Midterm 1 QUESTİONS (A)

  Midterm 1  QUESTİONS  (A)

There are 2 parts. In every part, every question is 2 point. You can’t  use dictionary in the exam. You can use calculator but using cell phone  will not be allowed. You can not borrow erases from each other. Please read carefully and answer the questions. Good Luck.     

1.  A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. This move 

  a.  necessarily raises GDP. 

  b.  necessarily decreases GDP. 

  c.  doesn’t change GDP because gambling is never included in GDP. 

  d.  doesn’t change GDP because in either case his income is included. 

2. GDP  

  a.  includes the value of intermediate goods so we can get a measure of sales. 

  b.  excludes the value of intermediate goods because they are too difficult to measure. 

  c.  excludes the value of intermediate goods because their value is already counted in the value of final goods. 

  d.  None of the above are correct. 

3.  A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the 

second quarter, and holds the others in its warehouse. 

  a.  Since the DVDs will eventually be bought by consumers, they are included as consumption in the second 

quarter. 

  b.  Since the DVDs were not purchased this quarter, they will be counted as an increase in third-quarter GDP. 

  c.  The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-

quarter GDP. 

  d.  The DVDs will be counted as a change in inventory in the second quarter, and when sold in the third quarter 

will raise GDP. 

4. A Texas oil company extracts petroleum and sells it to a refinery for $1,000. After processing, the refinery sells the gasoline to a wholesaler for $1,500, who then sells it to a gas station for $1,700. The gas station sells it to customers for $2,500. In these transactions, how much has been added to GDP?

     a.  $1,000

     b.  $1,500

     c.  $1,700

     d.  $2,500

     e.  $6,700

5.  Greg, a U.S. citizen, works only in Canada. The value added to production from his employment is 

  a.  included in both U.S. GDP and U.S. GNP. 

  b.  included only in U.S. GDP. 

  c.  included only in U.S. GNP. 

  d.  not included in either U.S. GDP or U.S. GNP. 

6.  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. $6400. 

 b. $7000. 

 c. $7600. 

 d. $8900. 

 e. $9500. 

7. What are the three important macroeconomic goals about which most 

     economists, and society at large, agree?

     a.  rapid economic growth, full employment, and low interest rates

     b.  rapid economic growth, full employment, and stable prices

     c.  rapid economic growth, zero unemployment, and falling prices

     d.  rapid economic growth, low unemployment, and a balanced budget

     e.  rapid economic growth, a balanced budget, and balanced  international trade

8. 13. Rich countries (measured by GDP per capita) tend to have __________ infant mortality rates, __________ life expectancies at birth, and ___________ adult literacy rates than poor countries.

     a.  higher, higher, higher

     b.  lower, higher, higher

     c.  lower, lower, higher

     d.  lower, lower, lower

     e.  lower, higher, lower

9. The Consumer Price Index (CPI)

     a.  measures the prices of all goods produced in the economy

     b.  includes prices of raw materials

     c.  is found by averaging the prices of all goods consumed in the economy

     d.  includes only the prices of domestically produced consumer goods

     e.  includes the prices of some used consumer goods

10. The real wage rate measures

     a.  nominal wages after taxes

     b.  what workers are paid in terms of this year's dollars

     c.  what workers are paid in terms of purchasing power

     d.  what workers have available for spending after paying their bills

     e.  the number of dollars earned by workers

11) Which of the following statements about inflation is true?

1. Inflation always redistributes purchasing power, even if correctly anticipated.
2. Inflation does not affect real variables.
3. People who have to receive future payments will benefit from periods of high and unexpected inflation.
4. People who have to make future payments will benefit from periods of high and unexpected inflation.

12.  Macroeconomics includes the study of topics such as 

  a.  national output, the inflation rate, and the trade deficit. 

  b.  the price of Cisco stock, wage differences between genders, and antitrust laws. 

  c.  differences in market structure, and how consumers maximize utility. 

  d.  None of the above are correct. 

13.  Suppose that Wisconsin produces cheese and fish. In 2002, 20 units of cheese are sold at $5 each, and 8 units of fish are sold at $50 each. In 2001, the base year, the price of cheese was $10 per unit, and the price of fish was $75 per unit. 

  a.  Nominal 2002 GDP is $800, real 2002 GDP is $500, and the GDP deflator is 160. 

  b.  Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 160. 

  c.  Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 62.5. 

  d.  Nominal 2002 GDP is $800, real 2002 GDP is $500, and the GDP deflator is 62.5. 

Part II  

1. At the end of 2002, Tom wants to buy a used car for $ 1,000 but since he has no money, he asks his brother Bob for a loan. Tom agrees to pay Bob back after 2 years, that is at the end of 2004. Bob doesn’t ask for any interest, but he wants to be compensated for the lost in purchasing power due to inflation. The inflation rate is expected to be 5% and 4% in the first and second year of the loan respectively.

1. ( 2 pt) If the expectations about inflation are correct, what is the amount that Tom will pay to Bob at the end of the loan?

for the lost in purchasing power due to the inflation. Indeed, if the CPI was 100 at the beginning of the loan, it becomes 109.2 at its expiration. Therefore, in order for Bob to receive an amount of money with the same purchasing power that the $ 1,000 lent two years before, Tom has to pay $ 1,092.

2. ( 2 pt) Suppose Bob doesn’t ask any compensation for the inflation, what is the value of the money he receives at the end of the loan expressed in 2002 dollars?

b. In this case, Bob receives $ 1,000 at the end of the loan, but the value of this money expressed in 2002 dollars is only $ 1,000/109.2 = $ 915.75.

Suppose that, at the beginning of the loan, Tom agreed to pay $ 92 to Bob as compensation for the lost in purchasing power due to the inflation. Suppose also that the inflation during the second year is unexpectedly 6% instead of the expected 4%.

3. ( 2 pt) Who looses and who benefits from this unexpectedly higher inflation rate?

c. In terms of purchasing power, Tom benefits from the unexpectedly higher inflation rate, while Bob looses because of it.

4. ( 2 pt) What is the value of the money that Bob receives at the end of the loan expressed in 2002 dollars?

d. Bob receives $ 1,092 at the end of the loan; the CPI at the expiration of the loan is 111.3. Therefore, the value of the money he receives expressed in 2002 dollars is $1,092/111.3 = $ 981.13.

5. ( 2 pt) What is the amount that Tom should pay to Bob in order for the purchasing power of the sum lent not to change?

e. Since the CPI at the expiration of the loan is 111.3, the amount that Tom should pay to Bob in order to compensate him for the actual inflation rate during the two years of the loan is $ 1,113.