Reference no: EM131023232

Second Midterm - I

Use the following information to answer for the next two questions.

Consider the following production function that relates levels of capital and labor to output.

Aggregate Production Function: Y = KL

where Y is real GDP, K is the level of capital and L is the level of labor.

1. Suppose that capital in this economy is fixed at 100 units of capital. Given this information, does this production function exhibit diminishing marginal productivity of labor?

a. Yes. Every production function exhibits diminishing marginal productivity of labor.

b. No. The production function exhibits increasing marginal productivity of labor.

c. No. The production function exhibits constant marginal productivity of labor.

d. The marginal productivity of labor cannot be determined from the provided information.

2. Suppose that capital in this economy in year one is constant and equal to 100 units of capital and furthermore you know that the population in this economy in year one is initially equal to 1000 people.  Suppose that the population each year increases by 25% while 10% of capital depreciates and is not replaced each year. What is the growth rate in real GDP from year one to year two?

a. 8%

b. 10.5%

c. 12.5%

d. 15%

3. If an economy grows by approximately 5 percent a year how many years will it take for output to double given this growth rate?

a. 7 years

b. 10 years

c. 14 years

d. 20 years

4. Bakery A annually uses $10 million worth of sugar, flour, and eggs (assume all three of these ingredients are produced in the same year that the bread is produced) to produce its bread. Wages and salaries in Bakery A for the year are equal to $40 million; the bakery's only other annual expense is $15 million in interest that it pays on its bonds. The annual profits for the owner of the bakery are $10 million.

What is the contribution to GDP this year from Bakery A?

a. $75 million

b. $65 million

c. $55 million

d. $50 million

Use the following information for the next two questions

Consider an economy in which the labor force consists of the entire population. The following table summarizes values of population size, capital and real GDP in 3 consecutive years:

Year	Population	Capital	real GDP
1	1000	800	400
2	1100	960	500
3	1210	1152	625

5. What is the annual growth rate of real GDP in this economy?

a. 10%

b. 25%

c. 30%

d. The annual rate of growth in real GDP between year 1 and year 2 is different from the annual rate of growth between year 2 and year 3

6. Which of the following describes this economy?

a. There is growth in real GDP per capita between year 1 and year 2, and between year 2 and year 3.

b. Real GDP per capita grows between year 1 and year 2, but falls between year 2 and year 3

c. Real GDP per capita falls between year 1 and year 2, but grows between year 2 and year 3

d. There is a decrease in real GDP per capita between year 1 and year 2 and between year 2 and year 3.

7. Suppose the GDP deflator is increasing each year and furthermore, the GDP deflator is increasing at a faster rate than is nominal GDP. Given this information, which of the following statements must be true?

a. The rate of growth of real GDP must be greater than the rate of growth of nominal GDP.

b. The rate of growth of real GDP must be equal to the rate of growth of nominal GDP.

c. The relationship between the rate of growth of real GDP and the rate of growth of nominal GDP cannot be determined from the given information.

d. The rate of growth of real GDP must be less than the rate of growth of nominal GDP.

8. Badger Motor Company (BMC) produces cars in Badgerland. Every year BMC rents land and capital and hires labor from the residents of Badgerland. BMC also has to import 100 tons of steel from Cat Island each year which is the only intermediate product it uses. Suppose last year BMC produced 100 new cars and the price of each car was $20,000. BMC paid $250,000 in wages and $150,000 in rent. The import price of steel from Cat Island is $7,000 per ton. However, due to the recession, only 60 cars were sold in Badgerland last year.

What is BMC's contribution to Badgerland GDP last year?

a. $1.2 million

b. $1.3 million

c. $2 million

d. $0.7 million

9. In Finland, real GDP was lower in 2009 than in 2010. The GDP deflator was the same in 2009 and 2010. Therefore, we can conclude that nominal GDP in 2010 is

a. Lower than nominal GDP in 2009

b. Higher than nominal GDP in 2009

c. The same as nominal GDP in 2009

d. There is not enough information available to determine the trend of nominal GDP

10. The government of Macroland currently has a budget surplus of 100 million dollars. If they reduce the surplus to 50 million dollars, what happens to equilibrium private investment holding everything else constant?

a. Private investment increases

b. Private investment decreases

c. Private investment stays the same

d. The effect on private investment is ambiguous

11. Jack was a programmer in a small company in Tulsa. After working there for 5 years, Jack decided to quit his job in Tulsa and go to New York City to try his luck. Now he has been looking for a job in New York City for 3 weeks and has not found a job. According to the above information, which of the following statements is true?

a. Jack is a discouraged worker

b. Jack is cyclically unemployed

c. Jack is structurally unemployed

d. Jack is frictionally unemployed

12. Helena is a small island in the Pacific Ocean with a constant level of working age population. The unemployment rate was 5% in 2009. In 2010, 20% of the people who were unemployed in 2009 were classified as discouraged workers. All else equal (including the number of people employed), what can we say about the unemployment rate of Helena in 2010?

a. It is higher than 5%

b. It is lower than 5%

c. It is 5%

d. We do not have enough information to know the direction of change in the unemployment rate relative to its initial level.

13. The following is information about Waterside.

Total population: 15,000

Full-time workers: 6,000

Part-time workers: 3,000

Discouraged workers: 1,000

Total Unemployed workers (includes all types of unemployed workers): 1,000

Cyclically unemployed workers: 500

Seasonally unemployed workers: 0

What is the natural rate of unemployment in Waterside?

a. 3%

b. 5%

c. 7%

d. 10%

14. Following are descriptions of four persons' situations. Who do you think is not in the labor force?

a. After being laid off a month ago from her job, Alice has been volunteering as a babysitter for her uncle while she applies for jobs.

b. Bob lost his full-time job six months ago and has been working only one day per week since then.

c. Chris was frustrated and stopped looking for a job after trying to do so for a year.

d. David just graduated from college and is looking for a job.

15. The government is considering several policies to reduce cyclical unemployment. Which of the following policies do you think will work?

a. Open more job information centers

b. Raise the minimum wage

c. Implement an expansionary economic policy

d. Increase spending on job training programs

16. Which of the following statements is not a benefit from knowing the value of the CPI for two different years?

a. It gives us an estimate of the rate of inflation between those two years.

b. It allows us to roughly estimate the change in the cost of living between those two years.

c. It tells us how the prices of individual goods change over those 2 years.

d. It allows us to calculate the real wage for either year once we know the nominal wage.

Using following information to answer next two questions.

Suppose a nation has the following price index figures over time: 

Year	Price Index
1991	92
1992	98
1993	100
1994	104
1995	108
1996	110
1997	114
1998	119
1999	124
2000	130

17. What is the base year for this price index?

a. 1994

b. 1995

c. 1996

d.1993

18. Between which two years was the rate of inflation the greatest?

a. 1991-1992

b. 1993-1994

c. 1997-1998

d. 1999-2000

Use the following information to answer next two questions.

The isolated island of Oliveria is a closed economy that produces only widgets and olives.  In 2004, widgets cost $5, and in 2005 they cost $7.  Olives cost $0.35 in 2004, and the price of olives grew at the same rate as the price of widgets from 2004 to 2005.

19. In 2004, 46 widgets and 89 olives were produced in Oliveria. What was the GDP of Oliveria in 2004?

a. $461.1

b. $261.15

c. $365.61

d. $645.54

20. In 2005, Oliveria produced 53 widgets and 94 olives. What was the GDP deflator in 2005? (Set 2004 as the base year). [Hint: you might want to think about what the answer is rather than spending your time calculating the answer-the calculation is time consuming relative to just thinking about the answer.]

a. 140

b. 120

c. 90

d. 170

21. The government reduces taxes on saving instruments such as certificates of deposit. This reduces government revenue and the government cuts its expenditures by the amount of the reduction in government revenues.

Holding everything else constant, what happens to the equilibrium interest rate?

a. The equilibrium interest rate increases

b. The equilibrium interest rate decreases

c. The equilibrium interest rate stays the same

d. The effect on the equilibrium interest rate is ambiguous

22. The government of Macroland currently has a budget surplus of $100m. If they reduce the surplus to $50m, what happens to the equilibrium interest rate holding everything else constant?

a. The equilibrium interest rate increases

b. The equilibrium interest rate decreases

c. The equilibrium interest rate stays the same

d. The effect on the equilibrium interest rate is ambiguous

Use the following information to the answer the following two questions.

Let the demand and supply of loanable funds be given by:

D:  r = 90 - 3Q

S:   r = 10 + 2Q

Where r is the interest rate (where the interest rate is expressed as a whole number-for example, if the interest rate was equal to 10% then r = 10) and Q is the quantity of loanable funds in millions of dollars. The government currently has a balanced budget.

23. Suppose the government decides to run a budget deficit of 10 million dollars. Assume that the government's budget deficit is 10 million dollars no matter what the level of interest rate is in the economy. Given this budget deficit and holding everything else constant, what would be the equilibrium amount of private investment spending in this economy?

a. 8 million dollars

b. 12 million dollars

c. 16 million dollars

d. 22 million dollars

24. If the government decides to run a budget deficit of 10 million dollars, how much private investment spending does the government's budget deficit crowd out?

a. 2 million dollars

b. 4 million dollars

c. 8 million dollars

d. 16 million dollars