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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

ECON1006 Assignment (Deadline: 22:00, 27 April, 2018) Attempt ALL questions on the standard multiple-choice answer sheet provided in class. (Regardless of your reason, any other format of submission would incur a penalty of 20 marks out of 80). You can submit your answers to the assignment drop box located inside Department of Economics (5/F, WLB). Late submission will be NOT accepted.

1. Which of the following topics are more likely to be studied by a macroeconomist than by a microeconomist? a. the effect of taxes on the prices of airline tickets, and the profitability of automobilemanufacturing firms b. the price of beef, and wage differences between genders c. how consumers maximize utility, and how prices are established in markets for agricultural products d. the percentage of the labor force that is out of work, and differences in average income from country to country e. None of the above 2. In computing GDP, market prices are used to value final goods and services because a. market prices do not change much over time, so it is easy to make comparisons between years. b. market prices reflect the values of goods and services. c. market prices reflect the quantity sold. d. None of the above is correct; market prices are not used in computing GDP. e. None of the above. 3. One bag of oranges is sold for $6.00 to a company that turns them into juice which is sold to consumers for $12.00. Another bag of oranges is purchased by a grocery store for $6.00 who then sells it to a consumer for $7. Taking these four transactions into account, how much is added to GDP? a. $31 b. $25 c. $19 d. $27 e. None of the above is correct. 4. Suppose an economy produces only eggs and ham. In 2009, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham sold at $4 per pound. In 2010, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2009, a. nominal GDP is $400, real GDP is $500, and the GDP deflator is 80. b. nominal GDP is $400, real GDP is $500, and the GDP deflator is 125. c. nominal GDP is $500, real GDP is $400, and the GDP deflator is 80. d. nominal GDP is $500, real GDP is $400, and the GDP deflator is 125. e. nominal GDP is $500, real GDP is $500, and the GDP deflator is 125.

5. When an Egyptian firm purchases a cement mixer from Slovakia,

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

a. Egyptian investment does not change, Egyptian net exports decrease, Egyptian GDP decreases, Slovakian net exports increase, and Slovakian GDP increases. b. Egyptian investment increases, Egyptian net exports decrease, Egyptian GDP is unaffected, Slovakian net exports increase, and Slovakian GDP increases. c. Egyptian investment decreases, Egyptian net exports increase, Egyptian GDP is unaffected, Slovakian net exports decrease, and Slovakian GDP decreases. d. Egyptian investment increases, Egyptian net exports do not change, Egyptian GDP increases, Slovakian net exports do not change, and Slovakian GDP is unaffected. e. None of the above. 6. Matt is waiting to be recalled to a job from which he was laid off. David was fired but hasn’t looked for work during the last two months. Who does the BLS count as unemployed? a. Matt but not David b. David but not Matt c. both David and Matt d. neither David nor Matt e. Not enough information to tell. 7. Unemployment insurance a. reduces search effort which raises unemployment. b. reduces search effort which lowers unemployment. c. increases search effort which raises unemployment. d. increases search effort which decreases unemployment. e. None of the above. 8. Ms. Lane borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that year, the inflation rate is 15 percent. Which of the following statements is correct? a. Ms. Lane will repay the bank fewer dollars than she initially borrowed. b. Ms. Lane's repayment will give the bank less purchasing power than it originally loaned her. c. Ms. Lane's repayment will give the bank greater purchasing power than it originally loaned her. d. Ms. Lane's repayment will give the bank the same purchasing power that it originally loaned her. e. None of the above. 9. In which of the following cases would there be an effect on the value of the U.S. consumer price index, but not on the value of the U.S. GDP deflator? a. All of the truck tires that are produced by a certain company in South Korea are sold to the U.S. military, and the price of these tires decreases. b. All of the truck tires that are produced by a certain company in California are sold to the U.S. military, and the price of these tires decreases. c. Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery stores, and the price of these bananas increases. d. Most of the earth-moving machines that are produced by a certain company in Illinois are exported to other countries, and the price of these machines increases. e. None of the above.

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

10. Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias e. None of the above 11. In the long run, a. an increase in the federal budget deficit can lower the interest rate and investment spending. b. an increase in the federal budget deficit can raise the interest rate and investment spending. c. a decrease in the federal budget deficit can lower the interest rate and raise investment spending. d. a decrease in the federal budget deficit can raise the interest rate and lower investment spending. e. a decrease in the federal budget deficit can lower the interest rate and lower investment spending. 12. Ricardian equivalence refers to a. the equivalence of taxes and revenues in fiscal policy. b. the fact the households incorporate inflationary expectations in calculating interest payments. c. the equivalence of imports and exports in an open economy. d. the possibility that households may say save now so that they can pay the higher taxes later if there is a tax cut at the present time which drives up future interest payments. e. None of the above. 13. Larry buys stock in A to Z Express Company. Curly Corporation builds a new factory. Whose transaction would be classified as investment in macroeconomics? a. only Larry’s b. only Curly Corporation’s c. Larry’s and Curly Corporation’s d. neither Larry’s nor Curly Corporation’s e. Not enough information to tell 14. Suppose in some country that the first $5,000 of interest income is exempt from income tax. If the government then removed this exemption a. the interest rate and investment would rise. b. the interest rate would rise and investment would fall. c. the interest rate would fall and investment would rise. d. the interest rate and investment would fall. e. the interest rate would rise, but the impact on investment would be uncertain. 15. In the loanable funds market, if the government is running a deficit a. it is a supplier of funds as it is taking in more than it is spending b. it is a demander of funds as it is taking in more than it is spending c. it is a supplier of funds as it is spending more than it is taking in d. it is neither be a supplier or demander e. it is a demander of funds as it is spending more than it is taking in.

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

16. The labor demand curve shows the a. number of workers that firms will want to hire at any wage rate b. number of people who will want jobs at any wage rate c. amount of labor that a firm needs to produce a given amount of output d. equilibrium wage rate and number of workers employed e. amount of output workers will be able to buy for a given number of hours worked 17. What is the effect of diminishing returns to labor on the slope of the aggregate production function (where output is measured on the vertical axis and employment is measured on the horizontal axis)? a. It implies that the slope of the curve increases as the number of workers employed increases. b. It implies that the slope of the curve becomes negative as the number of workers employed increases. c. It implies that the slope of the curve decreases (or becomes flatter) as the number of workers employed increases. d. It keeps the slope the same throughout. e. It has nothing to do with the slope of the aggregate production function. 18. What is the potential output level? a. The output level that results when the loanable funds market clears. b. The output level that results when the returns to labor are zero. c. The output level that results when factories are completely full. d. The output level that results when the labor market is at full employment. e. The output level that would occur if the output level was positive. 19. One reason why economists often appear to disagree when asked about the impact of some bad economic news is that a. they do not understand the economy very well b. economics is a very difficult science, and so there are many incorrect economic projections being made c. economists rarely disagree; people just think they are disagreeing because they do not understand the language of economics d. economists often appear to be disagreeing when one is talking about long-run impact while the other is referring to short-run impacts e. economists are by nature competitive individuals and they often disagree 20. Total spending will equal total output a. after inventory adjustments b. only when total leakages are equal to total injections c. by the end of every year d. only when the sum of saving and investment equals the sum of net taxes and government expenditures e. saving is equal to net taxes

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

21. During the past century the average growth rate of U.S. real GDP per person is 2% per year. It implies that it doubled, on average, about every a. 100 years. b. 70 years. c. 35 years. d. 25 years. e. 50 years. 22. The employment-population ratio is a. percentage of the population unemployed b. percentage of the population employed c. the same as the unemployment rate d. always greater than 1 e. percentage of the population employed by the private sector. 23. Many less developed countries have low rates of economic growth because a. high population growth rates reduce living standards b. low population growth rates result in an inadequate labor supply c. high current output per capita reduces incentives for growth d. interest rates are too high e. they invest too much in infrastructure leaving little for private capital investment 24. In the loanable funds market, an increase in the desire to save is translated into a(n) a. increase in investment spending and slower growth in the capital stock b. decrease in investment spending and slower growth in the capital stock c. decrease in investment spending and faster growth in the capital stock d. increase in investment spending and faster growth in the capital stock e. increase in investment spending but with no growth in the capital stock 25. A rightward shift of the economy's labor supply curve would result from a(n) a. cut in income tax rates or an increase in welfare benefits to the needy b. cut in income tax rates or a cut in benefits to the needy c. increase in income tax rates or a cut in benefits to the needy d. increase in income tax rates or an increase in benefits to the needy e. cut in income tax rates or a freeze on benefits to the needy 26. Human capital is the a. knowledge and skills that workers acquire through education, training, and experience. b. stock of equipment and structures that is used to produce goods and services. c. total number of hours worked in an economy. d. same thing as technological knowledge. e. physical capital necessarily operated by humans. 27. Which of the following would increase productivity? a. an increase in the physical capital stock per worker b. an increase in human capital per worker c. an increase in natural resources per worker d. a technological improvement e. All of the above are correct.

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

28. The dictator of a certain country requires that companies planning to open or expand must pay a large fee to file an application one year prior to building new factories or expanding existing ones. Other things the same, in the long run this requirement would a. reduce real GDP per person and productivity. b. reduce real GDP per person but not productivity. c. reduce productivity but not real GDP per person. d. increase real GDP per person but reduce productivity. e. None of the above is correct. 29. One of the logics behind the catch-up growth is that a. workers in countries with low incomes will work more hours than workers in countries with high incomes. b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital. d. workers in countries with high incomes will work more hours than workers in countries with low incomes.. e. None of the above. 30. Investment from abroad (or foreign direct investment) a. is a way for poor countries to learn the state-of-the-art technologies developed and used in richer countries. b. is viewed by economists as a way to increase growth. c. often requires removing restrictions that governments have imposed on foreign ownership of domestic capital. d. All of the above are correct. e. None of the above is correct. 31. The Keynesian model a. relies on the market-clearing assumption b. is used primarily for long-run analysis c. is used primarily for short-run analysis d. focuses on the supply of and demand for resources e. focuses on fluctuations in the financial markets to explain fluctuations in real GDP 32. Which of the following is the definition of autonomous consumption spending? a. The effect of a change in wealth on consumption spending b. The part of consumption spending that is independent of disposable income c. The impact of disposable income on consumption spending d. The part of consumption spending that is independent of wealth e. The horizontal intercept of the consumption function.

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

Consider the following figure representing a closed economy to answer questions 33 and 34.

33. Which of the following is true? a. Equilibrium GDP is $8 trillion b. Unplanned inventory changes are $0.6 trillion when GDP is $8 trillion c. Equilibrium GDP is $7 trillion d. The MPC is 1 e. Government expenditures are $8.6 trillion. 34. If the full employment level of output is $9 trillion, which of the following is true? a. The economy is currently operating at the full employment level b. The economy is currently operating below than the full employment level c. The economy is currently operating above the full employment level d. The economy is operating neither at equilibrium nor full employment e. Prices are rising. 35. If the marginal propensity to consume is 0.75 and investment spending decreases by $20 billion, based on the Keynesian model, what will be the overall effect on GDP? a. GDP will decrease by $20 billion b. GDP will increase by $15 billion c. GDP will decrease by $80 billion d. GDP will decrease by $30 billion e. GDP will decrease by $26.7 billion. 36. Why is the effect of saving so controversial to economists? a. Increased saving always has an unambiguously positive effect on the economy b. Increased saving always has an unambiguously negative effect on the economy c. Increased saving may hurt the economy in the short run but help it in the long run d. Decreased saving my hurt the economy in the short run but help it in the long run e. Because different schools of economic thought use different definitions.

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

37. Automatic stabilizers reduce fluctuations in GDP by a. eliminating spending shocks b. increasing the amount of spending each year c. reducing the additional spending that occurs in each round of the multiplier d. increasing saving e. reducing the need for government involvement in the economy 38. In an expansion, a. federal budget deficits tend to rise b. federal budget deficits tend to fall c. the federal debt tends to rise faster than in a recession d. federal government tax receipts tend to fall e. there is pressure on the Fed to monetize the debt 39. Government debt and interest payments on that debt a. are problems if they grow faster than GDP b. are unrelated in the short run c. are unrelated in the long run, but not in the short run d. generally grow faster than government spending e. contributed to the crisis experienced by the U.S. economy in the late 1990s 40. The national debt a. will be zero when the federal budget is balanced. b. has been shrinking in the last 30 years. c. is equal to the government’s budget deficit. d. can grow without negative economic effects. e. is a flow measure while the deficit is a stock measure. 41. If the expenditure multiplier is 6.5, the tax multiplier is a. 7.5 b. 5.5 c. -5.5 d. -6.5 e. -7.5 42. If the marginal propensity to consume is 0.75 and autonomous consumption spending will decrease by $30 billion, by how much would net taxes need to decrease in order to have no change in output? a. $60 billion b. $30 billion c. $90 billion d. $120 billion e. $40 billion

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

43. If the Federal Reserve sets a required reserve ratio of 0.2 and a bank has $100 million in loans and $80 million in deposits, what is the level of required reserves for the bank? a. $100 million b. $16 million c. $80 million d. $20 million e. $36 million 44. Commercial banks can increase the money supply by a. accepting demand deposits b. loaning out required reserves c. loaning out excess reserves d. selling bonds to the public e. buying bonds from the Fed 45. When implementing monetary policy, the variable the Federal Reserve watches most closely is the a. required reserve ratio b. federal funds rate c. long term bond rate d. national debt e. short term corporate bond rate 46. If the Fed lowered the required reserve ratio, a. excess reserves would decrease b. the money supply would decrease c. the money supply would increase d. banks would borrow more from the Fed e. loans would earn more interest. 47. One of the most serious effects of a banking panic (bank run) is that a. banks will not earn as much profit b. banks will no longer be trusted by the public c. people will not place their excess money in banking accounts d. people may lose any accrued interest on their accounts e. large withdrawals of cash lead to a severe decrease in reserves and ultimately in the money supply 48. Suppose the Federal Reserve wants to decrease the money supply by $100,000. If the required reserve ratio is 0.1, which of the following actions will achieve the Fed’s goal? a. The Fed must purchase $100,000 in bonds. b. The Fed must sell $100,000 in bonds. c. The Fed must purchase $10,000 in bonds. d. The Fed must sell $10,000 in bonds. e. The Fed must sell $90,000 in bonds.

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ECON 1006 Principles of Economics II (Macroeconomics)

Semester 2, 2017/18

49. The money supply curve is vertical because a. real income does not influence the quantity of money supplied b. the price level does not influence the level of spending c. only the interest rate influences the quantity of money supplied d. the Federal Reser...