone call is now relatively more expensive.
c. better off because your wage rate went up.
d. better off because the phone call now costs less work.

60. Which of the following groups would most likely be harmed by inflation?
a. workers
b. borrowers
c. debtors
d. retirees
61. The economic benefits of owning a home are greater when home prices are
a. falling and interest rates are high.
b. rising and interest rates are low.
c. rising and interest rates are high.
d. falling and interest rates are low.
Econ 002 Midterm Review
Summer 2009 Page 14
Craig McLaren

62. The rate of interest written on a contract between a borrower and a lender is the
a. nominal interest rate.
b. real interest rate.
c. implied interest rate.
d. expected interest rate.

63. Rachel agrees to lend Phoebe $100 for six months and charges her interest of 2 percent. At
the end of the six-month period, prices have risen by 4 percent.
a. Purchasing power has been redistributed to Rachel.
b. No purchasing power has been redistributed.
c. Purchasing power has been redistributed to Phoebe.
d. Both Rachel and Phoebe received extra purchasing power.

64. Americans viewed the 12 percent mortgage interest rates of the 1980s as exorbitantly high
while they considered the 7 percent mortgage interest rates of the late 1990s as
reasonable. This represents a confusion of
a. actual and expected inflation.
b. real versus nominal inflation.
c. real versus nominal mortgages.
d. real versus nominal interest rates.

65. Which of the following services have experienced declines in relative prices due to
productivity increases?
a. medical services
b. restaurant meals
c. theatrical performances
. d. Internet access services

66. Which retail operation would have the highest costs per book sold?
a. a small independent bookstore
b. a large retail bookstore chain
c. an Internet seller of books
d. All would have the same costs.

67. Compared to workers in richer countries, workers in poorer countries have

a. lower productivity and lower wages.
b. higher productivity and higher wages.
c. higher productivity but lower wages.
d. the same productivity but lower wages.
68. The definition of human capital refers to
a. worker education and workers' equipment.
b. worker education and workers' physical capital.
c. workers' equipment and workers' physical capital.
d. worker education and worker training.
Econ 002 Midterm Review
Summer 2009 Page 15
Craig McLaren

69. Which of the following countries has the highest level of average educational attainment?
a. Canada
b. Italy
c. India
d. Sudan

70. The shrinking gap between the income levels of poor and rich countries is known as the
a. conservative hypothesis.
b. divergence hypothesis.
c. convergence hypothesis.
d. confluent hypothesis.

71. Imitation as a strategy for acquiring new technology is based on the difference in effort
between
a. creating it and thinking of it.
b. creating it and looking it up.
c. looking it up and writing it down.
d. discovering it and innovating it.

72. A nation's supply of capital refers to its level of

a. common stocks and corporate bonds.
b. financial wealth.
c. production equipment.
d. monetary balances.

73. The financing of investment spending is often made possible by

a. consumer spending.
b. money supply creation.
c. borrowing.
d. tax reductions.

74. The profitability of an investment project will increase if

a. tax rates increase.
b. real interest rates increase.
c. real interest rates decrease.
d. business tax deductions decrease.

75. In 1997, in order to stimulate capital investment, President Clinton and Congress
a. reduced real interest rates.
b. increased the money supply.
c. reduced the tax on corporate profits.
d. reduced the tax on capital gains.
76. Property rights uncertainty will usually cause
a. lower levels of investment spending.
b. lower levels of real interest rates.
c. higher levels of investment spending.
d. higher levels of real interest rates.
Econ 002 Midterm Review
Summer 2009 Page 16
Craig McLaren

77. Lower levels of education and training are often associated with low levels of
a. production.
b. productivity.
c. inflation.
d. both a and b.

78. In the United States, the wage premium for college education has been
a. decreasing since 1980.
b. increasing since 1980.
c. higher for males.
d. decreasing since 1990.

79. As the economy becomes more technologically sophisticated, the wage premium can be
expected to
a. continue rising.
b. continue falling.
c. rise.
d. fall.