EC 350 Test # IIa

Course: Principles of Micro and Engineering economics

Name:

Instructor: Gasper Sekelj

Date:

The test is worth 35 points. You have 1 hour and 30 minutes to complete the test. Good Luck.

1.) The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it
sells all 25 cars.
a) The value of increased inventory will be counted as part of GDP in 2003, but the value of
the cars sold in 2004 will not cause GDP to increase.
b) The value of the increased inventory will not affect 2003 GDP, but will be included in
2004 GDP.
c) The value of the increased inventory will be counted as 2003 GDP and the value of the
cars sold in 2004 will increase 2004 GDP.
d) None of the above are correct.
2.) An Italian company opens a pasta company in the U.S. The profits from this pasta company
are included in
a)
b)
c)
d)

both U.S. and Italian GNP.

both U.S. and Italian GDP.
U.S. GDP and Italian GNP.
U.S. GNP and Italian GDP.

3.) If a U.S. citizen buys a television made in Korea by a Korean firm,

a. U.S. net exports decrease, and U.S. GDP decreases.
b. U.S. net exports are unaffected, and U.S. GDP decreases.
c. U.S. net exports are unaffected, and U.S. GDP is unaffected.
d. U.S. net exports decrease but U.S. GDP is unaffected.
4.) Unemployment compensation is
a)
b)
c)
d)

part of GDP because it represents income.

not part of GDP because it is a transfer payment.
part of GDP because the recipients must have worked in the past to qualify.
not part of GDP because the payments reduce business profits.

5.) If in a given year an economy has consumption of $3000, investment of $2000, government
purchases of $1500, exports of $500, imports of $600, taxes of $1200, transfer payments of
$400, and depreciation of $300, then GDP will equal
a)
b)
c)
d)
e)

$6400.
$7000.
$7600.
$8900.
$9500.

6.) If a small country has current nominal GDP of $20 billion and a GDP deflator of 50, what is
its real GDP?
a)
b)
c)
d)

$100 billion
$40 billion
$10 billion
$4 billion

7.) If a country reported a nominal GDP of 115 billion in 2002 and 125 billion in 2001 and
reported a GDP deflator of 85 in 2002 and a deflator of 100 in 2001, then from 2001 to 2002
real output
a)
b)
c)
d)

and prices both rose.

rose and prices fell.
fell and prices rose.
and prices both fell.

8.) Which goods are supposed to be included in the CPI?

a)
b)
c)
d)
9.)

all goods and services produced in the economy

all goods and services that typical consumers buy
all goods and services in the consumption component of the GDP accounts
all the goods, but not the services, in the consumption component of the GDP accounts
If the price index in the first year was 90, in the second year was 100, and in the third
year was 95, the economy experienced

a) 10 percent inflation between the first and second years and 5 percent inflation between
the second and third years.
b) 10 percent inflation between the first and second years and 5 percent deflation between
the second and third years.
c) 11 percent inflation between the first and second years and 5 percent inflation between
the second and third years.
d) 11 percent inflation between the first and second years and 5 percent deflation between
the second and third years.

10.)
a)
b)
c)
d)
11.)

a)
b)
c)
d)
12.)

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to
165, or 180 to 198?
100 to 110
150 to 165
180 to 198
All changes show the same rate of inflation.
Andrew is offered a job in Des Moines where the CPI is 80 and a job in New York where
the CPI is 125. Andrew's job offer in Des Moines is for $42,000. How much does the
New York job need to pay in order to make the two salaries have almost the same
purchasing power?
$74,667
$65,625
$60,900
$52,500
Suppose that the real interest rate was 3 percent and the inflation rate was 1 percent.

a) The dollar value of savings increased at 2 percent, and the value of savings measured in
goods increased at 3 percent.
b) The dollar value of savings increased at 1 percent, and the value of savings measured in
goods increased at 2 percent.
c) The dollar value of savings increased at 3 percent, and the value of savings measured in
goods increased at 1 percent.
d) The dollar value of savings increased at 4 percent, and the value of savings measured in
goods increased at 3 percent.
13.)

a)
b)
c)
d)
14.)
a)
b)
c)
d)

In 2002 real GDP in Oceania was 561.0 billion and the population was 2.2 million. In
2001 real GDP was 500.0 billion and the population was 2.0 million. What was the
approximate growth rate of real GDP per person?
12 percent
10 percent
4 percent
2 percent
The equipment and structures available to produce goods and services are called
physical capital.
human capital.
the production function.
technology.

15.)
a)
b)
c)
d)
16.)
a)
b)
c)
d)
17.)

Other things equal, relatively poor countries tend to grow

slower than relatively rich countries; this is called the poverty trap.
slower than relatively rich countries; this is called the Malthus effect.
faster than relatively rich countries; this is called the catch-up effect.
faster than relatively rich countries; this is called the constant-returns-to-scale effect.
Suppose Japanese-based Sony Corporation builds and operates a new chip factory in the
United States. Future production from such an investment would
increase U.S. GNP more than it would increase U.S. GDP.
increase U.S. GDP more than it would increase U.S. GNP.
not affect U.S. GNP, but would increase U.S. GDP.
have no affect on U.S. GNP or GDP.
The President of a developing country proposes that his country needs to help domestic
firms by imposing trade restrictions.

a) These are outward-oriented policies and most economists believe they would have
beneficial effects on growth.
b) These are outward-oriented policies and most economists believe they would have
adverse effects on growth.
c) These are inward-oriented policies and most economists believe they would have
beneficial effects on growth.
d) These are inward-oriented policies and most economists believe they would have adverse
effects on growth.
18.)
a)
b)
c)
d)
19.)

Patents turn new ideas into

public goods, and increase the incentive to engage in research.
public goods, but decrease the incentive to engage in research.
private goods, and increase the incentive to engage in research.
private goods, but decrease the incentive to engage in research.
The sale of stocks

a) and bonds to raise money is called debt finance.

b) and bonds to raise money is called equity finance.
c) to raise money is called debt finance, while the sale of bonds to raise funds is called
equity finance.
d) to raise money is called equity finance, while the sale of bonds to raise funds is called
debt finance.

20.)
a)
b)
c)
d)
21.)

a)
b)
c)
d)
22.)

a)
b)
c)
d)
23.)
a)
b)
c)
d)
24.)
a)
b)
c)
d)

Which of the following equations represents national saving in a closed economy?

Y - I - G - NX
Y-C-G
Y-I-C
G+C-Y
Suppose that in a closed economy GDP is equal to 10,000, Taxes are equal to 2,000,
Consumption equals 6,500, and Government expenditures equal 2,500. What are private
saving and public saving?
1500 and -500
1500 and 500
1000 and -500
1000 and 500
The country of Aquilonia does not trade with any other country. Its GDP is $30 billion.
Its government purchases $5 billion worth of goods and services each year, collects $7
billion in taxes, and provides $3 billion in transfer payments to households. Private
saving in Aquilonia is $5 billion. What is consumption and
investment?
$18 billion and $5 billion
$21 billion and $4 billion
$13 billion and $7 billion
There is not enough information to answer the question.
Henry buys a bond issued by Ralston Purina, which uses the funds to buy new machinery
for one of its factories.
Henry and Ralston Purina are both investing.
Henry and Ralston Purina are both saving.
Henry is investing; Ralston Purina is saving.
Henry is saving; Ralston Purina is investing.
The supply of loanable funds slopes
upward because an increase in the interest rate induces people to save more.
downward because an increase in the interest rate induces people to save less.
downward because an increase in the interest rate induces people to invest less.
upward because an increase in the interest rate induces people to invest more.

25.)
a)
b)
c)
d)
26.)
a)
b)
c)
d)
27.)

a)
b)
c)
d)
28.)
a)
b)
c)
d)
29.)

Suppose the U.S. government allowed taxpayers to earn their first $5,000 of interest
income tax free. This would shift the
supply for loanable funds right making interest rates fall.
supply of loanable funds left making interest rates rise.
demand for loanable funds right making the interest rate rise.
demand for loanable funds left making the interest rate fall.
If Canada increases its budget deficit, it will reduce
private saving and so shift the supply of loanable funds left.
investment and so shift the demand for loanable funds left.
public saving and so shift the supply of loanable funds left
None of the above are correct.
Jackie puts $400 into an account when the interest rate is 10 percent. Later she checks her
balance and finds it's worth about $708.62. How many years did she wait to check her
balance?
5 years
6 years
7 years
8 years
Sari puts $100 in an account with an interest rate of 10 percent. According to the rule of
70, about how much does she have at the end of 21 years?
$210
$300
$800
$1,010
If a person is risk averse, then he has

a) diminishing marginal utility of wealth, implying that his utility function gets flatter as
wealth increases.
b) diminishing marginal utility of wealth, implying that his utility function gets steeper as
wealth increases.
c) increasing marginal utility of wealth, implying that his utility function gets flatter as
wealth increases.
d) increasing marginal utility of wealth, implying that his utility function gets steeper as
wealth increases.

30.)
a)
b)
c)
d)
31.)
a)
b)
c)
d)
32.)

a)
b)
c)
d)
33.)
a)
b)
c)
d)
34.)

Marcus puts a greater proportion of his portfolio into government bonds. This
increases both risk and the average rate of return
decreases both risk and the average rate of return
increases risk, but decreases the average rate of return
decreases risk, but increases the average rate of return
A college student who is not working or looking for a job is counted as
neither employed nor part of the labor force.
unemployed and in the labor force.
unemployed, but not in the labor force.
employed and in the labor force.
A few years ago, based on concepts similar to those used to estimate U.S. employment
figures, the Canadian adult non-institutionalized population was 24 million, the labor
force was 16 million, and the number of people employed was 14 million. According to
these numbers, the Canadian labor-force participation rate and unemployment rate were
about
67 percent and 8.3 percent.
67 percent and 12.5 percent.
58 percent and 8.3 percent.
58 percent and 12.5 percent.
Rick loses his job and immediately begins looking for another. Ceteris paribus, the
unemployment rate
increases, and the labor-force participation rate decreases.
increases, and the labor-force participation rate is unaffected.
is unaffected, and the labor-force participation rate increases.
decreases, and the labor-force participation rate is unaffected.
We would predict that the more generous unemployment compensation a country has,

a) the shorter the duration of each spell of unemployment, and the higher the unemployment
rate.
b) the shorter the duration of each spell of unemployment, and the lower the unemployment
rate.
c) the longer the duration of each spell of unemployment, and the higher the unemployment
rate.
d) the longer the duration of each spell of unemployment, and the lower the unemployment
rate.

35.)
a)
b)
c)
d)
11.)
a)
b)
c)
d)

When unions raise wages in some sectors of the economy, the supply of labor in other
sectors of the economy
decreases, raising wages in industries that are not unionized.
decreases, reducing wages in industries that are not unionized.
increases, raising wages in industries that are not unionized.
increases, reducing wages in industries that are not unionized.
Private markets fail to reach a socially optimal level when negative externalities are
present because
social costs equal private costs at the private market solution.
private costs exceed social costs at the private market solution.
social costs exceed private costs at the private market solution.
they internalize externalities.

For the next three questions use the graph shown below:

33.)
a)
b)
c)
d)

34.)

Which price and quantity combination represents the social optimum?

P0 and Q1.
P2 and Q1.
P1 and Q0.
P2 and Q0.

This market is creating a positive externality.

True

False

35.)
a)
b)
c)
d)

To internalize the externality in this market the government should

impose a tax on this product.
provide a subsidy for this product.
encourage firms to supply more of this product by taxing them.
produce the product itself.

Consider a city with a river. The city has a resort whose visitors use the river for recreational
purposes. The city also has a tannery that creates industrial waste, which it dumps into the river.
This pollutes the river and makes it a less desirable vacation location. That is, the tannery's
effluent decreases the resort's profits.
Suppose that the tannery can use a production method that includes water recycling. This would
reduce the pollution in the river to levels that are safe for recreation and would no longer affect
the resort. If the tannery uses the recycling method, the tannery's profits are $3,300 per week and
the resort's profits are $3,100 per week. If the tannery does not use the recycling method, the
tannery's profits are $4,000 per week and the resort's profits are $2,000 per week.
1.) Total profits (the tannery's profits and the resort's profits combined) are highest when:
a) The recycling production method is used
b) The recycling production method is not used
2.) Suppose the resort has the property rights to the river. That is, the resort has the right to a
clean (unpolluted) river. In this case, assuming the two firms can bargain at no cost, the
tannery will:
a)
b)
c)
d)

Not use the recycling method and not pay the resort any money
Use the recycling method, but not pay the resort any money
Use the recycling method and pay the resort between $0 and $400
Use the recycling method and pay the resort between $700 and $1,000

3.) Suppose the tannery has the property rights to the river and can dump its sewage into the
river. In this case, assuming the two firms can bargain at no cost, the resort will:
a)
b)
c)
d)

Pay the tannery between $0 and $400 to use the recycling method
Pay the tannery between $400 and $700 to use the recycling method
Pay the tannery between $700 and $1100 to use the recycling method
Accept that the tannery is not going to use the recycling method and deal with the
consequences

4.) Which of the following statements is correct?

a) Both firms will be equally well off, regardless of the initial distribution of property rights.
b) The resort will make the most profit when the tannery has the property rights to pollute
the river, and the tannery will make the most profit when the resort has property rights to
a clean river.
c) The resort will make the most profit when it has property rights to a clean river, and the
tannery will make the most profit when it has the property rights to pollute the river.