CB 2402 Macroeconomics

Semester A, 2016-2017

Part I Multiple-Choice Question: Choose only one answer, the best answer.
(45 questions, 1 point each)
1. During a business cycle expansion, total production ________ and total employment
________.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases
2. In calculating gross domestic product, the Bureau of Economic Analysis uses the sum
of the market value of final goods and services produced. This means that the BEA
A) values goods and services at their market prices, multiplies them by the quantity
produced, and then adds them up.
B) values goods at their market prices, multiplies them by the quantity produced, and
then adds them up.
C) simply counts the total number of goods produced in the market place and then adds
them up.
D) simply counts the total number of goods and services produced in the marketplace and
then adds them up.
Product

Quantity

Price

Shoes

40

$60.00

DVDs

100

18.00

Tomatoes

2,000

1.00

Ketchup

300

4.00

3. Refer to the above table. Suppose that a simple economy produces only four goods
and services: shoes, DVDs, tomatoes, and ketchup. Assume one half of the tomatoes are
used in making the ketchup and the other half of the tomatoes are purchased by
households. Using the information in the above table, nominal GDP for this simple
economy equals
A) $7,400.
B) $6,400.
C) $5,800.
D) 2,440 units.
4. The purchase of a new house is included in
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A) net exports.
B) consumption expenditures.
C) investment expenditures.
D) government purchases.
5. In 2013, Kendall Ford, an automobile dealership, spent $20,000 on a new car lift for
its repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on
Ford Motor company stock. Unsold cars and trucks were valued at $400,000 on January
1, 2013 and unsold cars and trucks were valued at $900,000 on December 31, 2013.
What is Kendall Ford's total investment spending in 2013?
A) $22,000
B) $322,000
C) $522,000
D) $1,022,000
6. The informal sector can be a significant drag on the economies of developing countries
because the firms in the informal sector
A) employ illegal immigrants from other countries.
B) do not pay taxes to the government.
C) sell their goods and services to citizens in other countries.
D) produce goods and services no one wants.
7. GDP is not a perfect measure of well-being because
A) the value of leisure is included in GDP.
B) GDP is adjusted for increases in drug addiction.
C) GDP is adjusted for changes in crime rates.
D) GDP is not adjusted for pollution.
8. Scott is a woodworker and charges $125 an hour for his time manufacturing custommade wood products. For his wife's birthday, he designs and creates an intricate birdseye
maple jewelry box that takes him 15 hours to complete. By how much and in what
direction does GDP change as a result of his efforts?
A) GDP is not affected by Scott's production of the jewelry box.
B) GDP rises by $125.
C) GDP rises by $1,875.
D) GDP falls by $1,875.
9. Real GDP is GDP in a given year
A) valued in the prices of that year.
B) valued in the prices of the base year.
C) adjusted only for unanticipated inflation.
D) adjusted only for anticipated inflation.

Guns
Produced

Butter
Price of Guns Produced

Price of Butter

2005

80

$5

40

$4

2013

90

60

10

Year

Consider the data for Tyrovia, a country that produces only two products: guns and butter.
10. Refer to the above table. Real GDP for Tyrovia for 2013 using 2005 as the base year
equals
A) $1,140.
B) $880.
C) $690.
D) $560.
11. Refer to the above table. Nominal GDP for Tyrovia in 2013 equals
A) $1,140.
B) $880.
C) $690.
D) $560.
Oranges
Produced

Price of
Oranges

Shirts
Produced

Price of Shirts

2009

1,800

$0.90

110

$30.00

2011

2,000

1.00

110

35.00

Year

Consider the data shown above for Vicuna, a country that produces only two products:
oranges and shirts.
12. Refer to the above table. Real GDP for Vicuna for 2009 using 2011 as the base year
equals
A) $4,620.
B) $5,100.
C) $5,650.
D) $5,850.

13. Refer to the above table. Nominal GDP for Vicuna for 2009 equals
A) $4,920.
B) $5,100.
C) $5,300.
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D) $5,850.
14. If the GDP deflator is less than 100, then for that year nominal GDP ________ real
GDP.
A) is greater than
B) is less than
C) may be greater than or less than
D) equals
15. The output of U.S. citizens who work in Canada would be included in the
A) gross domestic product of Canada.
B) gross national product of Canada and the gross national product of the United States.
C) gross domestic product of the United States.
D) gross national product of Canada.
16. Consider the data below for a simple economy.
Total population
Working-age population
Employment
Unemployment

20,000
15,000
1,000
100

The labor force participation rate for this simple economy equals ____ %.
A) 5
B) 5.5
C) 6.67
D) 7.33
17. Suppose the working-age population of a fictional economy falls into the following
categories: 90 are retired or homemakers; 60 have full-time employment; 20 have parttime employment; 20 do not have employment, but are actively looking for employment;
and 10 would like employment but do not have employment and are not actively looking
for employment. The official unemployment rate as calculated by the U.S. Bureau of
Labor would equal
A) 20%.
B) 25%.
C) 33%.
D) 37.5%.

18. Suppose the government launches a successful advertising campaign that convinces
workers with high school degrees to quit their jobs and become full time college students.
This would cause
A) the labor force participation rate to decrease.
B) the number of discouraged workers to increase.
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C) the unemployment rate to decrease.

D) no change in the unemployment rate.
19. Assume the market basket for the consumer price index has three products Cokes,
hamburgers, and CDs with the following values in 2006 and 2011 for price and quantity:
Base Year (2006)
2011
Product
Quantity
Price
Price
Cokes
100
$0.5
$0.75
Hamburgers
200
2
2.5
CDs
10
20
21
The Consumer Price Index for 2011 equals
A) 75.
B) 93.
C) 108.
D) 121.
20. A consumer price index of 160 in 1996 with a base year of 1982-1984 would mean
that the cost of the market basket
A) equaled $160 in 1996.
B) rose 60% from the cost of the market basket in the base year.
C) equaled $160 in 1983.
D) rose 160% from the cost of the market basket in the base year.
21. If the price level rose in three consecutive years from 100 to 120 to 140, then the
annual inflation rate over those years would
A) decrease.
B) remain the same.
C) equal 20%.
D) increase.
22. If the number of unemployed workers is 19 million, the number in the working-age
population is 500 million, and the unemployment rate is 4%, what is the labor force
participation rate?
A) 4.75%
B) 7.8%
C) 95%
D) 96.2%

23. An increase in unemployment insurance payments would, in effect, ________ the

amount of time spent searching for a job, which would increase ________
unemployment.
A) increase; cyclical
B) increase; frictional
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C) decrease; cyclical
D) decrease; frictional
24. Which of the following policies would reduce structural unemployment?
A) an increase in the minimum wage
B) a job retraining program
C) implementing an unemployment insurance policy
D) building an online job database that helps workers find jobs
25. Efficiency wages cause unemployment because
A) firms pay wages that are below the market wage, causing the quantity of labor
demanded to be greater than the quantity of labor supplied.
B) firms pay wages that are below the market wage, causing the quantity of labor
demanded to be less than the quantity of labor supplied.
C) firms pay wages that are above the market wage, causing the quantity of labor
demanded to be greater than the quantity of labor supplied.
D) firms pay wages that are above the market wage, causing the quantity of labor
demanded to be less than the quantity of labor supplied.
26. The substitution bias in the consumer price index refers to the idea that consumers
________ the quantity of products they buy in response to price, and the CPI does not
reflect this and ________ the cost of the market basket.
A) change; overestimates
B) change; underestimates
C) do not change; overestimates
D) do not change; underestimates
27. Suppose an economy has only three goods and the typical family purchases the
amounts given in the table above. If 2006 is the base year, then what is the CPI for 2013?
Quantity
Price
Product
(2006)
Price (2006)
(2013)
Computers
1
$1,200
$900
Books
10
25
30
Burgers
50
3
4
A) 14.3
B) 87.5
C) 114.3
D) 160
28. Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964
and 219 in 2013, then the value of your grandfather's salary in 2013 dollars is
approximately
A) $84,775.
B) $63,830.
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C) $37,200.
D) $26,280.
29. Looking at the table below, what is the rate of growth of real average hourly earnings
from 2012 to 2013?
Nominal Average Hourly
CPI
Year
Earnings
(1982-1984 =100)
2011
$10
100
2012
10
105
2013
12
117
A) 7.7%
B) 6.25%
C) 4%
D) -4%
30. If you want to earn a real interest rate of 3% on money you lend, and you expect that
inflation will be 2%, what nominal rate of interest will you charge?
A) 1%
B) 5%
C) 6%
D) 9%
31. 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.
32. Which of the following would contribute to a sustained high rate of economic growth
in the long run in an economy?
A) growth in capital per hour accompanied by technological change
B) increases in labor force participation rates as workers who are out of the labor force
pursue rising wages
C) a shift of workers in the economy from the agricultural sector to the nonagricultural
sector
D) an influx of immigrant labor into an economy without any accompanying
technological change

33. In a closed economy, which of the following equations reflects investment? (Y =

GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
A) Y - C - G
B) Y - C - T
C) Y - T + TR
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D) C + G -T
34. When the government runs a budget deficit, we would expect to see that
A) private saving will fall.
B) investment will fall.
C) G + TR < T.
D) public saving is positive.
35. How will an increase in the government budget surplus as a result of lower
government spending (with no change in net taxes) affect private saving in the economy?
A) Private saving will increase by the amount of increase in the budget surplus.
B) Private saving will decrease by the amount of increase in the budget surplus.
C) Private saving will decrease by less than the amount of increase in the budget surplus.
D) Private saving will be unaffected by the increase in the budget surplus.
36. Which of the following explains the cause of the change in the unemployment rate at
the end of a recession?
A) Firms are hesitant to rehire laid off workers, as they continue to operate below
capacity.
B) Firms rapidly hire new workers at the first sign of an increase in demand for their
goods.
C) Discouraged workers return to the labor force, and this makes the unemployment rate
fall.
D) Discouraged workers leave the labor force, and this makes the unemployment rate
rise.
37. Equilibrium in the loanable funds market determines
A) the nominal interest rate.
B) the current interest rate.
C) the real interest rate.
D) the expected interest rate.
38. How would the equilibrium interest rate respond to a change from an income tax to a
consumption tax?
A) The equilibrium interest rate would rise.
B) The equilibrium interest rate would fall.
C) The equilibrium interest rate would be unaffected.
D) The equilibrium interest rate may rise or fall based on whether the demand or supply
of loanable funds changes.
39. If a country's real GDP is rising by 3% per year while its population is rising at 5%
per year, which of the following is true?
A) The country's standard of living is falling.
B) The country's standard of living is rising.
C) Growth in nominal GDP outweighs growth in the population.
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D) Growth in nominal GDP is less than the growth in the population.

40. If the per-worker production function shifts down,
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-worker production function becomes steeper.
D) positive technological change has occurred in the economy.
41. Which of the following government provisions would help increase the accumulation
of knowledge capital?
A) patents
B) copyrights
C) education subsidies
D) All of the above are correct.
42. Which of the following is a true statement regarding the economic growth model's
predictions and how it actually affects the real world?
A) The growth model predicts that poor countries should catch up with rich countries, but
developing countries are not catching up to lower-income industrialized countries as a
group.
B) The growth model predicts that poor countries will never catch up with rich countries,
but lower-income industrialized countries are catching up to higher-income industrialized
countries as a group.
C) The growth model predicts that poor countries will catch up with rich countries, but
lower-income industrialized countries are not catching up to higher-income industrialized
countries as a group.
D) The growth model predicts that poor countries will catch up with rich countries, and
this is what we observe across all developmental categories of countries.
43. By offering less generous unemployment insurance programs, the United States can
expect
A) citizens to pay more in taxes than citizens pay in Europe.
B) workers to be slow in gaining new skills in response to fluctuations in the labor
market.
C) shorter periods of unemployment for their workers.
D) longer periods of unemployment for their workers.

44. During an expansion, how do inflation and unemployment typically change?

A) Inflation and unemployment both rise.
B) Inflation and unemployment both fall.
C) Inflation falls and unemployment rises.
D) Inflation rises and unemployment falls.
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45. Policies to promote growth by increasing saving and investment work through
A) decreasing the supply of loanable funds, lowering the interest rate, raising the level of
investment in physical capital.
B) increasing the supply of loanable funds, increasing the interest rate, raising the level of
investment in physical capital.
C) increasing the supply of loanable funds, lowering the interest rate, lowering the level
of investment in physical capital.
D) increasing the supply of loanable funds, lowering the interest rate, raising the level of
investment in physical capital.

Part II Long Question (3 questions, 20 points each)

The following information is extracted from an article in Wall Street Journal.

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The most recent edition of the World Happiness Report ranks 158 countries based on how
people answer questions about the quality of their lives. Six factors account for 75% of
the differences between the countries, the researchers say. They are GDP, life expectancy,
generosity, social support, freedom and corruption.
GDP is not even a very good measure of economic well-being, said John Helliwell, coauthor of the World Happiness Report and a professor of economics at the University of
British Columbia. It fails to account for pollution, military expenditures and household
services. Even if you had a very good measure of the economy, it still wouldnt capture
all of life.
Although GDP and life expectancy relate directly to income, the other four factors reflect
a sense of security, trust and autonomy. The U.S., which is No. 1 in the world in overall
GDP, was ranked eighth in GDP per capita in 2014, up from 11th place in 2013. But it
only ranks 15th in happiness.
The U.S. performs well in GDP, but its weaker in the other five variables than the
highest-ranking countries. Canadas GDP, for example, is 20% below the U.S.s, but it
scores higher than the U.S. in the other variables.
The problem is that while incomes in the U.S. have risen, the countrys sense of social
cohesion has declined, said Jeffrey D. Sachs, a professor of health policy and
management at Columbia University and co-author of the World Happiness Report.
On Gauging the Pursuit of Happiness. Wall Street Journal. 21th August 2015.
Question 46:
a) Show how pollution, military expenditures and household services understate/overstate
the GDP in measuring well-being of a country. Explain your answer. (12 marks)
b) Explain why some countries like US have high GDP but ranks low in happiness Index.
Please give one example to illustrate your answer. (8 marks)

47. (20 Points) Consider the following data from Hong Kong between 2011 and 2013:
Year

2011

2012

11

2013

Nominal GDP (HK$ million)

1,934,433

Real GDP (2012 HK$ million)

2,005,999

Working-age Population

6,161,564

Labor Force

3,703,100

Unemployment Rate (%)

CPI (Base year 2012)
Employment
Labor force participation rate
(%)

96
3,577,195

2,037,064

2,125,353
6,305,229

3,785,200
3.3

3.4

100

104
3,727,601

60.5
101

GDP deflator

First, in the 10 blanks in the table above (1 point each, total 10 points), then answer the
following 4 questions:
(1) What is the inflation rate in 2013 when using GDP deflator as the measure of
price level? (2 points)
(2) If using CPIs to represent the price levels, what are the inflation rates in 2011 and
2012, and what is the percentage change in inflation rate from 2012 to 2013? (3
points)
(3) What are the CPIs in 2012 and in 2013 when using 2011 as the base year? And
what is the inflation rate in 2013 when using these CPIs with 2011 as the base
year to represent the price levels? (3 points)
(4) If 100,000 full-time college students are considered as employed workers in 2011,
by what amount will the employment-population ratio increase/decrease/no
change in 2011? (2 points)

48. (20 Points) Suppose you are a famous international economic advisor. You have been
asked to assess the possibilities for growth in a developing country.

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(a) This country abundant in labor and some natural resources. The capital to labor ratio
is low. It has a free market economy. You have found that this country does not have a
very strong and healthy banking system, however the political system is stable and the
government does a good job protecting property rights. Assess this country's prospects
for growth. Recommend two things that would enhance the country's growth.
(b) Explain to the prime minister how improving education and training can contribute to
his country's economic growth, and why it is important for the government to take a proactive role in promoting education.
(c) Suggest two policies the government could pursue to help increase the accumulation
of knowledge.

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