Econ 1a exam 1 Foldvary

250 pts. Max. 10 pts each.

1) The closed-economy macroeconomic equation Y - C - G = I

a) tells us nothing other than that mathematically, output minus consumption minus government spending equals investment.

b) implies that in the closed economy, savings equals investment.

c) is misleading because government spending comes from taxes and is already in C and I.

d) tells us that government spending cannot economically be an investment.

2. When we compare real GDP among different years,

a) we are using constant prices, thus excluding or adjusting for inflation.

b) we only use real reliable data, not imaginary or just estimated numbers.

c) we keep it real by not counting private interest and rent, but only real goods.

d) we include inflation, because that is the reality in today's world.

3. When you pay taxes to government, that tax payment

a.         is included in GDP as income to the government, and spending by the taxpayer.

b.         is in GDP because all tax revenues are spent.

c.         is not in GDP.

d.         is subtracted from GDP, because it decreases disposable income.

4. Suppose you have an island with ten grades of land of increasing productivity 1-10. There is no rent on the least productive land, with an output of 4-bushels per period. In each period of production, all farmers must buy a new plow, which costs two bushels. This plow doubles production. What effect will this technology increase have?


A)Rent will increase by 50%; the wage will increase by 50%

B)Rent will increase by 50%, wage will double

C)Rent will double, wage will increase by 50%

D)Rent will double, wage will double

5. Which of the following transactions is included in the US GDP?

A) I make jam at home and sell 30 jars for $5 each to a local grocery store, which will sell them for a higher price in the same year. This $150 transaction will be included in the GDP.

B) A firm has unsold inventory at the end of the year. Its value goods is included in the GDP.

C) A Toyota Tacoma is manufactured in Japan, shipped, and sold in the US. The price of that car is included in the GDP.

D) While babysitting my neighbor, I sell some illegal drugs to the children’s parents. The price of the illegal drug is not included in GDP, but the money I make babysitting is.

6) Which of the following is not counted in GDP?

   A) School tuition.

   B) Owner-Occupied implicit rent.

   C) Services received from one’s own goods such as a car.

   D) Purchasing $5 worth of snacks.

7)         2007                                   2008

                           Quantity         Price Quantity            Price

Snacks 200 $2 295 $3.50

Candy 100 $1 150 $2

For this data, calculate real GDP for the year 2007. The base year is 2008.

    A) $900

    B) $500

    C) $1332.50

    D) $740

8) Approximately how much is the current United States GDP?

   A) $18 billion

   B) $18 quadrillion

   C) $10 trillion

   D) $18 trillion

9) Suppose the best land grows 25 bushels of corn per farm and the least productive land grows 12 bushels of corn per farm rent-free, and a plow that costs three bushels is used each period of production. How much is the wage in bushels?

     A) 25

     B) 22

     C) 9

     D) 12

10) Given the data from the previous question, calculate the rent of a 25-bushel farm.

    A) 16

    B) 13

    C) 22

    D) 12

11)      GDP includes all of the following except:

a.         Financial investments (i.e Stocks and Bonds)

b.         Intangible goods/services

c.         Owner Occupied Housing

d.         All of these are including when calculating GDP

12)      What can cause deflation to be good for an economy

a.         A decrease in the money

b.         Introduction of a new currency

c.         An increase in wealth greater than increase in money

d.         An increase in money

13) The largest spending component of GDP is:

A. Investment

B. Government

C. Consumption

D. Exports

14) Which of the following is not counted in the government spending portion of GDP?

A. government spending on defense, because only civilian goods are counted.

B. Social Security payments.

C. Government payments to employees, because government spending is already counted for the provision of goods to the public.

D. Government spending for goods that will be provided the following year.

15) 1. Suppose that an apartment complex built years ago converts to a condominium, where the renters are now owners of their former apartments. Are the rental and purchase in GDP?

a.         The rental was included in GDP, and so is the purchase of the condominiums.

b.         The rental was not included in GDP; the purchases of the condominiums are.

c.         Neither the rentals nor the purchases of the condominium are included in GDP.

d.         Both the rental value of owner-occupied condominiums and the purchase price are included in that year’s GDP.

e.         The rental was included in GDP; the purchases of the condominiums are not.

16) In the growth model, if the savings rate is .3; the per-worker GDP equals the per-worker stock of capital goods (y=k), the depreciation rate of capital goods is .1, and capital goods per worker in year 1 equals 10, then what will be the amount of capital goods in year 2?

a.          9

b.         10

c.         11

d.         12

e.         20


17).     In the model of economic growth, as the amount of capital goods increases,

a.         The marginal product of capital goods declines, while the depreciation rate stays the same.

b.         The marginal product of capital goods increases, while the depreciation rate declines.

c.         The marginal product of capital goods increases, as does the depreciation rate.

d.         The marginal product of capital goods and the depreciation rate both decline.

18) For the whole economy, generally,

a) income is greater than spending, because not all income is spent; some is saved.

b) income is less than spending, because some spending is by foreigners, who don’t earn income.

c) income can be substantially greater or less than spending; it does not have to equal it.

d) income equals spending.


19. Aunt Colleen says, “it will be better for this year’s GDP if you spend your income for consumption, rather than save it.” Is she right?

a) Yes, since more consumer spending leads to more production.

b) No, because money that is saved gets normally loaned out for spending by the borrower.

c) It depends on what you are spending on.

d) Yes, because spending gets multiplied as the sellers spend their money.

20) A dentist exchanges dental work for carpentry work.

a) This is not included in GDP, since money was not involved.

b) This is production that is not just done for oneself at home, so it should be counted in GDP.

c) They trade value for value, so no new value is created, so it is not counted.

d) There is no way to put a price on this trade, so it is not counted.

21) In the Solow growth model, if depreciation is .1, the production function is y=k, and the savings rate is .4, what will be the growth of the economy in that year?

a.         40 percent.

b.         50 percent.

c.         There is not enough information to determine this.

d.         30 percent.

22) In macroeconomics, the relationship between inputs, such as labor, to total output is called

A. an inverse production function

B. an aggregate production function

C. a consumption function.

D. an investment and savings function.

23) An economic investment is

a) an increase in the amount of capital goods and human capital.

b) the purchase of stocks, bonds, and land.

c) any asset that people hold for speculation.

d) all goods produced except for gold.

24) A problem with GDP, gross domestic product, which makes it incomplete or in error, is that

a) it does not include the market value of owner-occupied housing.

b) Some goods are counted twice, since both producer and consumer goods are counted.

c) the underground, illegal economy is included as an estimate, which is grossly in error.

d) goods and services produced at home, such as child care, cooking, and cleaning, are excluded.

25) If Japan can make all products at a lower cost of production than the US, then

a) trade occurs because of comparative advantage.

b) trade occurs because of absolute advantage.

c) the two economies do not trade.

d) Japan will export and the US will not export.