Quiz #1

1.Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges
cost $0.50 each. In this case, the value of GDP is:
A) 10 pieces of fruit.
B) $7.
C) $8.
D) $10.

2.Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a
compact disc player for $500, and the automobile company puts all of these items in or on a car that it
sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:
A) $20,000.
B) $20,000 less the automobile company's profit on the car.
C) $20,900.
D) $20,900 less the profits of all three companies on the items that they sold.

3.Assume that apples cost $0.50 in 2015 and $1 in 2020, whereas oranges cost $1 in 2015 and $1.50 in
2020. If 4 apples were produced in 2015 and 5 in 2020, whereas 3 oranges were produced in 2015 and 5
in 2020, then the GDP deflator in 2020, using a base year of 2015, was approximately:
A) 1.5.
B) 1.7.
C) 1.9.
D) 2.0.

4.Assume that apples cost $0.50 in 2015 and $1 in 2020, whereas oranges cost $1 in 2015 and $0.50 in
2020. If 10 apples and 5 oranges were produced in 2015, and 5 apples and 10 oranges were produced in
2020, the CPI for 2020, using 2015 as the base year, is:
A) 0.75.
B) 0.80.
C) 1.
D) 1.25.

5.If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by
approximately _______ percent.
A) 2
B) 3
C) 5
D) 8

6.If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per person grew by
approximately ________ percent.
A) 2
B) 3
C) 4
D) 8

7.The two most important factors of production are:

A) goods and services.
B) labor and energy.
C) capital and labor.
D) saving and investment.

8.Unlike the real world, the classical model with fixed output assumes that:
A) all factors of production are fully utilized.
B) all capital is fully utilized but some labor is unemployed.
C) all labor is fully employed but some capital lies idle.
D) some capital lies idle and some labor is unemployed.

9.If bread is produced by using a constant returns to scale production function, then if the:
A) number of workers is doubled, twice as much bread will be produced.
B) amount of equipment is doubled, twice as much bread will be produced.
C) amounts of equipment and workers are both doubled, twice as much bread will be produced.
D) amounts of equipment and workers are both doubled, four times as much bread will be produced.

10.A competitive, profit-maximizing firm hires labor until the:

A) marginal product of labor equals the wage.
B) price of output multiplied by the marginal product of labor equals the wage.
C) real wage equals the real rental price of capital.
D) wage equals the rental price of capital.
11.If the consumption function is given by C = 500 + 0.5(Y -T), and Y is 6,000 and T is given by T =
200 + 0.2Y, then C equals:
A) 2,500.
B) 2,800.
C) 3,500.
D) 4,200.

12.Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6Y.
Investment (I) is given by the equation I = 2,000 -100r, where r is the real interest rate in percent. No
government exists (G=0). In this case, the equilibrium real interest rate is:
A) 2 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.

13.The nominal interest rate is the:

A) rate of interest that investors pay to borrow money.
B) same as the real interest rate.
C) rate of inflation minus the real rate of interest.
D) real rate of interest minus the rate of inflation.

14.In the classical model with fixed income, if the demand for goods and services is less than the
supply, the interest rate will:
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease, depending on whether consumption is greater or less than investment.

15.According to the model developed in Chapter 3, when government spending increases without a
change in taxes:
A) consumption increases.
B) consumption decreases.
C) investment increases.
D) investment decreases.
16.Use the model developed in Chapter 3 and assume that consumption does not depend on the interest
rate. In this case, when there is a technological advance that leads to an increase in investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment increases and the interest rate falls.

17.Use the model developed in Chapter 3, but assume that consumption decreases, other things being
equal, when the interest rate rises. If there is a technological advance that leads to an increase in
investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment decreases and the interest rate rises.

18.With a Cobb-Douglas production function, the share of output going to labor:

A) decreases as the amount of labor increases.
B) increases as the amount of labor increases.
C) increases as the amount of capital increases.
D) is independent of the amount of labor.

19. The rate of inflation is the:

A) median level of prices.
B) average level of prices.
C) percentage change in the level of prices.
D) measure of the overall level of prices.

20. All of the following actions are investments in the sense of the term used by macroeconomists
except:
A) IBM's building a new factory.
B) corner candy store's buying a new computer.
C) John Smith's buying a newly constructed home.
D) Sandra Santiago's buying 100 shares of IBM stock.
21. In a closed economy, the components of GDP are:
A) consumption, investment, government purchases, and exports.
B) consumption, investment, government purchases, and net exports.
C) consumption, investment, and government purchases.
D) consumption and investment.

22. If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y =
50K0.5L0.5, where K = 100 and L = 100, then C equals:
A) 1,000.
B) 2,500.
C) 3,000.
D) 5,000.

23. An economy's ________ equals its ________.

A) consumption; income
B) consumption; expenditure on goods and services
C) expenditure on goods; expenditures on services
D) income; expenditure on goods and services

24. The best measure of the economic satisfaction of the members of a society is:
A) nominal GDP.
B) real GDP.
C) the rate of inflation.
D) the value of corporate profits.

25. Real GDP means the value of goods and services measured in _________ prices.
A) current
B) actual
C) constant
D) average

26. Assume that an increase in consumer confidence raises consumers' expectations of future
income and thus the amount they want to consume today for any given income. This shift, in a
neoclassical economy, will:
A) lower investment and raise the interest rate.
B) raise investment and lower the interest rate.
C) lower both investment and the interest rate.
D) raise both investment and the interest rate.

27. In the long run, according to the quantity theory of money and the classical macroeconomic
theory, if velocity is constant, then ______ determines real GDP and ______ determines
nominal GDP.
A) the productive capability of the economy; the money supply
B) the money supply; the productive capability of the economy
C) velocity; the money supply
D) the money supply; velocity

28. Using decade-long data across countries from 2000–2010, countries with high money
growth tend to have _____ inflation.
A) high
B) low
C) constant
D) decreasing

29. According to the quantity theory a 5 percent increase in money growth increases inflation
by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation
increases the nominal interest rate by _____.
A) 1; 5
B) 5; 1
C) 1; 1
D) 5; 5

30. The real interest rate is equal to the:

A) amount of interest that a lender actually receives when making a loan.
B) nominal interest rate plus the inflation rate.
C) nominal interest rate minus the inflation rate.
D) nominal interest rate.