Econ 102 Introductory Macroeconomic Analysis

Practice Midterm 2

1. Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the
following will occur because of the automatic mechanism adjusting the economy back to potential
GDP?
a. Unemployment will rise.
b. SRAS will shift down.
c. Output will increase.
d. Prices will decrease.

Figure 13-3

2. Refer to Figure 13-3. Suppose the economy is at point C. If taxes increase, where will the eventual
long-run equilibrium be?
a. A
b. B
c. C
d. D

3. Which of the following would decrease domestic investment?

a. An increase in domestic GDP
b. An increase in firms’ cash flow
c. A higher investment tax credit from the government
d. Policies by the Federal Reserve designed to raise the interest rate
4. If gross domestic product equals $1,950 billion, government purchases equal $280 billion,
investment equals $500 billion, exports equal $670 billion and imports equal $390 billion. What is
consumption expenditure?
a. $280 billion
b. $780 billion
c. $890 billion
d. $1,170 billion

5. The international trade effect states that

a. an increase in the price level will raise net exports.
b. an increase in the price level will lower net exports.
c. an increase in the price level will raise exports.
d. an increase in the price level will lower imports.

6. The U.S. real exchange rate is defined as the nominal exchange rate times
a. U.S. prices minus foreign prices.
b. prices in the United States divided by foreign prices.
c. foreign prices divided by U.S. prices.
d. None of the above

7. A paperback book in the U.S. costs $6. In Chile it costs 4 pesos. If the nominal exchange rate is 1/2
peso per dollar, what is the real exchange rate based on the book prices?
a. 2/3
b. 3/4
c. 4/3
d. 2/3

8. The nominal exchange rate is about 1.8 Aruban florin per dollar. If a basket of goods in the United
States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity
to hold?
a. 18 florin
b. 36 florin
c. 72 florin
d. 90 florin
 Table 8-1
(Data in billions)
Year Y C T TR

2004 210 175 25 10

2005 250 180 35 15
2006 270 205 20 10
2007 300 210 30 10

9. Refer to Table 8-1. Table 8-1 gives data for the economy of Sylvania. Approximately what was the
marginal propensity to consume (MPC) in Sylvania from 2005 to 2006?
a. 0.75
b. 0.78
c. 0.83
d. 1.2

10. If the U.S. real exchange rate appreciates, U.S. exports

a. increase and U.S. imports decrease.
b. decrease and U.S. imports increase.
c. and U.S. imports both increase.
d. and U.S. imports both decrease.

Use the (hypothetical) information in Table 31-1 to answer the following questions.

Table 31-1
Currency per U.S. Price Country Price
Country Currency U.S. Dollar Index Index
Bolivia boloviano 8.00 200 1600
Japan yen 125.00 200 50,000
Morocco dinar 10.00 200 2,000
Norwegian kroner 6.5 200 1,500
Thailand baht 40.00 200 7,000

11. Refer to Table 31-1. For which country(ies) in the table does purchasing-power parity hold?
a. Bolivia and Japan
b. Bolivia and Morocco
c. Japan and Morocco
d. Norway and Thailand
12. When r increases:
a. C goes down, I goes down, NX goes down
b. C goes down, I goes down, NX goes up
c. C goes down, I goes up, NX goes down
d. C goes up, I goes up, NX goes down

13. During the late 1990s, many firms successfully integrated the internet into some aspects of their
business, allowing them to produce more efficiently. The result was that
a. SRAS shifted down.
b. there was a lower level of national output at every price level.
c. aggregate demand increased.
d. long-run aggregate supply decreased.

14. A steep short-run aggregate supply (SRAS) curve

a. means the majority of prices in the economy are not flexible.
b. means that the majority of prices in the economy are flexible
c. represents a negative supply shock.
d. means that if expectations turn positive, the equilibrium price level will go down.

15. Assume the United States is the domestic country. If inflation in Russia is higher than it is in the
United States, according to purchasing power parity,
a. the purchasing power of the ruble in buying Russian goods will rise relative to the
dollar.
b. the value of the ruble will rise with respect to the dollar in the long run.
c. the value of the dollar will rise with respect to the ruble in the long run.
d. Both A and C are correct.

16. Assume the U.S. is the domestic country. In July 2009, the average price of a Big Mac in the U.S.
was $3.57. In Mexico, the average price of a Big Mac at that time was 33 pesos. What should the
nominal exchange rate be if purchasing power parity holds?
a. 0.108 pesos per dollar
b. 8.25 pesos per dollar
c. 9.24 pesos per dollar
d. 11.78 pesos per dollar

17. A negative supply shock will cause

a. the SRAS curve to shift right.
b. the SRAS curve to shift left.
c. the LRAS curve to shift right.
d. the LRAS curve to shift left.
18. The model of aggregate demand explains the relationship between
a. the price and quantity of a particular good.
b. unemployment and output.
c. wages and employment.
d. AE and the price level.

19. Aggregate demand would shift right if either

a. the price level decreased, or government expenditures increased.
b. the price level decreased, or the government instituted an investment tax credit.
c. government expenditures increased or the interest rate decreased
d. All of the above are correct.

Figure 13-1

20. Refer to Figure 13-1. All other things being equal, a decrease in firms' expectations of the future
profitability of investment spending would be represented by a movement from
a. AD1 to AD2.
b. AD2 to AD1.
c. point A to point B.
d. point B to point A.

21. Net exports usually ________ when the U.S. economy is in a recession and ________ when the U.S.
economy is expanding.
a. decrease; increase
b. decrease; decrease
c. increase; decrease
d. increase; increase
 22. The invention of the cotton gin ushered in the Industrial Revolution and began a long period of
technological innovation. What did this technological change do the short-run supply curve?
a. It moved the economy up along a stationary short-run aggregate supply curve.
b. It shifted the short-run aggregate supply curve to the left.
c. It moved the economy down along a stationary short-run aggregate supply curve.
d. It shifted the short-run aggregate supply curve to the right.

23. Which of the following shifts the aggregate demand curve to the right?
a. Congress reduces purchases of new weapons systems.
b. Monetary policy lowers interest rates
c. The price level rises.
d. Net exports fall.

` 24. Which of the following is not a reason the aggregate demand curve slopes downward? As the price
level increases
a. net exports increase.
b. the purchasing power of wealth declines.
c. the interest rate increases.
d. the exchange rate increases.

25. Suppose the economy at the natural rate of unemployment. A decrease in investment causes the
price level to ________ in the short run and ________ in the long run. (Assume the government
takes no action in the short run or the long run.)
a. decrease; increase
b. decrease; decrease further
c. increase; decrease
d. increase; increase further

26. Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the
following will occur because of the automatic mechanism adjusting the economy back to potential
GDP?
a. Unemployment will fall.
b. SRAS will shift up.
c. Output will decrease.
d. Prices will increase.
27. Investment spending will decrease when
a. the interest rate falls.
b. business cash flow decreases.
c. the corporate income tax decreases.
d. firms become more optimistic about earning future profits.

28. Which of the following is not an example of investment spending as that term is used by
macroeconomists?
a. Purchase of a new fleet of delivery trucks by United Parcel Service
b. An employee purchases a stock for his retirement account
c. A family's purchase of a new house
d. Apple Computer stockpiles $100 million worth of parts for installation in its
laptops

Figure 13-3

29. Refer to Figure 13-3. Suppose the economy is at point A. If government spending increases in the
economy, where will the eventual long-run equilibrium be?
a. A
b. B
c. C
d. D

30. If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will
a. decrease consumption by $9 million.
b. increase consumption by $9 million.
c. increase saving by $1 million.
d. decrease consumption by $1 million.
 EC 102
Practice Midterm 2
Answer Key

1. A
2. A
3. D
4. C
5. B
6. B
7. B
8. C
9. C
10. B
11. B
12. A
13. A
14. B
15. C
16. C
17. B
18. D
19. C
20. B
21. C
22. D
23. B
24. A
25. B
26. A
27. B
28. B
29. C
30. A