THE SAMPLE EXAM

1. The labor force equals the number of people who are employed. number of people employed plus the number of people unemployed. number of people who are unemployed. adult population.

2. Which of the following is counted as unemployed according to official statistics? George, a full-time student who is not looking for work Larry, who has retired (emekli) and is not looking for work Mary, who is waiting for her new job to start All of the above would be counted as unemployed.

3. Sam just lost his job, but isn't yet looking for a new one. Sam is counted as unemployed and part of the labor force. counted as unemployed, but not part of the labor force. not counted as unemployed, but counted as part of the labor force. not counted as unemployed or counted as part of the labor force.

4. For the economy as a whole expenditure exceeds (is greater than) income because of taxes. income must equal expenditure. income exceeds expenditure because of saving. expenditure exceeds income because of the government budget deficit.

5. Gross Domestic Product is defined as the market value of all final goods and services produced by a country’s citizens in a given period of time. every good and service produced within a country in a given period of time. all final goods and services produced within a country in a given period of time. all goods and services produced by a country’s citizens in a given period of time.

6. An American company has a fast-food store in İstanbul 6. An American company has a fast-food store in İstanbul. The value of the goods and services produced in the store are included in both Turkish GDP and U.S. GDP. in U.S. GDP, but not Turkish GDP. partly in Turkish GDP and partly in U.S. GDP. in Turkish GDP, but not U.S. GDP.

7. The four components of GDP are consumption, money supply, government purchases, and exports. investment, transfer payments, and imports. investment, government purchases, and net exports. investment, government purchases, and foreign exchange

8. Productivity is the growth rate of real GDP. average amount a worker produces per hour. level of real GDP. None of the above is correct.

9. The productivity of U.S. workers is higher than that of workers in many countries that have less capital. Which of the following arguments concerning these facts is logically consistent? If U.S. workers have more capital, they should have lower productivity. Productivity in the United States is higher because the United States has more workers than those countries having low productivity. The United States could have greater productivity because its workers have both more human capital and more physical capital per worker. None of the above is logically consistent.

10. Which of the following is human capital? a company’s cafeteria the exercise equipment in a company’s gym employees’ knowledge of the production process All of the above are correct.

11. Which of the following would increase productivity? an increase in the amount of equipment per-worker an increase in the knowledge and skills of workers an increase in the number of employed workers All of the above are correct.

12. The CPI is a measure of the overall cost of producer inputs. personal imports. goods and services bought by a typical consumer. goods and services produced in the economy.

13. Most, but not all, soccer balls used in the United States are imported from other nations. If the price of soccer balls increases, the GDP deflator will increase, but the consumer price index will not increase. increase less than the consumer price index. increase more than the consumer price index. not increase, but the consumer price index will increase.

14. Which of the following is the most accurate (correct, precise) statement about the relationship between the nominal interest rate and the real interest rate? The real interest rate is the nominal interest rate minus the rate of inflation. The real interest rate is the nominal interest rate minus the price level. The real interest rate is the nominal interest rate times the price level. The real interest rate is the nominal interest rate times the expected price level divided by the current price level.

15. In 1970 Professor Fellswoop made $12,000, in 1980 he earned $24,000, in 1990 he earned $36,000. The CPI was 40 in 1970, 60 in 1980, and 100 in 1990. Given this information we can say that in terms of 1999 dollars, Professor Fellswoop’s salary was highest in A. 1970, and lowest in 1980. B. 1990, and lowest in 1980. C. 1980, and lowest in 1970. D. 1990, and lowest in 1970.

Short answer questions

1) The GDP of Farmistan has only two goods : milk and honey 1) The GDP of Farmistan has only two goods : milk and honey. Prices are quoted in US dollars.

Milk Honey year P Q 1 $2 10 $5 20 2 $4 15 30 Compute nominal GDP in each year: Year 1: $2 x 10 + $5 x 20 = $120 Year 2: $4 x 15 + $4 x 30 = $180 Increase: This example is similar to that in the text, but using different goods and different numerical values. Suggestion: Ask your students to compute nominal GDP in each year, before revealing the answers. Ask them to compute the rate of increase before revealing the answers. In this example, nominal GDP grows for two reasons: prices are rising, and the economy is producing a larger quantity of goods. Thinking of nominal GDP as total income, the increases in income will overstate the increases in society’s well-being, because part of these increases are due to inflation. We need a way to take out the effects of inflation, to see how much people’s incomes are growing in purchasing power terms. That is the job of real GDP. 50%

Compute real GDP in each year, using year 1 as the base year: Pizza Latte year P Q 1 $10 10 $2.00 20 2 $4 15 30 $2 $5 Compute real GDP in each year, using year 1 as the base year: Increase: This example shows that real GDP in every year is constructed using the prices of the base year, and that the base year doesn’t change. The growth rate of real GDP from one year to the next is the answer to this question: “How much would GDP (and hence everyone’s income) have grown if there had been zero inflation?” Thus, real GDP is corrected for inflation. Year 1: $2 x 10 + $5 x 20 = $120 Year 2: $2 x 15 + $5 x 30 = $180 50.0%

GDP deflator for year t = [nominal GDP in year t] [real GDP in year t]

year Nominal GDP Real GDP GDP deflator 1 $120 100 2 $180 Again, the growth rate of real GDP from one year to the next is the answer to this question: “How much would GDP (and hence everyone’s income) have grown if there had been zero inflation?” This is why real GDP is corrected for inflation.

2) The statistics for the country of Absurdistan in year 2007 show that there were 15 people who are unemployed, and 45 people who were employed. The adult population of the country in that year was 80. Use this information to calculate a. the labor force b. the labor force participation rate c. the unemployment rate

Adult population: 80 Employed: 45 Employed: 15 a. Labor force is unemployed + employed: 45+15 = 60 Labor force participation rate is labor force divided by adult population : 60/80 = 75% the unemployment rate unemployed divided by labor force : 15/60 = 25%

3) The consumption basket of the typical consumer in the Fun Republic contains 10 hamburgers and 15 movie tickets. The table (see next slide) shows their prices for 2004 – 2006. The base year is 2004.

10 hamburgers, 15 movie tickets How much did the basket cost in 2004? Answer: 10x5 + 15x10 = 200

10 hamburgers, 15 movie tickets What is the CPI in 2005? Basket costs 10x7 + 15x16 = 310. CPI(2005) = (310x100)/200 = 155

10 hamburgers, 15 movie tickets What is the inflation rate from 2004 to 2005? Inflation = [(155 – 100)/ 100]x100 = 55%

4) Explain the effects of an increase in the government (public) deficit on the capital markets (market for loanable funds). How are the real interest rate and investment affected by this? Draw a graph and explain your answer. Do not forget to label the axes.

€800 €1,200 Interest S2 Supply, S1 Rate Demand 1. A budget deficit decreases the supply of loanable fund s . . . €800 6% 2. . . . which raises the equilibrium interest rat e . . . €1,200 5% Loanable Funds 3. . . . and reduces the equilibrium quantity of loanable funds. (in billions of euros) Copyright©2010 South-Western