1.

We know the following about a tie manufacturer: tie sales $1,300, cotton purchases $750,
wages $400, interest on business loans $100, and profits $50. What is the contribution to GDP of
this producer using the income approach?
A) $550
B) $500
C) $450
D) $400

2. Suppose that the government collects $3 million in taxes, pays $2 million in social security
benefits, pays $0.5 million in interest on the national debt, and pays workers $1 million to sit at
their desks and work as little as possible. The government's contribution to GDP is
A) $0.
B) $1 million.
C) $3 million.
D) $3.5 million.

3. A business cycle trough is a

A) small positive deviation from trend in real GDP.
B) relatively large positive deviation from trend in real GDP.
C) small negative deviation from trend in real GDP.
D) relatively large negative deviation from trend in real GDP.

4. A lagging variable can be recognized by the fact that

A) its persistence is smaller than that of GDP.
B) its turning points happen before the turning points of GDP.
C) the turning points of GDP happen before its turning points.
D) its persistence is larger than that of GDP.

5. Positive correlation between x and y implies that

A) when x is high, y is high.
B) when x is high, y is low.
C) when x is zero, y is positive.
D) x and y are positively unrelated.

6. Real investment tends to be

A) procyclical and less variable than real GDP.
B) procyclical and more variable than real GDP.
C) countercyclical and less variable than real GDP.
D) countercyclical and more variable than real GDP.

7. The utility function captures

A) how consumers interact.
B) how an individual consumer ranks consumption bundles.
C) how output is produced from labor and capital inputs.
D) how happy a consumer is about a given consumption bundle.
8. We assume that the representative consumer's preferences exhibit the properties that
A) they are convex and that more is always preferred to less.
B) more is always preferred to less and that each consumer has one strictly favorite good.
C) each consumer has one strictly preferred good and that consumption and leisure are both
normal goods.
D) consumption and leisure are both normal goods and that the consumer likes diversity in his or
her consumption bundle.

9. Which of the following is false?

A) A lump-sum tax does not depend on any action taken by a consumer.
B) In practice, no taxes are lump-sum.
C) Lump-sum taxes are realistic.
D) All taxes have distorting effects on the behavior of economic agents.

10. A positive, pure income effect can be obtained by

A) increasing the real wage.
B) increasing the tax.
C) increasing the dividend.
D) decreasing leisure.

11. If consumption and leisure are perfect complements for the consumer
A) an increase in the real wage causes the consumer to substitute consumption for leisure.
B) an increase in the real wage causes the consumer to substitute leisure for consumption.
C) an increase in dividend income has no effect on the ratio of consumption to leisure.
D) the effect of an increase in dividend income depends on whether consumption is normal.

12. The substitution effect measures

A) the responses of quantities to changes in the relative prices of goods.
B) the responses of relative prices to changes in the demand for goods.
C) how two goods can be used for the same purpose.
D) the responses of quantities to changes in the relative qualities of goods.