ECON 1010 Principles of Macroeconomics Solutions to Midterm Exam #3 Professor: David Aadland Spring Semester 2017 April 11th, 2017
Your Name _____________________________________________
Section 1: Multiple Choice and T/F (60 pts). Circle the correct answer; each is worth two points. 1. Assuming a non-zero interest rate, the dollar amount of a future payment is ______ its present value. a. always exactly the same as b. usually exactly the same as c. less than d. more than __________________________________________________________________________________________ 2. An amount that would equal a particular future value if deposited today at the prevailing interest rate is the: a. present value. b. inflation rate. c. discount premium. d. market index. __________________________________________________________________________________________ 3. A liability is: a. having wronged someone and being held responsible in court. b. a requirement to pay in the future. c. inability to perform an agreed task. d. a claim that entitles the owner to future income from the seller. __________________________________________________________________________________________ 4. Which portfolio is the most diversified in terms of risk? a. $100,000 worth of stock in ten companies in the same industry b. $100,000 worth of stock in ten companies in two industries c. $100,000 worth of stock in ten companies in five industries d. $100,000 worth of stock in one company that sells ten products __________________________________________________________________________________________ 5. An illiquid asset: a. cannot be sold. b. provides the owner no return or income. c. is a tangible asset. d. cannot quickly be converted into cash with little loss of value. __________________________________________________________________________________________ 6. Shares of stock represent: a. shares of ownership in the issuing company. b. a tax liability for the issuing company. c. a tax deduction for the investor. d. a debt of the issuing company to the investors who purchase the stock. __________________________________________________________________________________________ 7. The aggregate supply curve shows the relationship between the: a. price of oil and the quantity of aggregate output supplied. b. aggregate price level and the quantity of aggregate output supplied. c. price of money and the quantity of aggregate output supplied. d. level of employment and the quantity of aggregate output supplied.
8. Which will shift the short-run aggregate supply curve to the right? a. economy-wide decrease in commodity prices b. increase in nominal wages c. decrease in productivity d. decrease in government purchases of goods and services __________________________________________________________________________________________ 9. A decrease in energy prices will: a. increase short-run aggregate supply. b. decrease the quantity of aggregate output supplied in the short run. c. decrease aggregate demand. d. increase the quantity of aggregate output demanded. __________________________________________________________________________________________ 10. An increase in the minimum wage would likely a. cause the economy to move up the short-run aggregate supply curve from left to right. b. cause the economy to move down the short-run aggregate supply curve from right to left. c. shift the short-run aggregate supply curve to the right. d. shift the short-run aggregate supply curve to the left. __________________________________________________________________________________________ 11. The long-run aggregate supply curve is vertical because in the long run: a. technological progress outpaces raises in nominal wages. b. all factors of production increase. c. the price of labor is flexible, while the price of physical capital is fixed. d. all prices are flexible. __________________________________________________________________________________________ 12. In the short run, a positive demand shock: a. reduces aggregate output and increases the aggregate price level. b. increases aggregate output and reduces the aggregate price level. c. reduces aggregate output and the aggregate price level. d. increases aggregate output and the aggregate price level. __________________________________________________________________________________________ 13. Stagflation may result from a(n): a. increase in the supply of money. b. decrease in the supply of money. c. increase in the price of imported oil. d. decrease in the price of imported oil. __________________________________________________________________________________________ 14. If membership falls in labor unions and unions become less popular, then production costs: a. will increase; SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level. b. will fall; there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall. c. will not change; AD will shift to the right, increasing equilibrium GDP and aggregate price level. d. will fall; SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.
__________________________________________________________________________________________ 15. Which does economists view as investment spending? a. stocks b. bonds c. spending on physical capital d. mutual fund investing __________________________________________________________________________________________ 16. Private savings is equal to: a. income after taxes minus consumption. b. taxes minus government spending on goods and services. c. the total amount of savings accounts plus stocks plus bonds owned by households. d. income plus investment. __________________________________________________________________________________________ 17. A budget surplus exists when which occurs? a. Taxes are greater than government spending. b. Taxes are less than government spending. c. Taxes are less than government spending plus investment. d. Investment is less than government spending less taxes. __________________________________________________________________________________________ 18. A budget deficit arises when a. consumption spending exceeds investment spending. b. there is government-generated savings. c. savings are equal to consumption. d. tax revenues fall short of government expenditures. __________________________________________________________________________________________ 19. The price in the loanable funds market is the: a. rate of return of a project. b. price level. c. interest rate. d. consumer price index. __________________________________________________________________________________________ 20. The present value of a sum of money to be received in the future is: a. determined by the relevant interest rate. b. more than the sum to be received today. c. determined by the slope of the demand for loanable funds. d. determined by the slope of the supply of loanable funds. __________________________________________________________________________________________ 21. A shortage of loanable funds will result if the: a. demand for loanable funds increases. b. supply of loanable funds decreases. c. nominal interest rate is held above the equilibrium level. d. nominal interest rate is held below the equilibrium level.
22. According to the Figure, the slope of the consumption function is called the:
a. marginal propensity to save. b. average propensity to consume. c. marginal propensity to consume. d. marginal consumption increment. __________________________________________________________________________________________ 23. The most important factor affecting a household’s consumer spending is: a. its expected future disposable income. b. its current disposable income. c. its wealth. d. the current interest rate. __________________________________________________________________________________________ 24. If disposable income increases, then: a. the consumption function will shift upward. b. there will be a rightward movement along the consumption function. c. there will be a leftward movement along the consumption function. d. the consumption function will shift downward. __________________________________________________________________________________________ 25. Which will shift the aggregate consumption function upward? a. Disposable income rises. b. Consumer expectations turn more pessimistic about the future. c. The stock market is strong and wealth is rising. d. Disposable income falls. __________________________________________________________________________________________ 26. Income–expenditure equilibrium occurs when: a. GDP is equal to planned aggregate spending. b. GDP is equal to actual aggregate spending. c. GDP is equal to unplanned aggregate expenditure. d. consumption and investment are equal. __________________________________________________________________________________________ 27. An increase in the price of imported oil leads to a: a. positive supply shock. b. negative supply shock. c. positive demand shock d. negative demand shock.
28. In the short run, wages and some prices are considered to be: a. sticky. b. unpredictable. c. extremely flexible. d. irrelevant. __________________________________________________________________________________________ 29. If the economy is currently in a recessionary gap, real GDP will be ________ potential output. a. below b. the same as c. above d. in equilibrium with __________________________________________________________________________________________ 30. An inflationary gap is automatically closed by ______ wages that shift the a. falling; SRAS curve rightward b. falling; SRAS curve leftward c. rising; SRAS curve rightward d. rising; SRAS curve leftward