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Introduction to Macroeconomics Allen R. SandersonEconomics 19900 Autumn 2007

FIRST HOUR EXAMINATION

Name (Please Print): ______________________________________ [42 Points Possible]

Part I. Multiple Choice. Circle letter corresponding to your answer. One point each; 20 points total.

1. A consumer price index of 200 in 2007, with a base year of 1982-84, would mean that:a. the cost of a representative good would have cost $200 in 1982, 1983 and 1984.b. the cost of a typical market basket of goods equals $200 outside right now.c. the cost of a market basket of goods approximately doubled in the last 23-25 years.d. the standard of living for Americans is twice as high now as it was 23-25 years ago.e. the standard of living for Americans today is lower than it was in the early 1980s.

2. Adam Smiths invisible hand directs economic activity via:

a. the legal system and government regulation.b. exploitation of natural resources and workers.c. the political process.d. private property.e. prices.

3. Formally, or traditionally, we measure recessions by looking at:a. declines in nominal GDP.b. a slowing down of the growth rate in real GDP.c. increases in the unemployment rate.d. decreases in the GDP deflator.e. decreases in real GDP.

4. In our GDP accounts, consumption consists of spending by households on goods and services,with the exception of:a. items not made in the U.S.b. higher education expenses, like tuition and fees, paid to private institutions.c. intangible services.d. the purchase of new homes.e. the estimated value of owner-occupied housing.

5. Which of the following is usually regarded as the best single measure of economic well-being?a. the unemployment rate (or the employment rate)b. price stabilityc. real GDPd. the international trade deficit

e. the size of the public sector and whether or not the government is running a deficit

6. The CPI is a measure of:a. the overall cost of goods and services bought by the typical consumer.b. changes in the standard of living in our economy.c. the goods and services produced by our economy in a given year.d. the price of a random selection of goods and services produced in the U.S. at various

points in time.e. the rate of change in the cost of nominal GDP.

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7. Suppose a representative market basket of goods was chosen to calculate the CPI, and 2002 is

chosen as the base year. In 2002 the baskets total cost was $50; in 2004 it would have cost $52;and in 2006 the total outlay for it would have been $54.60. The value of the CPI for 2006 was:a. 54.60; b. 104.60; c. 106.60; d. 109.20 ; e. 156.60.

8. The annual inflation rate for the economy above over this four-year period was approximately:a. 1.15%; b. 2.2%; c. 4.6%; d. 6.6%; e. 9.2%.

9. Which of the following statements is correct?a. The largest source of revenue for the U.S. federal government is borrowing (that is

deficit spending), especially from China.b. The largest expenditure category for the U.S. federal government is for national

defense, homeland security and the war on terrorism.c. About 20 percent of the U.S. governments receipts come from individual and corporate

income taxes.d. Sales taxes and property taxes are the two most important revenue sources for state and

local governments.e. The U.S. federal government collects a higher percentage of citizens incomes in taxes

than is true of most countries.

10. All of the following are acknowledged problems in using the CPI to measure the cost ofliving except:a. it fails to account for the introduction of new goods.b. it fails to capture well the changes in the quality of goods.c. it doesnt account adequately for substitutions on the part of consumers when relative

prices change.d. it doesnt include new, less expensive, outlets or sources where consumers can buy from.e. it doesnt include the prices of imported goods that U.S. consumers buy from abroad.

11. The claim that all citizens should make an equal sacrifice to support government programsis usually associated with:a. the ability-to-pay principle.

b. the principle of tax incidence.c. the benefits-received principle.d. proportional or flat tax rates.e. horizontal equity.

12. Evidence indicates that the typical person who becomes unemployed in the U.S. in 2007:a. will do so by quitting his or her last job.b. will find another job within two months.c. will leave the labor force and never return.d. is very likely to become a discouraged worker.e. should be considered or treated as cyclically unemployed.

13. Acme Aluminum Company sells $1 million worth of aluminum ore to ABC Foil Company, which

uses the aluminum as the chief input in making aluminum foil. ABC, Inc. sells $3 million infoil to Wal-Mart, which in turn sells it to customers/households for $4 million. How much dothe above transactions contribute to GDP?a. $3 million; b. $4 million; c. $5 million; d. $7 million; e. $8 million

14. Which of these changes in the price index represents the greatest rate of inflation?a. 106 to 112; b. 112 to 118; c. 150 to 158; d. 200 to 210;e. impossible to determine without knowing the base year.

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15. Which of the following statements is incorrect?a. For people 20 and over, women have similar unemployment rates to those of men.b. Adults have lower unemployment rates than do teenagers (16-19 years of age).c. For people 20 and over, the unemployment rate of African-Americans is about double

that of whites.d. White males have the highest labor force participation rates of any group, but it has been

falling over time.e. The labor force participation rate of the U.S. adult population is now almost 90 percent.

16. When some dollar amount is automatically corrected and/or adjusted for inflation by law orcontract, we refer to this as:a. purchasing power parity.b. the GDP deflator.c. indexation.d. the exchange-rate adjustment.e. neutrality.

17. The BLS does all of the following except:a. gathers data on unemployment and employment..b. acts as one of the principal statistical arms (or wings) for the Department of Labor.

c. produces data on the length of the average work week and duration of unemployment.d. determines the timing for the onsets and conclusions of recessions.e. computes and reports the CPI.

18. The natural rate of unemployment is:a. the unemployment rate that would prevail with zero inflation.b. the economists notion of full employment.c. the unemployment we would expect if everyone who wanted a job had one.d. one that cannot be influenced by public policy.e. basically the same as what one calls frictional unemployment.

19. The value of total income for an economy ___________ the value of total production or output.a. equals

b. is > than (because of double-counting)c. is < than (because of profits and depreciation)d. is < than (because of government spending on goods and services)e. is < than (because of imports and exports)

20. Goods that are used as inputs by other producers are called or referred to as:a. nominal GDP (as opposed to real GDP).b. the underground economy.c. intermediate goods.d. stocks (rather than flows).e. disinvestment.

Part II. Short Answer, Problem, Graphing and Essay Questions. 22 Points Total.

1. If the cost of housing increases by 10 percent, then, ceteris paribus, the CPI will rise by_______ percent. Fill in the blank and explain. (2 points)

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2. What types of taxes or tax systems impose the smallest deadweight losses? (2 points)

3. In a recent front-page story in The Wall Street Journal on Mexicos Carlos Slim, the worldsrichest man, the article said: In all, . . . his fortune represents 7% of the countrys annualeconomic output. (At his height, John D. Rockefellers wealth was equal to 2.5% of the U.S.gross domestic product.) Discuss. (2 points)

4. Americans are spending more than ever on their drinks, with sales of spirits, wine and beerincreasing 47 percent from 1995 to 2005, to $160 billion. Discuss this sentence from aDecember 16, 2006, article from The New York Times. (3 points)

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5 50 years ago, Arthur Frommer published the first edition of his now-famous travel guide:Europe on $5 a day. What should he have entitled his 2007 edition? Why? (2 points)

6. Why could the CPI and GDP deflator diverge? (2 points)

7. Suppose you bought a used copy of Mankiw/Parkin at our University / B&N bookstore for $50,which the bookstore had purchased from another U of C student for $30. How much, if anythingat all, of your purchase price contributes to this years GDP? Why/Explain. How about our GNP?

(3 points)

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8. The reasons why someone cannot get a job are similar to the reasons why someone cannotget a date. Discuss. (3 points)

9. Words used in Economics 199 might not always means the same thing in English (that is, casualconversation, newspaper/broadcast accounts, or by ordinary people who speak English but notEconomics. Name a few from this section of the course and discuss briefly the difference(s).(3 points)

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