EC 202 PRINCIPLES OF MACROECONOMICS FALL 2009 TEST 1

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Read the questions very carefully, answer all of them and mark the your answer on the answer sheet.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) By definition, economics is the study of A) how to make money in the stock market. B) how to make money in a market economy. C) the choices people make to attain their goals, given their scarce resources. D) supply and demand. Table 1-1 Hours Open 1 2 3 4 5 6 Total Revenue (Dollars) $35 60 80 92 100 105 1)

Eva runs a small bakery in the village of Roggerli. She is debating whether she should extend her hours of operation. Eva figures that her sales revenue will depend on the number of hours the bakery is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $8 per hour. 2) Refer to Table 1-1. Using marginal analysis, determine how many hours should Eva extend her bakery's hours of operations? A) 2 hours B) 3 hours C) 5 hours D) 4 hours E) 6 hours 3) The three fundamental questions that any economy must address are A) What will be the prices of goods and services; how will these goods and services be produced; and who will receive them? B) What goods and services to produce; how will these goods and services be produced; and who receives them? C) Who gets jobs; what wages do workers earn; and who owns what property? D) How much will be saved; what will be produced; and how can these goods and services be fairly distributed? 2)

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4) The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each. What is the opportunity cost of buying a cappuccino? A) 2 1/2 Russian tea cakes B) 2/5 of a Russian tea cake C) $2.50 D) $1.00 5) How are the fundamental economic questions answered in a market economy? A) The government alone decides the answers. B) Individuals, firms, and the government interact in markets to decide the answers to these questions. C) Households and firms interact in markets to decide the answers to these questions. D) Large corporations alone decide the answers. Figure 2-2

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Figure 2-2 above shows the production possibilities frontier for Mendonca, an agrarian nation that produces two goods, meat and vegetables. 6) Refer to Figure 2-2. Suppose Mendonca is currently producing 60 pounds of vegetables per period. How much meat is it also producing, assuming that resources are fully utilized? A) 45 pounds of meat B) 75 pounds of meat C) 80 pounds of meat D) 100 pounds of meat 6)

Figure 2-3

7) Refer to Figure 2-3. Carlos Vanya grows tomatoes and strawberries on his land. A portion of his land is more suitable for growing tomatoes and the other portion is better suited for strawberry cultivation. Which of the graphs in Figure 2-3 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph B E) either Graph B or Graph C Figure 2-5

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8) Refer to Figure 2-5. If the economy is currently producing at point Y, what is the opportunity cost of moving to point W? A) 2 million tons of steel B) zero C) 9 million tons of paper D) 16 million tons of paper

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Table 2-2 George Lawns Mowed Gardens Cultivated 10 5 Jack 6 4

Table 2-2 shows the output per day of two gardeners, George and Jack. They can either devote their time to mowing lawns or cultivating gardens. 9) Refer to Table 2-2. Which of the following statements is true? A) Jack has a comparative advantage in both tasks. B) George has a comparative advantage in both tasks. C) Jack has a comparative advantage in lawn mowing and George in garden cultivating. D) Jack has a comparative advantage in garden cultivating and George in lawn mowing. Table 2-3 One Digital Camera 100 hours 60 hours Wheat (per pound) 4 hours 3 hours 9)

China South Korea

Table 2-3 shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea. 10) Refer to Table 2-3. What is South Korea's opportunity cost of producing one digital camera? A) 25 pounds of wheat B) 20 pounds of wheat C) 60 pounds of wheat D) 0.05 pounds of wheat 11) Rayburn Reed is a highly talented photographer. He has chosen to specialize in photography because of all of the following except A) he obviously has a comparative advantage in photography. B) his opportunity cost of pursuing another career is very low. C) for him, this is the most lucrative way to purchase the products that he wants to consume. D) his photographs are highly esteemed by art lovers who are willing to pay very high prices. 12) Which of the following is not a factor of production? A) an acre of farmland B) a drill press in a machine shop C) the manager of the local tire shop D) $1,000 in cash 13) The law of demand implies, holding everything else constant, that A) as the price of bagels increases, the quantity of bagels demanded will decrease. B) as the price of bagels increases, the demand for bagels will decrease. C) as the price of bagels increases, the quantity of bagels demanded will increase. D) as the price for bagels increases, the demand of bagels will increase. 10)

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14) Which of the following will not shift the demand curve for a good? A) An increase in population. B) An increase in the price of the good. C) A decrease in the price of a substitute good. D) An increase in consumer incomes. 15) Technological advancements have led to lower prices and an increase in the sale of digital cameras. How does this affect the digital photo printing paper market? A) The demand curve for digital photo printing paper shifts to the right. B) The demand curve for digital photo printing paper shifts to the left. C) The supply curve for digital photo printing paper shifts to the right. D) The supply curve for digital photo printing paper shifts to the left. 16) In July, market analysts predict that the price of gold will rise in August. What happens in the gold market in July, holding everything else constant? A) The supply curve shifts to the right. B) The supply curve shifts to the left. C) The quantity demanded and the quantity supplied of gold increase. D) The demand curve shifts to the left. 17) George Gnat subscribes to a monthly pest control service for his home. Last week the owner of the service informed George that he will have to raise his monthly service fee because of increases in the price of gasoline used by his workers on their service trips. How is the market for pest control services affected by this? A) There is an increase in the supply of pest control services. B) There is a decrease in the demand for pest control services. C) There is a decrease in the quantity supplied of pest control services. D) There is a decrease in the supply of pest control services. 18) Hurricane Katrina damaged a large portion of refining and pipeline capacity when it swept through the Gulf coast states in August 2005. As a result of this, many gasoline distributors were not able to maintain normal deliveries. At the pre-hurricane equilibrium price (i.e., at the initial equilibrium price), we would expect to see A) a surplus of gasoline. B) the quantity demanded equal to the quantity supplied. C) a shortage of gasoline. D) an increase in the demand for gasoline.

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Figure 3-2

19) Refer to Figure 3-2. If the current market price is $25, the market will achieve equilibrium by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded.

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Figure 3-5

20) Refer to Figure 3-5. Assume that the graphs in this figure represent the demand and supply curves for women's clothing. Which panel best describes what happens in this market when the wages of seamstresses rise? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) 21) Refer to Figure 3-5. Assume that the graphs in this figure represent the demand and supply curves for Fruitopia, a soft drink. Which panel describes what happens in the market for Fruitopia when the price of Snapple, a substitute product, decreases? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) 22) Refer to Figure 3-5. Assume that the graphs in this figure represent the demand and supply curves for potatoes and that steak and potatoes are complements. What panel describes what happens in this market when the price of steak rises? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) 23) What does it mean to say that an owner has "unlimited liability" for business debts? A) It means creditors can seek payments for outstanding debts through business assets and the owner's personal assets. B) It means the owner can borrow an unlimited amount of money in credit markets at very low interest rates. C) It means the owner will always honor all her debts in the event of a bankruptcy. D) It means creditors have no recourse to collect payments from the owner in the event of bankruptcy.

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24) Giles is interested in purchasing Ted's desktop publishing company, the Peach Pit Press. Being relatively inexperienced in the business field, Giles hires Diana to negotiate on his behalf. Identify the parties to this transaction. A) Giles is the principal and Diana is the agent. B) Ted is the principal and Diana is the agent. C) Diana is the principal and Ted is the agent. D) Giles is the principal and Ted is the agent. 25) The two main types of financial securities are A) stocks and bonds. B) assets and liabilities. C) financial markets and financial intermediaries. D) savings and loans. 26) Which of the following is an example of indirect financing? A) Google issues new stock for sale in the financial market B) Google sells a bond in the financial market C) Google borrows money from Credit Suisse, an investment bank D) Google sells a financial security in the financial market 27) Which of the following would not be listed on the face of a bond? A) the market price of the bond B) the coupon rate of bond C) the principal amount of the bond D) the name of the issuer 28) Suppose you purchased in 2006 a house built in 2000. Which of the following would be included in gross domestic product for 2006? A) the value of the house in 2006 B) the value of the house in 2000 C) the value of the house in 2006 minus depreciation D) the value of the services of the real estate agent 29) The factors of production include A) wages. B) capital.

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29) C) investment. Table 7-4 D) transfers.

Consumption expenditures Investment expenditures Government purchases Government transfer payments Exports Imports

$800 300 300 400 300 100 30)

30) Refer to Table 7-4. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $2,100. C) $1,700. D) $1,400.

31) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP? A) GDP will decrease. B) GDP will increase. C) GDP will not change. D) GDP may increase or may decrease depending on inflation. Table 7-8 Guns Produced 80 90 Price of Guns (Dollars) $5 $6 Butter Produced 40 60 Price of Butter (Dollars) $4 $10

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Year 2000 2006

Consider the following data for a fictional economy that produces only two products: guns and butter. 32) Refer to Table 7-8. Real GDP for this fictional economy for 2006 using 2000 as the base year equals A) $1,140. B) $880. C) $690. D) $560. 33) Refer to Table 7-8. Nominal GDP for this fictional economy in 2006 equals A) $1,140. B) $880. C) $690. 32)

33) D) $560. 34)

34) Which of the following could cause nominal GDP to increase, but real GDP to decrease? A) The price level rises and the quantity of final goods and services produced rises. B) The price level rises and the quantity of final goods and services produced falls. C) The price level falls and the quantity of final goods and services produced rises. D) The price level falls and the quantity of final goods and services produced falls. 35) If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be A) equal to 100. B) greater than 100. C) less than 100. D) less than 0. Table 7-12 Year 1997 1998 1999 Nominal GDP $8,318 $8,790 $9,299 Real GDP $8,159 $8,516 $8,876

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36) Refer to Table 7-12. Consider the following data on nominal GDP and real GDP (values are in billions of dollars): The GDP deflator for 1998 equals A) 96.9. B) 103.2. C) 104.2. D) 105.7. 37) If an American firm opens a production facility in India, the total value of the production will be included in the A) gross domestic product of the U.S. B) net domestic product of the U.S. C) gross domestic product of India. D) gross national income of India.

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38) Which of the following is included in both the U.S. GDP and U.S. GNP? A) the value of all cars produced by General Motors in the U.S. B) the value of all cars produced by Ford in Mexico C) the value of all cars produced by Toyota in the U.S. D) the value of all cars produced by Nissan in Japan and the U.S. 39) A country in which a significant fraction of domestic production takes place in foreign owned factories and facilities is most likely a country where A) GNP is much larger than GDP. B) GDP is much larger than GNP. C) GDP is equal to GNP. D) GDP is not comparable to GDP. Table 8-1 Total Population Working-Age Population Employment Unemployment Consider the data above for a simple economy. 40) Refer to Table 8-1. The unemployment rate for this simple economy equals A) (100/1,000) x 100. B) (100/1,100) x 100. C) (100/15,000) x 100. D) (100/20,000) x 100. 41) Suppose the labor force stays constant, and the working population stays constant, but a greater number of persons who were unemployed become employed. The labor force participation rate will A) increase. B) decrease. C) remain constant. D) not change in way that can be predicted. 42) The advice to "keep searching, there are plenty of jobs around here for which you are qualified", would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) core unemployment 43) Structural unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. 44) Full employment is not considered to be zero unemployment, because A) some cyclical unemployment always exists. B) some people do not want a job. C) there are not enough jobs for everyone who wants one. D) people do not find jobs instantaneously. 20,000 15,000 1,000 100

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45) Which of the following would increase the unemployment rate? A) a law making it illegal to work more than 35 hours per week B) a cut in unemployment compensation C) an increase in unemployment insurance payments D) a decrease in the minimum wage 46) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would A) increase. B) remain the same. C) decrease. D) equal 20%. Table 8-4 Base Year (2000) Quantity Price 100 $10 200 $2 2006 Quantity 120 180 Price $12 $3

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Product Meat Potatoes

47) Refer to Table 8-4. Assume the market basket for the consumer price index has two products meat and potatoes with the following values in 2000 and 2006 for price and quantity: The Consumer Price Index for 2006 equals A) 125. B) 129. C) 135. D) 141. Table 8-6 Year 1996 1997 1998 CPI 157 161 163

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48) Refer to Table 8-6. Consider the following values of the consumer price index for 1996, 1997, and 1998: The inflation rate for 1997 equals A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. 49) Suppose your grandfather earned a salary of $12,000 in 1961. If the CPI is 30 in 1961 and 196 in 2005, then the value of your grandfather's salary in 2005 dollars equals A) $78,400. B) $62,500. C) $40,000. D) $23,520. 50) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation A) equal to 0 percent. B) greater than 7 percent. C) equal to 7 percent. D) less than 7 percent.

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Answer Key Testname: TEST1FALL2009

1) C 2) C 3) B 4) A 5) C 6) B 7) C 8) B 9) D 10) B 11) B 12) D 13) A 14) B 15) A 16) B 17) D 18) C 19) C 20) B 21) D 22) D 23) A 24) A 25) A 26) C 27) A 28) D 29) B 30) C 31) A 32) C 33) A 34) B 35) B 36) B 37) C 38) A 39) B 40) B 41) C 42) A 43) A 44) D 45) C 46) C 47) D 48) C 49) A 50) B 12