JOHN RAPP

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ECO 204 --Test # 1

 

This is the first test that was given in January, 2006.

 


True-False
. Use “A” for true and “B” for false.

1.    The major types of productive resources are land, labor, capital and money.

2.    In the United States, the richest twenty percent of households receive almost one half of the nation’s
       total income.

3.    An increase in the demand for personal computers, ceteris paribus, will lower the equilibrium price of
       computers and increase the equilibrium quantity.

4.    A public good involves joint consumption.

5.    In measuring gross domestic product, government includes the value of all nonmarket activities, e.g.
       the services of a homemaker.

6.    The underground economy is defined as all unreported income.

7.    Compared to 1950, there is presently a smaller proportion of males in the labor force and a larger
       proportion of females.

8.    Frictional unemployment occurs when those seeking employment do not have the skills for
       available jobs.

9.    Inflation is defined as the average rate of increase in all prices.

10.  Inflation harms creditors and benefits debtors.


Multiple choice. Select the letter of the best response.

11.  Which of the following is correct?
      A.  In most economies, capital and labor are scarce while land is not scarce.
      B.  Economics may be defined as the study of allocating scarce resources among unlimited wants.
      C.  In affluent economies, scarcity of resources does not exist.
      D.  Normative economics involves statements of facts that can be scientifically proven.

12.  Which of the following is true regarding a production possibilities curve?
      A.  Points inside the curve are attainable but not desirable.
      B.  Points outside the curve are not attainable until an economy experiences economic growth.
      C.  It is shaped the way it is because of the law of increasing opportunity cost.
      D.  all of the above
      E.  none of the above

13.  Opportunity cost
      A.  is a value added concept.
      B.  is always measured in dollars because you can’t add together oranges and concerts.
      C.  is zero if an economy is operating inside its production possibilities curve.
      D.  decreases as more of a particular good or service is acquired.

14.  A  newspaper editorial telling what should be done to reduce unemployment is an example of
      A.  positive economics.                     D. normative economics.
      B.  pure economics.                          E. negative economics.
      C.  abstract economics.

15.  In the United States,
      A.  Gross domestic product (GDP) per capita is among the highest in the world.
      B.  GDP has grown more slowly than population in recent years.
      C.  per capita GDP is a good measure of a society’s quality of life.
      D.  total output is over fifty percent of the world’s total output.
      E.  A and D above

16.  Among the explanations for economic growth in the United States in the past century is
      A.  an increase in labor productivity.
      B.  increases in government transfer payments.
      C.  that we have achieved greater equality in the distribution of income.
      D.  that the supply curves for most goods and services have shifted to the left.
      E.  all of the above

17.  As a percentage of total output, compared to 1900, the U. S. currently
      A.  produces more services, more agricultural goods, and fewer government purchases.
      B.  produces more manufactured goods and fewer government purchases.
      C.  produces more services, fewer agricultural goods, and more government purchases.
      D.  produces a larger proportion of all categories of goods and services.
      E.  none of the above

18.  According to the law of demand, ceteris paribus, the quantity demanded in a given time period
      A.  increase as its price rises.                 C. increases as its price falls.
      B.  decreases as its price falls.                D. both A and B above

19.  If the supply of a good increases and, at the same time, demand decreases,
      A.  equilibrium price will fall and equilibrium quantity will increase.
      B.  equilibrium price will increase and equilibrium quantity will fall.
      C.  equilibrium price will fall, but the effect on quantity cannot be determined.
      D. equilibrium quantity will increase, but the effect on price cannot be determined.

20.  When half of the consumers in a small town move away, the markets for many goods and
       services will experience a
      A.  lower equilibrium price and a higher equilibrium quantity.
      B.  lower equilibrium price and a lower equilibrium quantity.
      C.  higher equilibrium price and a higher equilibrium quantity.
      D.  higher equilibrium price and a lower equilibrium quantity.

21.  When price floors (or price supports) are set for a given item,
      A.  quantity supplied and price will both be higher than at equilibrium.
      B.  quantity supplied will be less than at equilibrium and price will be greater than at equilibrium.
      C.  quantity supplied will be greater and price will be less than at equilibrium.
      D.  quantity supplied and price will both be lower than at equilibrium.

22.  Which of the following is not a result of a price ceiling which keeps price below equilibrium?
      A.  Quality of the product often decreases
      B.  A shortage results.
      C.  A “black market” develops.
      D.  Suppliers increase production.
      E.  none of the above

23. Other things equal, minimum wage legislation results in
      A.  decreased unemployment in the economy.
      B.  increased unemployment in the economy.
      C.  higher wages for all workers.
      D.  lower wages for all workers.
      E.  both B and C

24.  Which of the following is the best example of a public good?
      A.  the post office                                             D. flood control
      B.  electric power                                             E. none of the above
      C.  air pollution

25.  Which of the following is correct?
      A.  Externalities refer to government intervention in international markets.
      B.  Government is not empowered to do anything to preserve competition.
      C.  Although there is general agreement as to government’s economic functions, there is
           a lot of disagreement as to how and how much government should intervene.
      D.  One objective of macroeconomic policy is to ensure that the economy operates inside
           its production possibilities curve.

26.  In the United States,
      A.  the federal government spends more than state and local governments.
      B.  total government spending (federal, state and local) is over 50 percent of GDP.
      C.  total government purchases of goods and services is about 19 percent of GDP but,
           if transfer payments are included in government spending, the total is about 30 percent of GDP.
      D.  state and local government spending is greater than federal government spending.
      E.  both C and D above

27. Which of the following is correct about government spending in the United States?
      A.  The largest category of federal expenditure is for national defense.
      B.  The largest category of federal expenditure is for health care.
      C.  Most government spending is discretionary, not mandatory.
      D.  State and local governments spend very little on education or welfare.
      E.  none of the above

28.  The federal personal income tax is
      A.  the second largest single source of revenue for the federal government.
      B.  progressive, but not as progressive as it was in the 1960s.
      C.  much more progressive than it was in the 1960s.
      D.  currently levied on individuals’ total income, regardless of how it is was earned or how it is spent.

29.  The federal corporate income tax
      A.  involves double taxation, since dividends are also subject to the individual income tax.
      B.  often forces firms to make decisions based on tax consequences rather than on economic
           consequences.
      C.  it the biggest source of revenue for the federal government.
      D.  both A and B above
      E.  both B and C above

30.  GDP can be found by
      A.  adding up the spending on goods and services by business, government, households,
           and net exports.
      B.  adding up the value added at every stage of production in the economy.
      C.  adding up the final value of all goods and services produced in the economy.
      D.  all of the above
      E.  A and C above

31.  Which of the following is not included in GDP?
      A.  depreciation expenses by business firms
      B.  wages paid to a steel worker
      C.  the full value of a ton of steel sold to an automobile manufacturer
      D.  rent payment for a used car dealership
      E.  both C and D

32.  The value of goods that have been produced but not sold during a given time period
      A.  decreases GDP by preventing resources from being used in their best alternative use.
      B.  increases government stockpiles but leaves GDP unchanged
      C.  increases business inventories and increases GDP for the period
      D.  decreases business investment and decreases GDP for the period.

33.  The investment component of GDP
      A.  excludes depreciation.
      B.  includes only gross private domestic investment.
      C.  includes both public and private investment.
      D.  is larger than any of the other GDP components.

34.  If the price level was 1.0 in 2004 and 1.2 in 2005, and if nominal GDP was $600 in 2004
      and $700 in 2005, then real income in 2005 was
      A.  $500.                                                         D. $840.
      B.  $583.                                                         E. none of the above
      C.  $720.

35.  When an individual makes repairs to his or her own home instead of hiring a company
      to make the repairs, the activity is
      A.  included in GDP because it represents production.
      B.  excluded from GDP because it is a nonmarket activity.
      C.  excluded from GDP because it is an intermediate good.
      D.  excluded from GDP but included in disposable personal income.

36.  Disposable personal income is
      A.  GDP plus net domestic product.
      B.  national income minus personal taxes.
      C.  personal income plus transfer payments.
      D.  net domestic product plus transfer payments.
      E.  none of the above

37.  Real GDP per capita
      A.  is the best measure of a society’s social welfare.
      B.  is not an adequate measure of a society’s economic welfare.
      C.  is not an adequate measure of a society’s quality of life.
      D.  cannot be used to make comparisons over time.

38.  Who among the following would be counted among the unemployed?
      A.  someone who is on vacation, but will return to his or her job
      B.  someone who is on strike
      C.  an unpaid employee of a family farm
      D.  someone who works ten hours per week but would rather work forty hours per week
      E.  none of the above

39.  Suppose that in a population of 200 million persons, 100 million are in the labor force
      and 93 million are employed. The unemployment rate is
      A.  93.0 percent.                                     D. 3.5 percent.
      B.  7.0 percent.                                       E. not enough information to answer
      C.  50.0 percent.

40. “Discouraged workers”
      A.  are defined as workers who are unhappy in their jobs.
      B.  are counted as part of total unemployment.
      C.  are not actively seeking employment, although they desire to be employed.
      D.  are part of the labor force.
      E.  all of the above

41.  A recent medical school graduate is currently unemployed but is searching for a place to
       begin her practice. This is best regarded as an example of
      A.  structural unemployment.
      B.  cyclical unemployment.
      C.  frictional unemployment.
      D.  seasonal unemployment.
      E.  none of the above

42.  Who are the “phantom” unemployed?
      A.  people who report that they are actively seeking a job, even though they have little or
           no intention of finding one.
      B.  people who want a job, but aren’t looking because they don’t expect to find one.
      C.  people who lack the skills to be employed.
      D.  workers with very high rates of absenteeism.

43.  The effects of an increase in the unemployment rate include
      A.  a shift inward (to the left) of the production possibilities curve.
      B.  a shift outward (to the right) of the production possibilities curve.
      C.  possible increases in crime.
      D.  an increase in output as employers substitute capital for labor.
      E.  A and C above

44.  Inflation occurs when
      A.  some prices are rising and some prices are falling.
      B.  both relative prices and average prices are rising.
      C.  average prices are rising, but it is not certain what is happening to relative prices.
      D.  relative prices are rising, but it is not certain what is happening to average prices.

45.  If the number of dollars you receive every year is the same, but average prices are
      rising, then
      A.  your nominal income rises and your real income rises.
      B.  your nominal income rises but your real income falls.
      C.  your nominal income falls but your real income rises.
      D.  your nominal income stays the same but your real income falls.
      E.  your nominal income stays the same but your real income rises.

46.  Which of the following best describes the effects of inflation?
      A.  If a household purchases things whose prices have risen rapidly, they will suffer
           from inflation.
      B.  If a household’s nominal income rises faster than inflation, that household will
           gain from inflation.
      C.  Inflation acts like a regressive tax.
      D.  all of the above
      E.  none of the above

47.  Changes in relative prices may occur in a period of
      A.  a stable price index.                                    D. all of the above    
      B.  inflation.                                                       E. none of the above
      C.  deflation.

48.  If, at the beginning of 2005, the consumer price index was 148.2 and at the end of 2005
      it was 152.4, what was the inflation rate during 2005?
      A.  4.2 percent                                                   C. 2.8 percent
      B.  6.1 percent                                                   D. 3.9 percent

Questions 49 and 50 refer to the following table which provides information needed to
construct a consumer price index for 2005. (Extra columns are included for you to use
however you wish in answering the next two questions.)

                       

Item

Quantity

purchased

Price in 2005

     

A

15

$3.00

     

B

20

$4.00

     

C

10

$7.00

     

D

10

$9.00

     


49.  Assuming 2005 is the base year, which of the following is correct about the data for 2005?
      A.  The average price of the four goods is $5.75.
      B.  The average price of the four goods is $5.18, and the price index is 55.
      C.  The average price of the four goods is $5.18, and the price index is 100.
      D.  The average price is $6.50, but the price index cannot be determined.
      E.  none of the above

50.  Suppose that in 2006, each of the items’ price increases by $2.00. What will the price index be
      in 2006 (rounded to the nearest whole number)?
      A.  50                                                                     D. 426
      B.  72                                                                     E. none of the above
      C.  139

ANSWERS

1.    B
2.    A
3.    B
4.    A
5.    B

6.    A
7.    A
8.    B
9.    A
10.  A

11.  B
12.  D
13.  C
14.  D
15.  A

16.  A
17.  C
18.  C
19.  C
20.  B

21.  A
22.  D
23.  B
24.  D
25.  C

26.  E
27.  E
28.  B
29.  D
30.  D

31.  C
32.  C
33.  B
34.  B
35.  B

36.  E
37.  C
38.  E
39.  B
40.  C

41.  C
42.  A
43.  C
44.  C
45.  D

46.  D
47.  D
48.  C
49.  C
50.  C