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EC 350 Test # IIa

Course: Principles of Micro and Engineering economics
Name:

Instructor: Gasper Sekelj
Date:

The test is worth 35 points. You have 1 hour and 30 minutes to complete the test. Good Luck.

1.) The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it
sells all 25 cars.
a) The value of increased inventory will be counted as part of GDP in 2003, but the value of
the cars sold in 2004 will not cause GDP to increase.
b) The value of the increased inventory will not affect 2003 GDP, but will be included in
2004 GDP.
c) The value of the increased inventory will be counted as 2003 GDP and the value of the
cars sold in 2004 will increase 2004 GDP.
d) None of the above are correct.
2.) An Italian company opens a pasta company in the U.S. The profits from this pasta company
are included in
a)
b)
c)
d)

both U.S. and Italian GNP.
both U.S. and Italian GDP.
U.S. GDP and Italian GNP.
U.S. GNP and Italian GDP.

3.) If a U.S. citizen buys a television made in Korea by a Korean firm,
a. U.S. net exports decrease, and U.S. GDP decreases.
b. U.S. net exports are unaffected, and U.S. GDP decreases.
c. U.S. net exports are unaffected, and U.S. GDP is unaffected.
d. U.S. net exports decrease but U.S. GDP is unaffected.
4.) Unemployment compensation is
a)
b)
c)
d)

part of GDP because it represents income.
not part of GDP because it is a transfer payment.
part of GDP because the recipients must have worked in the past to qualify.
not part of GDP because the payments reduce business profits.

6. taxes of $1200. $7600. government purchases of $1500. rose and prices fell.5. in the consumption component of the GDP accounts If the price index in the first year was 90. $7000. then from 2001 to 2002 real output a) b) c) d) and prices both rose. but not the services.) If a small country has current nominal GDP of $20 billion and a GDP deflator of 50. b) 10 percent inflation between the first and second years and 5 percent deflation between the second and third years. $8900. what is its real GDP? a) b) c) d) $100 billion $40 billion $10 billion $4 billion 7. exports of $500. and depreciation of $300.) If in a given year an economy has consumption of $3000. and in the third year was 95. in the second year was 100. c) 11 percent inflation between the first and second years and 5 percent inflation between the second and third years. then GDP will equal a) b) c) d) e) $6400. and prices both fell. imports of $600. $9500. the economy experienced a) 10 percent inflation between the first and second years and 5 percent inflation between the second and third years.) If a country reported a nominal GDP of 115 billion in 2002 and 125 billion in 2001 and reported a GDP deflator of 85 in 2002 and a deflator of 100 in 2001. . d) 11 percent inflation between the first and second years and 5 percent deflation between the second and third years.) all goods and services produced in the economy all goods and services that typical consumers buy all goods and services in the consumption component of the GDP accounts all the goods. investment of $2000. transfer payments of $400. fell and prices rose. 8.) Which goods are supposed to be included in the CPI? a) b) c) d) 9.

. or 180 to 198? 100 to 110 150 to 165 180 to 198 All changes show the same rate of inflation.10. and the value of savings measured in goods increased at 3 percent.2 million.625 $60.667 $65. What was the approximate growth rate of real GDP per person? 12 percent 10 percent 4 percent 2 percent The equipment and structures available to produce goods and services are called physical capital.) a) b) c) d) 14.) a) b) c) d) In 2002 real GDP in Oceania was 561. 150 to 165. a) The dollar value of savings increased at 2 percent. b) The dollar value of savings increased at 1 percent.0 billion and the population was 2. and the value of savings measured in goods increased at 3 percent. Andrew's job offer in Des Moines is for $42. In 2001 real GDP was 500. 13. and the value of savings measured in goods increased at 2 percent. the production function.500 Suppose that the real interest rate was 3 percent and the inflation rate was 1 percent. Andrew is offered a job in Des Moines where the CPI is 80 and a job in New York where the CPI is 125. human capital.) a) b) c) d) 11.900 $52. How much does the New York job need to pay in order to make the two salaries have almost the same purchasing power? $74. c) The dollar value of savings increased at 3 percent. technology.) a) b) c) d) 12.0 million. and the value of savings measured in goods increased at 1 percent.) Which change in the price index shows the greatest rate of inflation: 100 to 110.000. d) The dollar value of savings increased at 4 percent.0 billion and the population was 2.

this is called the Malthus effect. while the sale of bonds to raise funds is called equity finance.15. public goods.S. but decrease the incentive to engage in research.S.S. this is called the catch-up effect. GNP. GDP. relatively poor countries tend to grow slower than relatively rich countries. faster than relatively rich countries.) a) b) c) d) 19. and increase the incentive to engage in research. d) to raise money is called equity finance. The sale of stocks a) and bonds to raise money is called debt finance. have no affect on U.) Other things equal. while the sale of bonds to raise funds is called debt finance. GDP more than it would increase U. Future production from such an investment would increase U. 18.) a) b) c) d) 16. this is called the constant-returns-to-scale effect. but decrease the incentive to engage in research. private goods.S. Suppose Japanese-based Sony Corporation builds and operates a new chip factory in the United States.) Patents turn new ideas into public goods.S. faster than relatively rich countries. d) These are inward-oriented policies and most economists believe they would have adverse effects on growth.S. private goods.) a) b) c) d) 17. increase U. The President of a developing country proposes that his country needs to help domestic firms by imposing trade restrictions. GNP. but would increase U. c) These are inward-oriented policies and most economists believe they would have beneficial effects on growth. not affect U. this is called the poverty trap. b) and bonds to raise money is called equity finance. c) to raise money is called debt finance. b) These are outward-oriented policies and most economists believe they would have adverse effects on growth. and increase the incentive to engage in research. GDP.S. GNP more than it would increase U. . slower than relatively rich countries. GNP or GDP. a) These are outward-oriented policies and most economists believe they would have beneficial effects on growth.

upward because an increase in the interest rate induces people to invest more. The supply of loanable funds slopes upward because an increase in the interest rate induces people to save more. What are private saving and public saving? 1500 and -500 1500 and 500 1000 and -500 1000 and 500 The country of Aquilonia does not trade with any other country. Ralston Purina is investing. downward because an increase in the interest rate induces people to invest less. Its government purchases $5 billion worth of goods and services each year. Henry and Ralston Purina are both investing. Private saving in Aquilonia is $5 billion.) a) b) c) d) 21. Henry is investing. Henry and Ralston Purina are both saving. Consumption equals 6.500.) a) b) c) d) 22.I .) a) b) c) d) 24. Ralston Purina is saving. Henry is saving. Its GDP is $30 billion. Henry buys a bond issued by Ralston Purina. What is consumption and investment? $18 billion and $5 billion $21 billion and $4 billion $13 billion and $7 billion There is not enough information to answer the question.NX Y-C-G Y-I-C G+C-Y Suppose that in a closed economy GDP is equal to 10. Taxes are equal to 2.500. which uses the funds to buy new machinery for one of its factories. and Government expenditures equal 2.G . collects $7 billion in taxes. downward because an increase in the interest rate induces people to save less.) a) b) c) d) Which of the following equations represents national saving in a closed economy? Y .20.) a) b) c) d) 23. .000.000. and provides $3 billion in transfer payments to households.

This would shift the supply for loanable funds right making interest rates fall. d) increasing marginal utility of wealth.25. implying that his utility function gets steeper as wealth increases. implying that his utility function gets flatter as wealth increases.S.) a) b) c) d) 28.) a) b) c) d) 26. How many years did she wait to check her balance? 5 years 6 years 7 years 8 years Sari puts $100 in an account with an interest rate of 10 percent. Later she checks her balance and finds it's worth about $708. demand for loanable funds left making the interest rate fall. c) increasing marginal utility of wealth.) a) b) c) d) 29.) a) b) c) d) 27. implying that his utility function gets steeper as wealth increases. Jackie puts $400 into an account when the interest rate is 10 percent. If Canada increases its budget deficit. public saving and so shift the supply of loanable funds left None of the above are correct.010 If a person is risk averse. it will reduce private saving and so shift the supply of loanable funds left. investment and so shift the demand for loanable funds left. demand for loanable funds right making the interest rate rise. supply of loanable funds left making interest rates rise.000 of interest income tax free. implying that his utility function gets flatter as wealth increases. then he has a) diminishing marginal utility of wealth. government allowed taxpayers to earn their first $5. . According to the rule of 70. b) diminishing marginal utility of wealth. about how much does she have at the end of 21 years? $210 $300 $800 $1.) Suppose the U.62.

3 percent. unemployed and in the labor force. Rick loses his job and immediately begins looking for another. and the labor-force participation rate decreases. the Canadian adult non-institutionalized population was 24 million.) Marcus puts a greater proportion of his portfolio into government bonds. d) the longer the duration of each spell of unemployment. This increases both risk and the average rate of return decreases both risk and the average rate of return increases risk. decreases.30. . employment figures.3 percent.S.5 percent. the unemployment rate increases. but decreases the average rate of return decreases risk. and the labor-force participation rate is unaffected. 58 percent and 8. b) the shorter the duration of each spell of unemployment. We would predict that the more generous unemployment compensation a country has. the labor force was 16 million. and the higher the unemployment rate.) a) b) c) d) 33.) a) b) c) d) 34. A few years ago. According to these numbers. 58 percent and 12. but not in the labor force.) a) b) c) d) 31. increases. Ceteris paribus. 67 percent and 12. c) the longer the duration of each spell of unemployment. and the labor-force participation rate is unaffected. based on concepts similar to those used to estimate U. unemployed. employed and in the labor force. is unaffected. and the lower the unemployment rate.) a) b) c) d) 32. the Canadian labor-force participation rate and unemployment rate were about 67 percent and 8.5 percent. a) the shorter the duration of each spell of unemployment. and the number of people employed was 14 million. and the lower the unemployment rate. but increases the average rate of return A college student who is not working or looking for a job is counted as neither employed nor part of the labor force. and the labor-force participation rate increases. and the higher the unemployment rate.

increases.) a) b) c) d) 11. social costs exceed private costs at the private market solution. raising wages in industries that are not unionized. P2 and Q0. reducing wages in industries that are not unionized. increases.) a) b) c) d) When unions raise wages in some sectors of the economy.) a) b) c) d) 34. they internalize externalities. private costs exceed social costs at the private market solution. For the next three questions use the graph shown below: 33.35. decreases. P1 and Q0.) Which price and quantity combination represents the social optimum? P0 and Q1. Private markets fail to reach a socially optimal level when negative externalities are present because social costs equal private costs at the private market solution. reducing wages in industries that are not unionized. True False . raising wages in industries that are not unionized. This market is creating a positive externality. the supply of labor in other sectors of the economy decreases. P2 and Q1.

provide a subsidy for this product. the tannery's profits are $4. encourage firms to supply more of this product by taxing them.300 per week and the resort's profits are $3. Consider a city with a river.000 3. the resort will: a) b) c) d) Pay the tannery between $0 and $400 to use the recycling method Pay the tannery between $400 and $700 to use the recycling method Pay the tannery between $700 and $1100 to use the recycling method Accept that the tannery is not going to use the recycling method and deal with the consequences .) a) b) c) d) To internalize the externality in this market the government should impose a tax on this product. In this case. the tannery's effluent decreases the resort's profits. which it dumps into the river. the tannery will: a) b) c) d) Not use the recycling method and not pay the resort any money Use the recycling method. This would reduce the pollution in the river to levels that are safe for recreation and would no longer affect the resort. assuming the two firms can bargain at no cost. That is.) Total profits (the tannery's profits and the resort's profits combined) are highest when: a) The recycling production method is used b) The recycling production method is not used 2.35.) Suppose the tannery has the property rights to the river and can dump its sewage into the river.) Suppose the resort has the property rights to the river. assuming the two firms can bargain at no cost. produce the product itself. the tannery's profits are $3. but not pay the resort any money Use the recycling method and pay the resort between $0 and $400 Use the recycling method and pay the resort between $700 and $1. This pollutes the river and makes it a less desirable vacation location. In this case.000 per week. the resort has the right to a clean (unpolluted) river.100 per week. If the tannery uses the recycling method. The city also has a tannery that creates industrial waste. The city has a resort whose visitors use the river for recreational purposes. Suppose that the tannery can use a production method that includes water recycling. If the tannery does not use the recycling method. 1.000 per week and the resort's profits are $2. That is.

and the tannery will make the most profit when the resort has property rights to a clean river.4. and the tannery will make the most profit when it has the property rights to pollute the river.) Which of the following statements is correct? a) Both firms will be equally well off. b) The resort will make the most profit when the tannery has the property rights to pollute the river. c) The resort will make the most profit when it has property rights to a clean river. regardless of the initial distribution of property rights. .