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ECON 162B-90, 91

Spring 2008

MIDTERM EXAMINATION NUMBER TWO (A)

PART I MULTIPLE CHOICE (30 points)

Choose the single best answer.

1.  To measure the contributions of each sector of the economy, economists use

a.  real GDP.

b.  the final-goods approach.

c.  the value-added approach.

d.  nominal GDP.

e.  none of the above.

2.  If the economy experiences inflation, then in years after the base year

a.  nominal GDP is greater than real GDP.

b.  nominal GDP is less than real GDP.

c.  real GDP must be decreasing.

d.  the price index will be less than 100.

e.  nominal GDP will equal real GDP.

3.  The overall balance of payments

a.  is negative if imports exceed exports.

b.  is always equal to zero due to double-entry bookkeeping.

c.  increases as exports sold to other countries rise.

d.  decreases as exports sold to other countries rise.

e.  none of the above.

4.  If Russia is experiencing a current account deficit, then

a.   its exports are greater than its imports.

b.  it is not trading with other countries.

c.  it must have a deficit in its capital and financial accounts.

d.  it must have a surplus in its capital and financial accounts.

e.  it is buying more financial assets from the rest of the world than it is selling to the rest of the world.

5.  Suppose that in 2005, one dollar was worth 120 yen.  In 2008, one dollar was worth 100 yen.  Then, from 2005 to 2008,

a.  the dollar depreciated.

b.  the yen appreciated.

c.  the dollar appreciated.

d.  the yen depreciated.

e.  both a) and b).

6.  If one euro trades for $1.50, and if one pound trades for $3.00, then one pound should be equal to

a.  two euros.

b. one-half euro.

c.  four and a half euros.

d.  two dollars.

e.  100 yen.

7.  Which of the following individuals would be included in the labor force?

a.  Alberta does volunteer work from home.

b.  Bob is in prison for selling crack.

   c.  Carol is currently serving in the military in Iraq.

d.  David was just laid off from his factory job and is actively seeking another

     form of employment.

e.  all of the above.

8.  In March 2008, the unemployment rate in the United States

a.  remained constant at 4.8%.

b.  increased to 5.1%.

c.  decreased to 4.5%.

d.  was the highest in the last twenty years.

e.  showed that the economy is growing at a steady rate.

9.   In 1913, the CPI was approximately equal to 10.  In 2007, the CPI was approximately equal to 200.  This means that

a.  prices increased by twenty times from 1913 to 2007.

b.  the value of the dollar declined by twenty times from 1913 to 2007.

c.  what a nickel could purchase in 1913 would require one dollar in 2007.

d.  the economy experienced inflation.

e.  all of the above.

10.  An important assumption of the classical model is that

a.  markets always clear.

b.  prices, wages, and interest rates are flexible.

c.  there is no money illusion.

d.  of rational self-interest.

e.  all of the above.

PART II TRUE-FALSE AND EXPLAIN (25 points)

State whether each of the following five statements is true or false (@ 2

points each) and then briefly explain why you gave the answer that you did (@ 3 points each).  Use graphs where appropriate, and you may use

the back of the page if necessary..

1. Nominal GDP measures the output of an economy  using constant, or base year, prices, so changes in nominal GDP reflect changes in output.

2.   If one million more families in the United States decide to educate their children at home (home schooling), then GDP will decline.

3.  If the value of the dollar falls, the current account deficit will increase.

4.  Unanticipated inflation tends to redistribute income from the rich to the poor.

5.  Say’s Law states that nominal variables are separable from real variables in the classical model.

PART III PROBLEMS AND ESSAYS             (45 points)

Answer each of the following three questions to the best of your abilities. Please show all work, and be sure to answer each part of every question.  Be sure to label all axes and curves, and show numerical intercepts and intersection points where ever possible.

Partial credit will be given where appropriate.

1.  Suppose that you are given the following information on the economy of Georgeville:

consumption 100 taxes 100

wages 100 rental income 100

interest income 100 exports 100

investment 100 net factor income from abroad 100

government spending 100 capital consumption allowance 100

profits 100      imports 100

a.  Find GDP using the expenditure approach. (3 points)

b.  Find GNP. (3 points)

c.  Find NNP. (3 points)

d.  Find NI using the income approach. (3 points)

e.  Find the statistical discrepancy. (3 points)

2.  Assume that the current exchange rate between euros and dollars is

€1 = $2.

The price of an MP3 player in the United States is $100.

The price of an MP3 player in France is €100.

It costs $20 to ship one MP3 player from one country to the other.

a.  Is it possible to profit from international arbitrage here? (yes or no) (2 points)

b.  If so, where should the MP3 player be purchased?  (US or France) (2 points)

c.  If so, prove that it is possible to profit from international arbitrage. (5 points)

d.  What happens to the supply of MP3 players in both countries? (3 points)

e.  What happens to the price of MP3 players in both countries? (3 points)

3.  Suppose that Barack Obama is elected president in a landslide vote in November.  One of his campaign promises is education reform, so billions more dollars are now spent on education to improve human capital.  This education and training increases the productivity of the American labor force.  Using the labor market, production function, and AD/AS graphs of the classical model graphically show the effects of such an increase in labor productivity.  (8 points)  What happens to the quantity of labor, real wages, real GDP, and the price level?  Explain.  (7 points)