Second Midterm - I

I. BINARY CHOICE QUESTIONS:

1. Holding all else constant, an increase in the savings rate will shift

a) The supply curve in the loanable funds market

b) The demand curve in the loanable funds market

2. How will a government budget deficit affect the equilibrium real interest rate, as determined in the loanable funds market?

a) The equilibrium real interest rate will increase, relative to the balanced budget case

b) The equilibrium real interest rate will decrease, relative to the balanced budget case

3. Generally, has the US business cycle become more or less turbulent (violent, defined by rapid movements) since 1980? Why?

a) More turbulent; the US Congress continually passes legislation that destabilizes the economy for political gain, and the Federal Reserve reinforces this behavior

b) Less turbulent; the Federal Reserve has smoothed out the business cycle through careful use of monetary policy

4. In periods of falling prices, it must be the case that

a) Real GDP grows faster than nominal GDP

b) Nominal GDP grows faster than real GDP

5. Choose the best answer to the following question: "Why do some countries grow faster than others for extended periods of time?"

a) Cross-country differences in physical capital, human capital, technology, and institutions (government, legal system, etc.) persist

b) Some countries have better natural resources than others, and countries will grow at different rates until the important natural resources are depleted

6. Evaluate the following statement: "Due to rapid economic growth in China, the standard of living for the typical Chinese citizen now exceeds that of the average US citizen."

a) True

b) False

7. According to historical data on the US business cycle, output and unemployment tend to move together.

a) True

b) False

8. Set 2010 as the base year. Assume that the inflation rate is constant and negative from 2008 to 2010. If nominal wages decrease every year between 2008 and 2010 due to the financial crisis, then real wages do not necessarily decrease from 2008 to 2010.

a) True

b) False

9. Consider the demand for loanable funds by businesses in France. If the real interest rate is 7%, the quantity of funds demanded is $15 million. If the real interest rate increases to 10%, then the quantity of funds demanded will be

a) More than $15 million

b) Less than $15 million

10. Due to a newspaper report on global warming, businesses expect that their profits will be lower in the immediate future. How will this event affect the loanable funds market?

a) In equilibrium, the real interest rate will increase and the quantity of loanable funds will decrease

b) In equilibrium, the real interest rate will decrease and the quantity of loanable funds will decrease.

II. MULTIPLE CHOICE QUESTIONS:

11. Using 2005 as the base year, the CPI in Finland is 110 in 2009 and 132 in 2010. With 2009 as the base year, what is the CPI in 2010?

a) 100

b) 115

c) 120

d) 135

12. In general, if we change the base year, the growth rate of the GDP deflator will ________ and the growth rate of the CPI will ________.

a) Change; stay the same

b) Change; change

c) Stay the same; change

d) Stay the same; stay the same

13. In Taiwan, real GDP was lower in 2008 than in 2009. The GDP deflator was the same in 2008 and 2009. Therefore, we can conclude that nominal GDP in 2008 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

14. Suppose that last year, GDP decreased while GDP per capita increased in an economy. Therefore, it must be the case that

a) The labor force decreased last year

b) The labor force increased last year

c) The economy experienced population growth last year

d) The economy experienced a decrease in population last year

15. Currently, the Bureau of Labor Statistics does not include discouraged workers in the unemployed group. What would happen to the labor force participation rate if these discouraged workers were reclassified as unemployed instead of being treated as not in the labor force? Holding everything else constant, the labor force participation rate would 

a) Increase

b) Decrease

c) Remain unchanged

d) Either increase, decrease, or remain unchanged, depending on additional information that is not given to us in the problem

16. In the library, you read the following newspaper headline from the 2008 archives: "Sharp rise in unemployment rate as global financial crisis hits jobs market." Based on this reading, what do you think was the main component of unemployment in 2008?

a) Frictional unemployment

b) Structural unemployment

c) Natural unemployment

d) Cyclical unemployment

17. If the unemployment rate is 12% and there are 6 million unemployed persons, then there are how many employed persons in the economy?

a) 100 million

b) 94 million

c) 50 million

d) 44 million

18. The following data on the labor market have been provided to you by the US Bureau of Labor Statistics. What is the unemployment rate for males?

a) 20%

b) 23%

c) 27%

d) 30%

Use the information below to answer the following two questions.

The following table provides equations for supply and demand in the 2010 South Korean loanable funds market. In the equations that are given r is the real interest rate expressed as a percentage (i.e. if the real interest rate is 10%, then the value of r in the equation would be 10).  QLF is the quantity of loanable funds (either savings S or investment I).

19. Assume that South Korea is a closed economy. Solve for the equilibrium real interest rate (r*) and the equilibrium quantity of loanable funds traded (QLF*).

a) r* = 6%; QLF* = 350

b) r* = 8%; QLF* = 400

c) r* = 10%; QLF* = 225

d) r* = 12%; QLF* = 200

20. Now assume that South Korea is an open economy and its net exports (NX) are expressed by the equation NX = 75 - 25r. Solve for the equilibrium real interest rate (r*) and the equilibrium level of net exports (NX*) under this assumption.

a) r* = 7%; NX* = -100

b) r* = 6%; NX* = -75

c) r* = 5%; NX* = -50

d) r* = 4%; NX* = -25

21. Interpret the demand curve in the loanable funds market as a collection of business investment projects that may or may not receive funding in equilibrium. There are many firms, and each firm owns an investment project with some certain rate of return that is known ahead of time. If the loanable funds market is in equilibrium, we can say that

a) All investment projects receive funding, with all firms borrowing at the equilibrium real interest rate

b) Only the most productive investment projects receive funding, with a firm borrowing at the equilibrium real interest rate provided that the rate of return on their project exceeds the equilibrium real interest rate

c) Only the least costly investment projects receive funding, with a firm borrowing at the equilibrium real interest rate provided that the rate of return on their project is less than the equilibrium real interest rate

d) All investment projects receive funding, with all firms borrowing at a real interest rate equal to the rate of return of their project

22. Holding capital, technology, and the price level fixed, what is the effect of an increase in household wealth on the labor market and the aggregate production function (output)?

a) In equilibrium, the real wage decreases and the quantity of labor increases; output increases and labor productivity decreases

b) In equilibrium, both the real wage and the quantity of labor increase; output increases and labor productivity decreases

c) In equilibrium, the real wage increases and the quantity of labor decreases; output decreases and labor productivity increases

d) In equilibrium, both the real wage and the quantity of labor decrease; output decreases and labor productivity increases

23. Based on historical US business cycle data, what is a reasonable estimate for the US natural rate of unemployment?

a) 0%

b) 3%

c) 5%

d) 10%

24. You are given the following two equations:

S_private = Y + TR - T - C

S_public  = T - TR - G

where S is savings, Y is nominal GDP, TR is government transfer payments, T is taxes, C is consumption spending, and G is government expenditure. What additional equation do you need to show that S ? I for a closed economy (savings equals investment)?

a) National savings: S = Y - C - G

b) Net exports: NX = X - M

c) Balanced budget condition: T = TR + G

d) GDP accounting equation: Y = C + I + G + NX

25. Which of the following is not a financial intermediary?

a) Real estate agent

b) Bank

c) Pension fund

d) Life insurance company

26. What was the purpose of the Employment Act of 1946, passed by the US Congress after World War II?

a) According to the Act, government should not interfere in the US economy

b) The Act stated that the US government was obligated to maintain full employment

c) Based on the Act, financial markets were extensively deregulated, leading to the global financial crisis of 2007-2010

d) The Act said that employers must pay their workers at least the minimum wage

27. Using the rule of 70 as an approximation, how long would it take for China to double its GDP at a constant GDP growth rate of 8%?

a) 7.75 years

b) 8 years

c) 8.75 years

d) 9 years

The following table lists aggregate statistics (in billions of $US) for Spain from 2008-2009. Assume that Spain is a small open economy.

Use this table to answer the following two questions.

28. In the table, entries A and B are missing. Based on the other entries of the table, what are the values of A and B?

a) A = 36; B = - 10

b) A = - 36; B = 10

c) A = 25; B = - 6

d) A = - 25; B = 6

29. What is the growth rate of private savings for Spain from 2008 to 2009?

a) 20%

b) -20%

c) 40%

d) -40%

30. Which of the following statements about economic growth is incorrect?

a) Economic growth creates winners and losers; all else equal, not everyone benefits from an increase in the growth rate, but the winners should outnumber the losers

b) Without technological progress, economic growth cannot continue forever at a constant rate due to diminishing marginal returns to capital and labor, population growth, and finite natural resources on Earth

c) Economic growth always matches increases in broader measures of the standard of living, such as life expectancy, average years of education, and leisure time

d) Economic growth is a relatively recent occurrence, with almost all growth taking place in the last 200 years.