Macro Midterm Exam Fall 2021

Multiple-choice with single answer:

(3 points each/60 points in total)

1. In an economic model of supply and demand in the car market:

A) exogenous variables affect endogenous variables.
B) price is an endogenous variable and quantity is an exogenous.
C) when the model is extended from partial equilibrium to general equilibrium model, more
exogenous variables may become endogenous.
D) the exogenous variables are determined by the model.

2. In a simple model of the supply and demand for the fossil fuel and car in the market, an
anticipation of the future rise in the price of oil will
A) shift the supply of fossil fuel to the right now.
B) increases the equilibrium quantity and price of fossil fuel now.
C) shift the demand of fossil fuel the the left now.
D) induce no response in the price and quantity of the car to this anticipation.

3. In an extended model of the supply and demand for Toyota traditional car and Tesla EV cars:
A)The increase in the car price of Honda is exogenous and is able to affect the price and quantity of
Tesla car.
B)The breakthrough of the rechargeable battery increases the price of Honda and decreases the
price of Tesla
C)The breakthrough of the rechargeable battery increases both the quantity of Honda Tesla car
D)Both the quantities of Tesla and Honda car are endogenous variables.

4. In the national income accounts, all of the following are classified as government purchases
except:
a. payments made to Social Security recipients.
b. services provided by police officers.
c. purchases of military hardware.
d. services provided by U.S. senators.

5. GDP is all of the following except:

a. the total expenditure of everyone in the economy.
b. the total income of everyone in the economy.
c. the overall expenditure on the economy's output of goods and services.
d. the total output of the economy.

6. Which of the following is a stock variable?

A) education expenditure
B) real GDP
C) capital
D) investment

7. When a firm sells a product out of inventory in the next year, which of the following is true
A) GDP next year increases.
B) consumption next year increases
C) inventory investment decreases this year
D) non of the above is true.

8.Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells
you a hamburger made from that meat for $2. In this case, GDP increases by:
a. $3
b. $2.
c. $1.
d. $0.5.

9.Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50
in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in
2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was:
a. $5.
b. $6.50.
c. $9.50.
d. $11.

10. An increase in the price of imported goods will show up in:

A) the CPI but not in the GDP deflator.
B) the GDP deflator but not in the CPI.
C) both the CPI and the GDP deflator.
D) neither the CPI nor the GDP deflator.

11. According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the
labor force if that person:
a. is going to school full time.
b. is temporarily absent from a job because of illness.
c. has been temporarily laid off.
d. is out of a job and was looking for work during the previous four weeks.

12. The production function feature called “decreasing returns to scale” means that if we:
A) multiply capital by z1 and labor by z2, we multiply output by z3.
B) increase capital and labor by 10 percent each, we increase output by less than 10 percent.
C) increase capital and labor by 5 percent each, we increase output by 5 percent.
D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5
percent.

13. A competitive, profit-maximizing firm hires capital until the:

A) marginal product of laborl equals the real wage.
 B) price of output multiplied by the marginal product of labor equals to wage.
C) The real rental price of capital equals to the marginal product of labor
D) non of the above are true.

14. If the consumption function is given by C = 150 + 0.75(Y – T) and T decreases by 1 unit, then
savings:
A) increases by 0.75 units.
B) increases by 0.25 units.
C) decreases by 0.25 units.
D) decreases by 0.75 units.

15. When the supply for loanable funds exceeds the demand of loanable funds, firms want to invest
______ than households want to save and the interest rate ______.
A) more; falls
B) more; rises
C) less; falls
D) less; rises

16. A decrease in government spending on military expenditure ______ the interest rate, the
crowding __ occurs when the investment ______.
A) increases; in; increases
B) increases; out; decreases
C) decreases; in; increases
D) decreases; out; decreases

17. In the classical model with fixed income, an increase in the government budget deficit will lead
to a:

A) higher real interest rate.

B) lower real interest rate.
C) higher level of output.
D) lower level of output.

18. In the United States, the money supply is determined:

a. only by the Fed.
b. only by the behavior of individuals who hold money and of banks in which money is
held.
c. jointly by the Fed and by the behavior of individuals who hold money and of banks
in which money is held.
d. according to a constant-growth-rate rule.

19. In a fractional-reserve banking system, banks create money when they:

a. accept deposits.
 b. make loans.
c. hold reserves.
d. exchange currency for deposits.

20. Between August 1929 and March 1933, the money supply fell 28 percent. At that time the
monetary base ______, and the currency–deposit and reserve–deposit ratios both ______.
a. fell; fell
b. fell; rose
c. rose; fell
d. rose; rose

Graphical and short answer:

21. Suppose a government increases a budget deficit by increasing government expenditure on
wasteful consumption. Using the long-run model of the economy developed in Chapter 3,
a. graphically illustrate the impact of increasing government expenditure. Be sure to label: i. the
axes; ii. the curves;
iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium
values. (5 points)
b. State “in short” what happens to: i. the real interest rate; ii. national saving; iii. investment; iv.
consumption; and v. output. (5 points)

22. Following the above question, suppose government runs a budget deficit by increasing
government expenditure on public infrastructure. What will be the possible difference in contrast to
the above result? Using the long-run model of the economy developed in Chapter 3,
a. graphically illustrate the impact of increasing expenditure on public infrastructure. Be sure to
label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curve shift;
and v. the terminal equilibrium values. (5 points)
b. State “in short” what happens to: i. the real interest rate; ii. national saving; iii. investment; iv.
consumption; and v. output. (5 points)

Calculations:
23. Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500
+ 0.6(Y – T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is
given by the equation I = 2,160 – 100r, where r is the real interest rate in percent. In this case,

a) What are the values of consumption, investment, and the real interest rate? (5 points)
b) Now suppose government runs a budget deficit by increasing G from 1000 to 1500, given
T = 600, what are the values of consumption, investment, and the real interest rate? (5 points)
c) Now suppose government runs a budget surplus by increasing Taxes from 600 to 1100, given G
= 1000 what are the values of consumption, investment and the real interest rate? (5 points)
d) Now suppose government runs a balanced budget by increasing G from 1000 to 1500 and T
from 600 to 1100 at the same time. what are the values of consumption, investment and the real
interest rate? (5 points)