Midterm 1

Macro Review Materials C

Ed Cho
Multiple-Choice Section (2 points per question)
For each multiple-choice question, read all possible answers before choosing the best possible one. There is no
additional penalty for incorrect multiple-choice answers. Growth accounting equations are listed below:

(∗ 1) % =% + % +(1 − )%
where = 0.30

(∗ 2) % =% + %

(∗ 3) = (1 − )
pop pop

1. Holding all other factors constant, which of the following will result in the largest increase in labor
productivity growth?
a. A 1% increase in the total factor productivity growth rate
b. A 1% increase in the growth rate of the capital stock
c. A 1% increase in the growth rate of the labor force
d. Either (a) or (b)

2. Suppose that in a closed economy GDP is equal to $11,000, taxes are equal to $2500, consumption is equal to
$7500, and government purchases equal $2000. What is the value of private savings, public savings and
national savings?
a. $1500, $1000, $500
b. $1000, $500, $1500
c. $500, $1500, $1000
d. none of the above

3. Mary buys a packet of tomato seeds from her local garden store for $5. She grows the tomatoes and
consumes them at home, where the tomatoes would normally sell on the market for $15. GDP increases by
___________ while ideal GDP increases by ____________.
a. $5; $15
b. $5; $10
c. $10; $15
d. $10; $20

4. After a house party, you decide to hire Molly Maid to clean your house. GDP ___________ while ideal GDP
__________.

a. increases; increases
b. increases; decreases
c. does not change; increases
d. does not change; decreases
5. Mell Computers produces a $100 memory-chip this year, and places it into inventory until it builds a $300
computer next year. This year, GDP increases by _____________ . Next year, the change in investment is
__________ and the change in consumption is _____________.
a. $100; -$200; $300
b. $100; -$100; $300
c. $100; -$100; $200
d. -$100; $100; $200

6. Given the following information below:

Year CPI (base year = 2010)

2010 X
2011 120

Which of the following statements is true?

a. X = 110
b. The inflation rate cannot be calculated with the information given
c. The inflation rate is 20%
d. The inflation rate is 2%

7. The present value of the payment to be made in the future falls as

a. the interest rate rises and the time until the payment is made increases.
b. the interest rate rises and the time until the payment is made decreases.
c. the interest rate falls and the time until the payment is made increases
d. the interest rate falls and the time until the payment is made decreases.

8. From the Levine article "Law, Endowments and Property Rights," which of the following statements is FALSE?
a. The US colonial north had strong private property rights because the soil encouraged settlers to grow
crops that did not have strong economies of scale
b. Countries with low mortality rates encouraged "settler colonies"
c. Countries with high mortality rates imported European institutions
d. The US colonial south had weak protection of property rights and high income inequality

9. A shepherd shears sheep, and sells the raw wool to a yarn spinner for $50,000. The spinner sells the yarn to a
knitting mill for $100,000. The knitting mill makes sweaters, which sell for a total of $500,000. How much of
the above counts in GDP?
a. $50,000
b. $100,000
c. $500,000
d. $650,000
10. Which of the following statements about GDP is FALSE?
a. it includes bread sold to a supermarket customer
b. it includes childcare provided by a day care center
c. it does not include the used car you sell to your friend
d. it does not include meals sold in restaurants

11. Government budget surpluses can affect long run standards of living through what chain:
a. S down, r up, I down, K/L down, Y/L down
b. S up, r down, I up, K/L up, Y/L up
c. S up, r up, I down, K/L down, Y/L down
d. S up, r down, I up, K/L down, Y/L down

12. Which of the following would lead us to expect convergence in GDP per capita across countries?
a. High levels of investment are associated with high GDP per capita
b. Many poor countries maintain barriers to trade
c. Poor countries have less capital per worker
d. Poor countries have failed to adopt the technology of rich countries

13. For a given amount of increased spending by the government, the most crowding out of private investment
occurs when the supply of loanable funds is _____________.
a. elastic
b. inelastic
c. unit elastic
d. the supply elasticity does not matter

14. “But in contrast to a modern society, a traditional agricultural society responds to technological change by
increasing population, not living standards.”
Robert E. Lucas, Jr.

For traditional agricultural societies, Professor Lucas is describing

a. Conditional Convergence
b. The Malthusian Trap
c. The Rule of 70
d. The Demographic Transition

15. According to our equation for long run growth in labor productivity, an equal, 5% increase in the rates of
growth of total factor productivity, the capital stock and the labor force will cause the rate of growth of real
output
a. to increase by 5%.
b. to increase by 10%.
c. to increase by 15%.
d. not to increase.
Consider the following graph for the next 4 multiple-choice questions . The carnation market is open to trade.

[$/dozen]

16. When the shown tariff is imposed in the market, domestic producers’ surplus:
a. increases by $100.
b. decreases by $300.
c. increases by $300.
d. decreases by $100.

17. With the tariff, the government collects ____________ in revenue, and the level of imports are
_____________ dozens of carnations.
a. $400; 200
b. $800; 200
c. $400; 400
d. $800; 400

18. After the government has collected all the tariff revenue, it decides to give it to the domestic party hurt most
by the tariff. _____________ will receive the tariff, and overall they will be ________________ than when
there was no tariff.
a. Consumers; better off
b. Consumers; worse off
c. Producers; better off
d. Producers; worse off

19. Assume instead that the carnation market does NOT have a tariff, and that it is open to trade. Moreover, the
world price is no longer PW = 4, but is now PW = 10. The domestic country will ______________ other
countries ______________ dozens of carnations.
a. export to; 400
b. export to; 200
c. import from; 400
d. import from; 200
20. In the article, "US Productivity: Missing or Hiding," it illustrates that
a. new technological progress like smart phone apps are being overrepresented in GDP, and traditional
manufacturing sectors are being underrepresented in GDP.
b. while some smart phone apps increase labor productivity, many others increase consumption of
media, so that on net, GDP has changed very little.
c. GDP has not capture the value of recent technological progress because they are largely given away
for little to no cost.
d. ideal GDP would change very little, since smart phone apps would increase both labor productivity
and consumption of media.

21. Which of these items will have no effect on the CPI in the US?
a. The price of an iPhone produced in China and sold in the US.
b. The rental cost of a newly renovated apartment on the market in New York City.
c. The price of specialty clams that are harvested in the US, which are then all exported to Europe.
d. The cost of a flu shot.

22. Which of the following statements is true

a. Because of the new-goods bias, the GDP deflator will tend to overestimate inflation.
b. We need the prices for multiple years to calculate the GDP Deflator.
c. A change in the price of industrial mixers will change the CPI.
d. The GDP deflator historically estimates a higher inflation rate than the CPI.

23. In the article, "A Happiness Index with a Long Reach," it illustrates that
a. other indices like the crime rate, and access to affordable healthcare, are better at predicting overall
happiness as compared to GDP.
b. GDP is a good measure, because it is able to capture both the value of the output of an economy, and
income inequality.
c. indicators like the divorce rate and friendliness are more controversial than life expectancy and
educational enrollment.
d. the number of frog and cat species is a better predictor of happiness as compared to GDP.

24. The table below contains data for the country of Togogo. The base year is 1974.
Year Nominal GDP GDP Deflator
1974 $2000 100
1975 $3000 120
1976 $3750 150
1977 $6000 200
From 1976 to 1977,
a. inflation was 33.3% and real GDP increased by $500.
b. inflation was 33.3% and real GDP increased by $2250.
c. inflation was 50% and real GDP increased by $500.
d. inflation was 50% and real GDP increased by $2250.
25. The real GDP in 2015 was $2290, and the GDP deflator for 2015 was 140. What was the nominal GDP in
2015?
a. $3,206
b. $4,600
c. $3,820
d. $1,635

26. An economist has argued that financial innovations, for instance, credit cards and electronic payment
systems, make it harder for consumers to self-regulate themselves in spending money. Consequently, this
lowers the private saving rate in the US economy. Assume before the financial innovation, that the real
interest rate is 5%.
a. Real interest rates will decrease to below 5% after the financial innovation.
b. The amount of investment increases because the demand curve shifts out in the loanable funds
market.
c. If the government reduce its spending without affecting the long-run output, it is possible to keep the
amount of investment in the loanable funds market the same.
d. If there is also a technological improvement which increases the return of investment, then it is
possible that real interest rates could decrease below 5%.

27. Microsoft opens a factory in China and produces 100 computers priced at $400. Microsoft sells 50 of these
computers to consumers in the U.S. and they put 50 computers into inventory in China. How much does US
GDP change by?
a. ΔGDP = 0
b. ΔGDP = -$40,000
c. ΔGDP = $40,000
d. ΔGDP = $80,000

28. A bond has a face value of $100, a coupon rate of 8%, and a maturity of 2 years. Assuming that the interest
rate is 10%, the bond has a price closest to which of the following?
a. $80
b. $90
c. $95
d. $100

29. Bill, a strapping 35 year-old, lost his job two weeks ago and decided last night, having not found a new job, to
end his job search. Last week, Bill was _________, and today he is __________.
a. unemployed; still unemployed
b. out of the labor force; still out of the labor force
c. unemployed; out of the labor force
d. unemployed; still in the labor force

30. As a result of greater access to the Internet, macro land increases the speed with which unemployed workers
are matched with suitable jobs. This access thus:
 a. Increases the natural rate of unemployment.
b. Does not affect the natural rate of unemployment but does reduce the rate of structural
unemployment.
c. Does not affect the natural rate of unemployment but does reduce the rate of frictional
unemployment.
d. None of the above

31. Macro land has a total population of 200,000, of which 100,000 people are of working age. 60,000 people
have jobs, 20,000 do not have jobs and are looking for work, and 20,000 working age people have dropped
out of the labor force. The unemployment rate in macro land is ____________, while its labor force
participation rate is _________________.
a. 20%; 40%
b. 20%; 80%
c. 25%; 40%
d. 25%; 80%

32. Which of the following BEST describes structural unemployment?

a. workers temporarily between jobs
b. unemployment in excess of the natural rate of unemployment
c. unemployment resulting from prevailing wages in excess of their equilibrium levels
d. unemployment resulting from sectoral shifts in the economy

33. Which of the following increases the number of unemployed workers?

a. The financial crisis has reduced the asset value of many retirees. As a consequence, many retirees
"un-retire," and begin looking for employment opportunities over the next few months to
compensate for the loss.
b. An auto company provides early retirement incentive for workers near retirement age, causing all of
these workers to retire early.
c. An auto company fires many young workers due to cost pressure. Right after the layoffs, all the
workers immediately decide to go back to school.
d. All of the above.
Long Question Section: "Putting Your Hard-Earned Savings to Work" (30 Points)
1. Arborland is a closed economy. The government asks you to evaluate the effects of Proposal 1 and Proposal 2
described below.
Proposal 1: The government provides an investment tax credit that is very successful, increasing investment
at every interest rate by $20 billion. The investment tax credit is paid for by cutting government
defense spending.

Proposal 2: The government provides the same investment tax credit as in Proposal 1, but does not cut
government defense spending.

a. (6 points) In the loanable funds diagram, the demand curve slopes downward. Explain intuitively why this
is true, using at most 2 sentences in the space provided below.

b. (8 points) For Proposal 1, draw a well-labeled diagram for the loanable funds market. Assume that before
Proposal 1 is implemented, the level of national savings is $40 billion. Label this initial equilibrium as point
A. After proposal 1 is implemented, label this post equilibrium as point B. Where possible, provide any
numerical values on your graph. Qualitatively determine (increase/decrease/no change) the effect
Proposal 1 has on the new equilibrium interest rate, investment, national savings, private savings and
public savings. Simply circle your answer for each variable below, and NO explanation is needed.
However, explain your diagram.

interest rate (increase/decrease/no change)

investment (increase/decrease/no change)

national savings (increase/decrease/no change)

private savings (increase/decrease/no change)

public savings (increase/decrease/no change)

====================> Continue to next blank page for space to draw your diagram
====================> Continue to next page
c. (6 points) What's the most you can say about the level of investment in Arborland? Explain intuitively
using at most the space provided below.

Assume that Arborland’s government has not implemented Proposal 1. Instead, the government decides to
implement Proposal 2, and that its goal is to move the economy to an equilibrium in which national savings
and investment are higher.

d. (10 points) Using a loanable funds diagram(s) for Proposal 2, show if the government can achieve its goals
by implementing Proposal 2. Show all possible scenario(s), with a separate diagram for each scenario as
needed. State any assumptions that you must make in your answer. Explain. [Feel free to use the next
blank page if you cannot fit your answer in the space below]