I, II, III and IVIII onlyEcon 102 Midterm 1 February 9, 2006 Part I: Multiple Choice: (26 Questions, 3 pts each=78 pts) Select the best answer among the given choices 1. Please indicate which of the following statements are true I. In general, stocks are riskier than bonds, so bonds must pay a higher return II. Government bonds are considered less risky than corporate bonds III. Stocks and bonds are attractive financial instruments that pay fixed returns. a) I only b) II only c) III only d) I and III only e) II and III only Use the following table to answer questions 2 and 3: Year Nominal GDP (in billions) GDP Deflator (base year 1997) 2000 10,453 121 2001 11,115 124 2002 11,990 125 2. Inflation between 2000 and 2001 was approximately a) 2.5 percent b) 3.0 percent c) 3.8 percent d) 6.3 percent e) 8.2 percent 3. What was the approximate percentage change in real GDP between 2000 and 2002? a) 18.5 percent b) 14.7 percent c) 11.0 percent d) 7.0 percent e) 4.0 percent 14. Which of the following statements is true? a) The GDP deflator calculates inflation using the current production basket while the CPI uses a fixed production basket. b) The rate of change of the GDP deflator indicates real GDP growth because it is based on current production in the economy. c) Changes in nominal GDP are the same as changes in the CPI because both capture changes in the cost of living. d) The GDP deflator calculates inflation using the current production basket while the CPI uses a fixed consumption basket. e) The GDP deflator is in real terms while the CPI is in nominal terms. For Questions 5 & 6, suppose the following events took place in Slovakia in Year 0. I. Congress passed a law exempting capital gains from taxation II. The average savings rate of the citizens of Slovakia temporarily increased by 1% III. Slovakian firms increased research and development efforts in response to a new government initiative IV. New unpopulated land was annexed from Poland, which increased the natural resource endowment of Slovakia 5. Which of the events above will most likely increase Slovakia’s per capita GDP level in the long run? a) I and IV b) I, II and III c) IV only d) III and IV e) I, II, III and IV 6. Which of the events above will most likely increase Slovakia’s per capita GDP growth rate in the long run? a) III and IV b) IV only c) I and III d) III only e) I, II, III and IV 2For Questions 7 & 8 consider the following countries, their current GDP per capita figures, and growth rates as indicated. Assume that growth rates for all countries are constant: Country Current GDP per capita Growth Rate per capita Slovakia $7,000 X Sweden $28,000 2.5% United States $35,000 2% Mongolia $3,000 4% 7. What would Slovakia’s growth rate have to be in order for Slovakians to be approximately as well off as Swedes in 140 years? a) 2.6% b) 3.0% c) 3.5% d) 5.0% e) 10.0% 8. Assume that the growth rate for Slovakia is actually 3%, which country will eventually be the wealthiest (per capita)? a) Slovakia b) Sweden c) United State d) Mongolia e) Cannot tell from the information provided 9. Consider the closed economy loanable funds model presented in class: Suppose Congress passes a bill that expands investment tax credits for firms that invest in new equipment. Meanwhile, they adjust government spending so as to leave the government’s budget unchanged. Which of the following will occur? a) An increase in investment and a decrease in the interest rate b) An increase in private savings and a decrease in the interest rate c) A decrease in investment, public savings and the interest rate d) An increase in investment, public savings and the interest rate e) An increase in investment, national savings and the interest rate 3For Questions 10 & 11 consider a closed economy model, i.e. Y=C+I+G. The following information is given: Y=$48,000 C=$34,700 – 1000r T=$8,000 G=$8,600 I=$5000-2000r 10. What is the interest rate and the level of private savings in equilibrium? a) 10%, $4,800 b) 10%, $5,400 c) 5%, $4,800 d) 5%, $5,400 e) 10%, $4,200 11. Now suppose that Congress passes a bill to increase spending on public school arts programs, and the new value of government purchases is $9200. Everything else being equal, what is the new interest rate? Does private savings increase or decrease a) The new interest rate is 20%; private savings increases b) The new interest rate is 30%; private savings increases c) The new interest rate is 25%; private savings increases d) The new interest rate is 30%; private savings remains the same e) The new interest rate is 25%; private savings decreases 12. In 2005 Hans, a German citizen, took a business trip to Hawaii and purchased software for his online trading business for $20,000. He also paid $300 to a local software engineer in Hawaii for a demonstration of how to use the software. Which of the following is correct? a) German Imports rose by $20,000. German Investment rose by $20,000. b) German Imports rose by $20,000. US Exports rose by $20,300. c) German Investment rose by $20,000. US Exports rose by $20,300. d) German Imports rose by $20,300. German Investment rose by $20,300. e) German Imports rose by $20,300. German Investment rose by $20,000. German Consumption rose by $300. 4For Questions 13-15 use the following information: Good Year 1 Price Year 2 Price Year 3 Price Year 4 Price Widget $2 $2.50 $2.50 $2.50 Gadget $5 $4 $5 $6 Mouse pad $20 $25 $30 $35 The CPI basket is 5 Widgets, 6 Gadgets and 1 Mouse Pad 13. Using Year 2 as the base year, what is the approximate rate of inflation from Year 3 to Year 4? a) 5 % b) 7.5% c) 10% d) 12.5% e) 15% 14. Using Year 3 as the base year, what is the approximate rate of inflation from Year 3 to Year 4? a) 5% b) 7.5% c) 10% d) 12.5% e) 15% 15. Using Year 3 as the base year, what is the CPI for year 1? a) 82.76 b) 92.50 c) 100 d) 107.5 e) 120.83 16. Hans, a US citizen, buys $500 worth of marijuana while on vacation in Holland. Upon his return, he sells the marijuana to unsuspecting Americans for $5,000. Upon discovering this, Franz reports Hans to the FBI, which spends $10,000 to put Hans behind bars for sale of an illegal substance. What is the increase in US GDP resulting from these transactions? a) $15,500 b) $15,000 c) $10,500 d) $10,000 e)