Page 1 ECON303 Intermediate Macroeconomics Practice Exam 1 PART I: Multiple Choice Questions 1. Macroeconomics does not try to answer the question of: A) why do some countries experience rapid growth. B) what is the rate of return on education. C) why do some countries have high rates of inflation. D) what causes recessions and depressions. 2. In a simple model of the supply and demand for pizza, the endogenous variables are: A) the price of pizza and the price of cheese. B) aggregate income and the quantity of pizza sold. C) aggregate income and the price of cheese. D) the price of pizza and the quantity of pizza sold. 3. All of the following statements about sticky prices are true except: A) in the short run, some wages and prices are sticky. B) the sticky-price model describes the equilibrium toward which the economy slowly gravitates. C) for studying year-to-year fluctuations, most macroeconomists believe that price stickiness is a better assumption than is price flexibility. D) magazine publishers tend to change their newsstand prices only every three or four years. 4. All of the following are measures of GDP except the total: A) expenditures of all businesses in the economy. B) income from all production in the economy. C) expenditures on all final goods and services produced. D) value of all final production. 5. All of the following are a stock except: A) a consumer's wealth. B) the government budget deficit. C) the number of unemployed people. D) the amount of capital in the economy.Page 2 6. In computing GDP, A) expenditures on used goods are included. B) production added to inventories is excluded. C) the amount of production in the underground economy is imputed. D) the value of intermediate goods is included in the market price of the final goods. 7. An example of an imputed value in the GDP is the: A) value-added of meals cooked at home. B) housing services enjoyed by homeowners. C) services of automobiles to their owners. D) value of illegal drugs sold. 8. All of the following actions are investments in the sense of the term used by macroeconomists except: A) IBM's building a new factory. B) corner candy store's buying a new computer. C) John Smith's buying a newly constructed home. D) Sandra Santiago's buying 100 shares of IBM stock. 9. The household survey conducted by the Bureau of Labor Statistics provides estimates of the number of workers ______, while the establishment survey provides estimates of the number of workers ______. A) self-employed; unemployed B) unemployed; self-employed C) with jobs; on firms' payrolls D) on firms' payrolls; with jobs 10. Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is: A) $20,000. B) $20,000 less the automobile company's profit on the car. C) $20,900. D) $20,900 less the profits of all three companies on the items that they sold.Page 3 11. Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is: A) $10,000. B) $12,000. C) $20,000. D) $22,000. 12. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was: A) $5. B) $6.50. C) $9.50. D) $11. 13. If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately ______ percent. A) 2 B) 3 C) 4 D) 8 14. Assume that the market basket of goods and services purchased in 2004 by the average family in the United States costs $14,000 in 2004 prices, whereas the same basket costs $21,000 in 2009 prices. However, the basket of goods and services actually purchased by the average family in 2009 costs $20,000 in 2009 prices, whereas this same basket would have cost $15,000 in 2004 prices. Given this data, a Laspeyres price index of 2009 prices using 2004 as the base year would be: A) 1.05. B) approximately 1.07. C) approximately 1.33. D) 1.50. 15. A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage: A) does not change GDP. B) decreases GDP by $60,000. C) increases GDP by $60,000. D) increases GDP by more than $60,000.Page 4 16. If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1000. 17. If the consumption function is given by C = 150 + 0.85(Y – T) and T increases by 1 unit, then savings: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units. 18. Assume that the consumption function is given by C = 200 + 0.7(Y – T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by: A) 70. B) 140. C) 175. D) 250. 19. Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should: A) not build because the rate of return on the factory is only 6 percent. B) not build because the rate of return on the factory is only 12 percent. C) build because the rate of return on the factory is 30 percent. D) build because the rate of return on the factory is 35 percent. 20. If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is: A) 300. B) 500. C) 1,000. D) 1,300.Page 5 21. In the classical model with fixed income, an increase in the real interest rate could be the result of a(n): A) increase in government spending. B) decrease in government spending. C) decrease in desired investment. D) increase in taxes. 22. Use the model developed in Chapter 3, but assume that consumption