EC102 .02 and 102.

05 NAME: _________________
ID #: ___________________
Spring 2016

MIDTERM EXAM I
GROUP A
March 22, 2016

Instructions:
 You have 80 minutes to complete the exam. There will be no extensions.
 The exam consists of 40 multiple choice questions. Each multiple choice
question is worth 1 point for a total of 40 points.
 Use a pencil to mark your answers on the answer sheet. Make sure you write
your name and ID number on the answer sheet as well.
 Please mark the group of your test on the answer sheet under “Test Form.”
 No calculators, dictionaries or formula sheets are allowed.
 The use of cell phones is strictly prohibited. Make sure your cell phone is
turned off and inside your bag. Do NOT use your cell phone even for
timekeeping purposes.
 This is a closed books/notes exam.
 Choose only one answer for each question.
 2 wrong answers will take away one correct answer.
 There is absolutely no talking during the exam.
 The proctors will NOT answer any questions.
 There are 9 pages in this exam booklet.

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GROUP A
1. Gross Domestic Product (GDP) is the total market value of all
A) final goods and services produced annually within a country's borders.
B) final and intermediate goods and services produced annually within a country's borders.
C) intermediate goods and services produced annually within a country's borders.
D) final goods and services produced every two years within a country's borders.

2. Which of the following illustrates double counting?

A) The total market value of tennis rackets and the total market value of tennis balls are
summed.
B) The total market value of the steel used to produce a car and the total market value of the
car itself are summed.
C) The total market value of picture frames and the total market value of camera film are
summed.
D) The total market value of eyeglasses and the total market value of carpet are summed.

3. Why do economists prefer to compare Real GDP figures for various years instead of GDP
figures?
A) Because when GDP in one year is higher than in another year, there is no way to tell why
it is higher. Is it because output is higher, prices are higher, etc.? This is not the case with
Real GDP. If Real GDP is higher in one year than in another year, it is because output is
higher.
B) Because when GDP in one year is higher than in another year, there is no way of knowing
if the quality of goods produced is higher in one year than the other. This is not the case
with Real GDP. If Real GDP is higher in one year than in another year, it is because the
quality of the goods produced is higher.
C) Actually the question is incorrect. Economists prefer to compare GDP figures instead of
Real GDP figures.
D) Because Real GDP is easier to compute than GDP.

4. If the border with Syria is closed and Syrian workers in Turkey are forced to go back to their
home countries,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) we will move up along the long-run aggregate supply curve.
D) we will move down along the long-run aggregate supply curve.

5. A "recession" is defined as
A) a period of negative inflation.
B) the lowest point in a business cycle.
C) two or more consecutive quarters of falling Real GDP.
D) a period of positive unemployment rate.

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GROUP A
6. One of the reasons why the AD curve slopes downward is that as the
A) price level rises, purchasing power of wealth rises.
B) price level falls, purchasing power of wealth rises.
C) nation's income level rises, purchasing power of wealth rises.
D) This is a trick question, because the curve is upward sloping.

7. Look at the following data: consumption = $813 billion; saving = $48 billion; exports = $43
billion; imports = $33 billion; gross investment = $423 billion; depreciation = $98 billion;
government purchases = $320 billion. What is GDP?
A) $1,632 billion
B) $1,448 billion
C) $1,566 billion
D) $1,468 billion

8. In the long run,

A) an increase in the price level will cause output to increase.
B) a decrease in the price level will cause output to increase.
C) a decrease in the price level will cause output to fall.
D) changes in the price level leave output unchanged.

9. In the basic model of the Circular Flow of Economic Activity, income flows from
A) government to households.
B) business firms to the money market.
C) households to government.
D) the factor market to households.

10. Suppose the market basket consists of 10 kg. of bananas, 20 kg. of apples, and 30 kg of
oranges. Current-year prices are $3.00 for each kg. of bananas, $2.00 for each kg. of apples,
and $1.00 for each kg. of oranges. Base-year prices are $1.00 for each kg. of bananas, apples
and oranges. What is the approximate CPI in the current year?
A) 1670
B) 167
C) 1.67
D) 100

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GROUP A
11. Refer to the figure above. Assume the economy is self-regulating and currently is in short-run
equilibrium with the price level equal to P3 and output level equal to Q1. If the government
does not intervene with either fiscal policy or monetary policy, where is the economy likely
to end up in the long run?
A) P5 and Q1
B) P5 and Q3
C) P3 and Q3
D) P2 and Q4

12. Autonomous consumption is

A) the change in consumption that results as a person's (or nation's) income increases or
decreases.
B) that portion of total consumption that is dependent upon the level of income.
C) the steady increase in the consumption of goods and services that automatically occurs as
a person grows from a child to an adult.
D) that portion of total consumption that is independent of the level of income.

13. Which of the following is considered a negative supply shock?

A) increasing immigration in the economy causes the labor supply to rise
B) an improvement in technology
C) an increase in unemployment
D) an unexpected decrease in the refining capacity for oil

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GROUP A
14. Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real
GDP per hour worked by $500. If capital per hour worked increases further from $20,000 to
$25,000, by how much would you expect real GDP per hour worked to increase if
there are diminishing returns?
A) By less than $500
B) By exactly $500
C) By more than $500 but less than $5,000
D) By more than $5,000 but less than $20,000

15. Which of the following is the main result of long-term economic growth?
A) increasing inflation rate
B) decreasing interest rates
C) decreasing unemployment rate
D) rising average living standards

16. If prices are rising over time and the level of production in the economy is fixed, nominal
GDP will
A) rise but real GDP will fall
B) rise but real GDP will be unchanged
C) be unchanged but real GDP will fall
D) none of the above

17. Between 1910 and 2010, the real GDP grew at a faster rate than the population growth rate.
So, the average growth rate of GDP per capita was:
A) Negative
B) Positive
C) Zero
D) Unknown

18. Which of the following statements is true?

A) If the marginal propensity to consume is 0.60, it follows that the average propensity to
consume is 0.40.
B) If the marginal propensity to consume is 0.80, the average propensity to save is 0.20.
C) If the marginal propensity to consume is greater than 1, then the change in income is
greater than the change in consumption.
D) If the marginal propensity to consume is 0.75, the marginal propensity to save is 0.25.

19. How is your purchase of a 400,000 TL BMW automobile that was produced entirely in
Germany recorded in the Turkish GDP accounts?
A) Consumption increases by 400,000 TL and net exports decreases by 400,000 TL.
B) Net exports increases by 400,000 TL.
C) There is no impact because this transaction does not involve domestic production.
D) Investment increases by €40,000 and net exports increases by €40,000.

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GROUP A
20. Suppose a drop in stock prices makes people feel less wealthy. This would cause __________
the economy's AD curve.
A) movement down along
B) movement up along
C) a rightward shift of
D) a leftward shift of

21. An increase in the government budget deficit should cause:

A) higher interest rates and more investment
B) higher interest rates and less saving
C) lower interest rates and less investment.
D) none of the above

22. Human capital refers to ________

A) the money people have.
B) the machines workers have to work with.
C) the accumulated skills and training workers have.
D) the wealth people have.

23. An increase in the interest rate

A) increases the present value of future returns from investment, and increases investment.
B) decreases the present value of future returns from investment, and decreases investment.
C) decreases the present value of future returns from investment, and increases investment.
D) increases the present value of future returns from investment, and decreases investment.

24. In an economy with no foreign countries, if GDP = 1,000, consumption = 600, taxes = 100,
and government purchases = 200, how much is national saving and investment?
A) saving = 300, investment = 300
B) saving = 200, investment = 100
C) saving = 0, investment = 0
D) saving = 200, investment = 200

25. If property rights are not enforced in a country, ________

A) the market system will still work smoothly.
B) entrepreneurs are unlikely to risk their own funds investing in such an economy.
C) that country’s growth rate will not be affected.
D) that country will grow more rapidly because of the reduction of law suits.

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GROUP A
26. Increasing the amount of consumption spending and reducing the amount of savings
________ investment expenditures, and ________ long-run economic growth in the
economy.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

27. Potential GDP equals $100 billion. The economy is currently producing $90 billion of goods
and services. If the MPC is 0.8, then how much must autonomous spending change for the
economy to move to potential GDP?
A) $18 billion
B) -$2 billion
C) -$18 billion
D) $2 billion

28. Share prices will follow a random walk if

A) shares are overvalued.
B) people behave irrationally when choosing shares.
C) markets reflect all available information in a rational way.
D) shares are undervalued.

29. Which of the following would not be included in the calculation of this year's GDP?
A) a headlight bulb purchased at Sağlam Oto by Ahmet to replace a burnt out bulb in his car
B) a headlight bulb purchased by Ford Motor Co. from a supplier
C) a headlight bulb produced but not sold this year and thus ending up as inventory
D) none of the above, i.e., all would be included

30. Which of the following would lead to lower interest rates?

A) households receive news that makes them believe that their incomes will fall in the future.
B) the value of household wealth increases due to an unexpected increase in the value of
their stock holdings.
C) a technological innovation occurs resulting in a large increase in capital purchases by
business.
D) None of the above

31. Suppose that the government announces a cut in the personal income tax rate. Based on the
permanent income hypothesis, the tax cut should lead to _______ in consumption if the tax
cut will be temporary than if it will be permanent
A) larger increase
B) larger decrease
C) smaller increase
D) smaller decrease

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GROUP A
32. If AE = 150 + 0.6Y and Y = 200, where Y is real GDP, unplanned inventories are
A) -70
B) -30
C) 70
D) 30

33. An increase in the budget deficit will

A) raise the interest rate and decrease the quantity of loanable funds demanded for
investment.
B) lower the interest rate and increase the quantity of loanable funds demanded for
investment.
C) raise the interest rate and increase the quantity of loanable funds demanded for
investment.
D) lower the interest rate and decrease the quantity of loanable funds demanded for
investment.

34. A point on a nation’s production possibilities curve represents

A) An undesirable combination of goods and services.
B) Combinations of production that are unattainable, given current technology and resources.
C) Levels of production that will cause both unemployment and inflation.
D) The full employment of resource to achieve a particular combination of goods and
services.

35. Capital, as economists use the term,

A) is the money the firm spends to hire resources.
B) is money the firm raises from selling stock.
C) refers to the process by which resources are transformed into useful forms.
D) refers to things that have already been produced that are in turn used to produce other
goods and services.

36. An increase in the marginal propensity to consume (MPC)

A) raises the value of the multiplier.
B) has no impact on the value of the multiplier.
C) rarely occurs because the MPC is set by congressional legislation.
D) lowers the value of the multiplier.

37. The catch-up effect refers to the idea that

A) rich countries aid relatively poor countries so as to "catch them up."
B) savings will always "catch-up" with investment spending.
C) it is easier for a country to grow fast if it starts out relatively poor.
D) if investment spending is low, increased saving will help investment to "catch-up." high
risk, high profit, and low savings

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GROUP A
38. Consider two things that might be included in GDP: A. The estimated rental value of owner-
occupied housing, and B. Purchases of newly constructed homes
A) A is included as consumption, while B is included as investment
B) B is included as consumption, while A is included as investment
C) Only B is included in GDP and it is included as investment
D) Only A is included in GDP and it is included as investment

39. Consider the market for loanable funds. Which of the following would lead to increased
investment and higher interest rates?
A) a decrease in household saving.
B) if business becomes more optimistic about future sales and profits
C) a higher tax on corporate profits
D) none of the above.

40. Let C = 50+0.8Y, I=50, G=50, and NX=-50, all in dollars. According to the Keynesian
model, the current level of output in this economy is
A) 100.
B) 200.
C) 500.
D) 800.

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GROUP A