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E202S09H02Exam1

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Douglas, Spring 2009

PLEDGE: I have neither given nor received unauthorized help on this exam.

February 19, 2009

SIGNED:__________________________ PRINT NAME: __________________________________

Econ 202 Section H02 Midterm 1

Multiple Choice Questions 2.5 points each. Bubble in answers on the attached sheet.

1. Which of the following expressions must be equal to national saving for a closed economy?

a.Y - I - Cb.Y - C - Gc.G + C - Yd.Y - I - G - NX 2. The supply curve for a good is

a.a line that relates price and quantity supplied.

b.a line that relates input prices and quantity supplied.c.a line that relates price and profit.

d.a line that relates profit and quantity supplied.

3. In the economy of Wrexington in 2008, real GDP was $5 trillion and the GDP deflator was 200. What was

Wrexington’s nominal GDP in 2008?

a.$10 trillionb.$100 trillionc.$2.5 trilliond.$40 trillion

4. In 2002 mortgage interest rates fell and mortgage lending increased. Which of the following could explain

both of these changes?

a.The supply of loanable funds shifted right.b.The demand for loanable funds shifted left.c.The demand for loanable funds shifted right.d.The supply of loanable funds shifted left.

5. Janelle earned a salary of $40,000 in 1996 and $65,000 in 2006. The consumer price index was 200 in 1996

and 350 in 2006. Janelle’s 1996 salary in 2006 dollars isa.$65,000.b.$43,655.c.$22,857.d.$70,000.

6. If the government institutes policies that increase incentives to save, then in the loanable funds market

a.the supply of loanable funds shifts left.b.the demand for loanable funds shifts right.c.the demand for loanable funds shifts left.d.the supply of loanable funds shifts right.

7. In the country of Monongalia in 2008, consumption was $1000, GDP was $1950, government purchases were

$500, and investment was $700. What were Monongalia’s net exports in 2008?a.$2200b.$250c.-$250

d.Net exports cannot be calculated from the information given.

Econ202H02 Exam 1, Spring 2009 Douglas

8. Suppose the government eliminates all environmental regulations and, as a result, the production of goods and

services increases, but there is considerably more pollution. Based on this scenario, which of the following

statements is correct?

a.GDP could either increase or decrease because GDP excludes environmental quality.b.GDP would definitely decrease because GDP includes environmental quality.c.GDP would definitely increase because GDP excludes environmental quality.

d.GDP would definitely increase, despite the fact that GDP includes environmental quality.

9. What is the future value of $500 one year from today if the interest rate is 4 percent?

a.$520b.$530c.$515

d.None of the above is correct.

10. We associate the term debt finance with

a.the bond market, and we associate the term equity finance with the stock market.

b.financial intermediaries, and we associate the term equity finance with financial markets.c.financial markets, and we associate the term equity finance with financial intermediaries.d.the stock market, and we associate the term equity finance with the bond market.

11. A larger budget surplus

a.raises the interest rate and reduces investment.b.raises the interest rate and investment.

c.reduces the interest rate and raises investment.d.reduces the interest rate and investment.

12. According to James Hamilton’s blog post, the “shadow banking system” consists of highly-leveraged

a.off-shore subsidiaries of traditional banks.

b.money-laundering operations that serve the illegal drug markets.

c.investment banks, hedge funds, SIVs, etc that often borrow short-term using commercial paper. d.slush funds set up by politicians pretending to do charity work.

Which of the following changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 13.

120, or 150 to 170?a.150 to 170b.100 to 120c.80 to 100

d.All of these changes produce the same rate of inflation.

14. Economists differ in their views of the role of the government in promoting economic growth. At the very

least, though, most economists agree that the government should

a.impose trade restrictions to protect the interests of domestic producers and consumers.b.provide social capital by maintaining property rights and political stability.c.limit foreign investment to industries that don't already exist in the country.d.subsidize key industries.

15. In the United States in 2008, consumption represented approximately

a.5 percent of GDP.b.15 percent of GDP.c.19 percent of GDP.d.70 percent of GDP.

Econ202H02 Exam 1, Spring 2009 Douglas

16. During the current quarter, a firm produces computers and adds some of them to its inventory rather than

selling them. The value of the computers added to inventory is

a.included in the current quarter GDP as consumption.b.not included in the current quarter GDP.

c.included in the current quarter GDP as investment.

d.included in the current quarter GDP as a statistical discrepancy.

17. If Proctor and Gamble sells a bond it is

a.borrowing indirectly from the public.b.borrowing directly from the public.c.lending indirectly to the public.d.lending directly to the public.

18. In his article “The End” Michael Lewis depicts the collapse of the mortgage-backed securities market as being caused

primarily by

a.over-regulation of financial markets by the government. b.profit-seeking by short-sighted and unscrupulous financiers. c.manipulation of interest rates by the Federal Reserve.

d.well-meaning government programs designed to encourage minority homeownership.

You rent a car and treat it with less care than you would if it were your own. This is an example of 19.

a.market risk.b.moral hazard.c.risk aversion.d.adverse selection. 20. Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs are sold at $3 per dozen and 50

pounds of ham are sold at $4 per pound. In 2004, the base year, eggs sold at $1.50 per dozen and ham sold at

$5 per pound. For 2005,

a.nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.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 $400, real GDP is $500, and the GDP deflator is 80.

21. Suppose the interest rate is 5 percent. Consider three payment options:

1. $500 today.

2. $520 one year from today.3. $550 two years from today.

a.2 has the lowest present value and 1 has the highest.b.1 has the lowest present value and 3 has the highest.c.3 has the lowest present value and 2 has the highest.d.None of the above is correct.

22. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as

the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $.60. The value of the CPI in 2004 wasa.104.0.b.102.0.c.96.2.d.152.0.

Econ202H02 Exam 1, Spring 2009

Douglas

23. Suppose you purchase 1000 shares of Stratford Industries stock for $100,000 ($100 per share), using $10,000 of your

own money and $90,000 of money that you borrowed at 10% annual interest. If one year later the price of Stratford Industries has risen to $150 per share and you sell your 100 shares and pay off your debt, the return on your own financial capital is ___; if it fell to $50 per share and you sold your shares and paid of your debt your return would be _____. (Ignore taxes and brokerage fees, but include interest payments in your calculations.) a.50%; -50%. b.410%; -410%c.41%; -59%. d.410% ; -590%.

Which of the following would necessarily increase the equilibrium interest rate? 24.

a.The demand for loanable funds shifts right and the supply of loanable funds shifts left.b.The demand for and the supply of loanable funds shift left.

c.The demand for loanable funds shifts left and the supply of loanable funds shifts right.d.The demand for and the supply of loanable funds shift right. 25. According to fundamental analysis, a saver should prefer to buy a stock if

a.its price has been falling recently but is nearing a resistance point.

b.its price has been rising lately and has broken through a resistance point. c.its price is high compared to the present value of the firm.d.its price is low compared to the present value of the firm.

26. Susan usually goes to Speedy Lube for an oil change. If she decides to change the oil in her car herself, this

change will cause GDP to

a.be unaffected because the same service is produced in either case.b.fall, because her labor in changing the oil will not count in GDP.

c.rise, because the oil will be a final good rather than an intermediate good.d.be unaffected because car maintenance is not included in GDP.

27. The sale price of a gallon of gasoline sold will count directly in GDP if it is sold by a

a.gasoline station to a bus company that operates a bus route between San Francisco and

Los Angeles.

b.gasoline station to a motorist in Los Angeles.

c.pipeline operator to a gasoline station in San Francisco.d.All of the above are correct.

28. The average amount of goods and services produced from each hour of a worker's time is called

a.per capita GDP.

b.technological knowledge.c.GDP.

d.productivity.

29. A transfer payment is a payment made by

a.foreigners, but not in exchange for a domestically-produced good or service.b.government, but not in exchange for a currently produced good or service.c.firms, but not in exchange for capital equipment.

d.consumers, but not in exchange for a tangible product.

30. Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new

machinery for one of its breweries. As defined in Econ 202, a.Fran is investing; Miller is saving.b.Fran is saving; Miller is investing.c.Fran and Miller are both investing.d.Fran and Miller are both saving.

Econ202H02 Exam 1, Spring 2009 Douglas

Short Answer Questions. 25 points. Answer in the space provided.

31. a)

U.S. automakers and unions are currently in talks that are expected to result in significant reductions in

autoworkers’ wages. Using a well-labeled diagram and a sentence or two (and holding all other factors constant), if the talks come out as planned explain how you would expect the agreement to affect the quantity and price of U.S. cars sold?

At the same time, consumer wealth will almost certainly fall over the next couple of years as stock prices and housing prices fall. Using a new diagram and a sentence or two (and holding all other factors including consumer income constant), explain how you would expect this decline in consumer wealth might affect the quantity and price of U.S. cars sold.

What do you expect to be the net effect of both of the above events to be on the quantity and price of U.S. cars sold?

ID: A

Econ 202 Section H02 Midterm 1Answer Section

MULTIPLE CHOICE

1. ANS: B PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 2. ANS: A PTS: 1 NAT: Analytic MSC: Definitional

3. ANS: A PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 4. ANS: A PTS: 1 NAT: Analytic

LOC: Understanding and applying economic models 5. ANS: D PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 6. ANS: D PTS: 1 NAT: Analytic

LOC: Understanding and applying economic models 7. ANS: C PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 8. ANS: C PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 9. ANS: A PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 10. ANS: A PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 11. ANS: C PTS: 1 NAT: Analytic

LOC: Understanding and applying economic models 12. ANS: C PTS: 1 13. ANS: C PTS: 1 NAT: Analytic MSC: Applicative

14. ANS: B PTS: 1 NAT: Analytic MSC: Applicative

15. ANS: D PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 16. ANS: C PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 17. ANS: B PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 18. ANS: B PTS: 1 19. ANS: B PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 20. ANS: A PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 21. ANS: A PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 22. ANS: A PTS: 1 NAT: Analytic

LOC: The study of economics and definitions in economics 23. ANS: D PTS: 1 24. ANS: A PTS: 1 NAT: Analytic

LOC: Understanding and applying economic models 1

MSC:

Interpretive

LOC:

Supply and demand

MSC:

ApplicativeMSC:

AnalyticalMSC:

ApplicativeMSC:

InterpretiveMSC:

Definitional

LOC:

Unemployment and inflationLOC:

Productivity and growth

MSC:

DefinitionalMSC:

InterpretiveMSC:

Interpretive

MSC:

InterpretiveMSC:

ApplicativeMSC:

Applicative

MSC:

Interpretive

25. ANS: D PTS: 1 NAT: Analytic