Econ 102 Practice Midterm 1 (50 minutes, no calculators, no communication devices)

30 Multiple Choices Questions Worth 2.5 Points Each, 1 Writing Question Worth 24 Points
Disclaimer: This practice midterm exam does not necessarily reflect the difficulty, actual coverage, or
actual proportion of material to be seen the actual exam.

MULTIPLE CHOICES QUESTIONS

1. Which of the following could cause nominal GDP to decrease, but real GDP to increase?
a) The price level falls and the quantity of final goods and services produced rises.
b) The price level rises and the quantity of final goods and services produced rises.
c) The price level rises and the quantity of final goods and services produced falls.
d) The price level falls and the quantity of final goods and services produced falls.

2. If the number of unemployed workers is 200 million, and the number in the labor force is 500
million, what is the unemployment rate?
a) 0.4%
b) 4%
c) 14%
d) 40%

3. 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.

4. Opportunity cost is defined as ________

a) the benefit of an activity.
b) the monetary expense associated with an activity.
c) the highest valued alternative that must be given up to engage in an activity.
d) the total value of all alternatives that must be given up to engage in an activity.

5. A production possibilities frontier with a ________ shape indicates increasing opportunity costs
as more and more of one good is produced.
a) linear
b) perfectly horizontal
c) bowed inward
d) bowed outward

6. According to a recent study, “Stricter college alcohol policies, such as raising the price of alcohol,
or banning alcohol on campus, decrease the number of students who use marijuana.” On the basis
of this information, how would you describe alcohol and marijuana?
a) The two goods are substitutes in consumption.
b) There is no relationship between the two goods.
c) The two goods are complements in consumption.
d) They are both luxury goods.
7. In recent years the cost of producing wines in the U.S. has increased largely due to rising rents for
vineyards. At the same time, more and more Americans prefer wine over beer. Which of the
following best explains the effect of these events in the wine market?
a) The supply curve has shifted to the left and the demand curve has shifted to the right. As a
result there has been an increase in the equilibrium quantity and an uncertain effect on the
equilibrium price.
b) Both the supply and demand curves have shifted to the right. As a result, there has been an
increase in the equilibrium price and an uncertain effect on the equilibrium quantity.
c) Both the supply and demand curves have shifted to the right. As a result, there has been an
increase in both the equilibrium price and the equilibrium quantity.
d) The supply curve has shifted to the left and the demand curve has shifted to the right. As a
result, there has been an increase in the equilibrium price and an uncertain effect on the
equilibrium quantity.

8. To calculate GDP using the value-added method, one would add up ________
a) the market value of final goods and services produced during a particular period.
b) only the value added by the underground economy.
c) the value added by each firm involved in the production of final goods and services.
d) the market value of intermediate goods and services produced during a particular period.

9. Which of the following would result in GDP for an economy equal to $10 trillion?
a) C = $6 trillion , I = $2 trillion , G = $1.5 trillion , NX = –$2 trillion
b) C = $5 trillion , I = $5 trillion , G = $2 trillion , NX = –$2 trillion
c) C = $7 trillion , I = $2 trillion , G = $4 trillion , NX = $3 trillion
d) C = $4 trillion , I = $3 trillion , G = $2 trillion , NX = –$1 trillion

10. The purchase of a new automobile by a household for private use is included in ________
a) consumption expenditures on services.
b) consumption expenditures on durable goods.
c) investment expenditures.
d) consumption expenditures on nondurable goods.

11. If you invest $10,000 in a bond that earns 7% interest per year, how many years will it take to
double your money?
a) 1 year
b) 2 years
c) 10 years
d) 20 years

12. Countries with high rates of economic growth tend to have ________
a) a labor force that is more productive.
b) a lower life expectancy at birth.
c) low rates of technological advancement.
d) a declining incidence of business cycle fluctuations.    
13. 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

14. If the per-worker production function shifts up, ________

a) it now takes more capital per hour worked to get the same amount of real GDP per hour
worked.
b) an economy can increase its real GDP per hour worked without changing the level of capital
per hour worked.
c) the per-hour production function becomes flatter.
d) negative technological change has occurred in the economy.

15. 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.

16. The only way the standard of living of the average person in a country can increase is if
________ increases faster than ________.
a) production ; population
b) population ; production
c) population ; GDP per capita
d) population; income

17. Which of the following can explain why some countries have not experienced relatively high
growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita?
a) Many of these developing countries do not have a functioning court system that can enforce
laws.
b) Countries that are relatively poor are more likely to experience wars and revolutions.
c) Countries that are relatively poor are likely to have a lower quality of health care.
d) All of the above.

18. Emily is a writer. She buys pens and paper for $20 and writes a 500 -page novel that she sells to a
publishing company for $500,000. If the publisher prints 1 million copies that sell for $25 each,
what is the total contribution to GDP from all transactions?
a) $25 million
b) $20 million
c) $500,000
d) $50,000
19. Which of the following statements is true?
a) A decrease in the crime rate increases GDP as people will spend more on security.
b) Household production is counted in GDP as it amounts to real production.
c) GDP accounting rules do not adjust for production that pollutes the economy.
d) GDP growth distributes income equally to people in the economy.

20. If a country passes a labor law limiting the number of hours of work per week, GDP would
________ and leisure would ________.
a) decrease ; increase
b) increase ; increase
c) increase ; decrease
d) decrease ; decrease

21. Which of the following is a true statement about real and nominal GDP?
a) If nominal GDP increases from one year to the next, we know that production of goods and
services has risen.
b) Nominal GDP is a better measure than real GDP in comparing changes in the production of
goods and service year after year.
c) Increases in average prices do not affect the calculation of nominal GDP.
d) If real GDP increases from one year to the next, we know that production of goods and
services has risen.

22. Disposable personal income equals personal income ________

a) minus personal tax payments.
b) plus government transfer payments.
c) minus personal tax payments plus government transfer payments.
d) minus government transfer payments plus personal tax payments.

23. In GDP accounting, which levels of government spending are included in government spending?
a) Purchases by the federal government only.
b) Purchases by federal, state, and local governments.
c) Purchases by the federal government and some state governments, but not local governments.
d) Purchases by governments only as they relate to national security, social welfare, and other
national programs.

24. Which of the following would be directly counted in GDP in 2014?

a) Kitchen cabinets purchased from Home Depot in 2014 to be installed in a house built in 1997
b) Kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a brand new
country-style home
c) Kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a farm house
built in 1950
d) None of the above
25. Which of the following is a positive economic statement?
a) Everyone should live at the same standard of living.
b) If the price of gasoline rises, a smaller quantity of it will be bought.
c) The government should close income tax loopholes.
d) U.S. firms should not be allowed to outsource production of goods and services.

26. If a decrease in income leads to in a decrease in the demand for ice cream, then ice cream is
________
a) a complement.
b) a substitute.
c) a normal good.
d) an inferior good.

27. Which of the following would shift the supply curve for energy drinks to the left?
a) A decrease in the expected future price of energy drinks
b) A decrease in the number of firms that produce energy drinks
c) An increase in consumer income (assuming that energy drinks are normal goods)
d) A decrease in the price of an input used to produce energy drinks

28. In the circular flow model, a worker is hired in a ________ and household purchases a new good
in ________.
a) product market ; product market
b) product market ; factor market
c) factor market ; product market
d) factor market ; factor market

29. When every good or service is produced up to the point where the last unit provides a marginal
benefit to society equal to the marginal cost of producing it, ________ occurs.
a) allocative efficiency
b) productive efficiency
c) equity
d) efficient central planning

30. Lionel’s Lawn Care is a company that maintains residential yards. Lionel’s cost for his standard
package of mowing, edging, and trimming is $15, and he charges $25 for this service. For a total
price of $40, Lionel will also trim shrubs, a service that adds an additional $10 to the total cost of
the standard package. Should Lionel continue to offer the shrub-trimming service?
a) Yes, his marginal benefit is greater than his marginal cost.
b) Yes, but only if he raises the price of the standard package.
c) No, his marginal benefit is less than his marginal cost.
d) More information is needed for Lionel to make this decision.
Part II – Writing Question
An economy produces two goods: hot dogs and burgers.
In 2009, 30 hot dogs are produced at a price of $2 each, and 40 burgers at a price of $7 each.
In 2015, 30 hot dogs are produced at a price of $4 each, and 60 burgers at a price of $8 each.
Answer each of the following questions. Only the final answer is graded, no calculation process is
graded. Each answer is worth 3 points.

What is the nominal GDP for each year?

2009: 2015:

Using 2009 as base year, what is the real GDP for each year?
2009: 2015:

Using 2009 as base year, what is the GDP deflator for each year?
2009: 2015:

Populations in 2009 and 2015 are 17 and 25 persons, respectively. Using 2009 as base year, what is
the per capita real GDP in each year?
2009: 2015: