ECO108/Spring 2011 Instructor: Jieruo Liu

Final Exam ((It is actually the exam from Fall 2010, ECO108)

Dec 13th, 12:00 p.m. – 1:00 p.m.

It is a closed-book test. Please do not talk uring the test. Cell phones and graphical calculators are NOT
allowed. If you are caught cheating, you will get a “zero” for the test. The exam ends at 1:00 p.m. sharp.
Late submission results in a 10 points deduction.

Also, please write ALL of your answers on the ANSWER SHEET and submit the answer sheet ONLY.

Good luck!!!

Please be advised, the sample exam does not cover exact the same topics as on the final exam.
Specifically, the coming final exam does not cover the topic of “Production and Growth”

NAME (PRINT): ID #: SIGNITURE:

1. (4pts) Which of the following is included in the consumption component of U.S. GDP?
a. purchases of staplers, paper clips, and pens by U.S. business firms
b. purchases of natural gas by U.S. households
c. purchases of newly constructed homes by U.S. households
d. All of the above are correct

2. (4pts) You observe a closed economy that has a government deficit and positive investment.
Which of the following is correct?
a. Private and public saving are both positive.
b. Private saving is positive; public saving is negative
c. Private saving is negative; public saving is positive
d. Both private saving and public saving are negative

3. (4pts) Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the
money she holds?
a. $40. If the price of goods rises, to maintain the real value of her money holdings she
need to hold more dollars.
b. 8 units of goods. If the price of goods rises, to maintain the real value of her money
holdings she needs to hold more dollars
c. $40. If the price of goods rises, to maintain the real value of her money holdings she
need to hold fewer dollars.
d. 8 units of goods. If the price of goods rises, to maintain the real value of her money
holdings she needs to hold fewer dollars.

Page | 1
ECO108/Spring 2011 Instructor: Jieruo Liu

4. (4pts) Matilda just graduated from college. In order to devote all her efforts to college, she
didn’t hold a job. She is going to cruise around the country on her motorcycle for a month
before she starts looking for work. Other things the same, the unemployment rate
a. increases and the labor-force participation rate decreases
b. and the labor-force participation rate both increase
c. increases and the labor-force participation rate is unaffected
d. and the labor-force participation rate are both unaffected.

5. (4pts) The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate
during this period was 6.5 percent. What was the real interest rate during this period?
a. 2.5 percent
b. 4.0 percent
c. 6.76 percent
d. 10.5 percent

6. (4pts) Other things equal, relatively poor countries tend to grow

a. slower than relatively rich countries; this is called the poverty trap
b. slower than relatively rich countries; this is called the fall-behind effect.
c. faster than relatively rich countries; this is called the catch-up effect
d. faster than relatively rich countries; this is called the constant-returns-to-scale effect

7. (4pts) What would happen in the market for loanable funds if the government were to decrease
the tax rate on interest income?
a. There would be an increase in the amount of loanable funds borrowed.
b. There would be a reduction in the amount of loanable funds borrowed
c. There would be no change in the amount of loanable funds borrowed
d. The change in loanable funds is uncertain.

8. (4pts) With the value of money on the vertical axis, the money supply curve is
a. upward-sloping
b. downward-sloping.
c. Horizontal
d. Vertical

9. (4pts) Last year, Tealandia produced 50,000 bags of green tea, and tea was the only good
Tealandia produced. Each bag sold at 4 units each of Tealandia's currency — the Leaf.
Tealandia's money supply was 40,000. What was the velocity of money in Tealandia?
a. 20
b. 5
c. 1/20
d. 1/5

Page | 2
ECO108/Spring 2011 Instructor: Jieruo Liu

10. (4pts) The banking system currently has $100 billion of reserves, none of which are excess.
People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed
lowers the reserve requirement to 8 percent and at the same time buys $10 billion of bonds,
then by how much does the money supply change?
a. It rises by $225 billion
b. It rises by $375 billion
c. It rises by $675 billion
d. None of the above is correct

11. (4pts) Which of the following is correct?

a. Lenders sell bonds and borrowers buy them.
b. Long-term bonds usually pay a lower interest rate than do short-term bonds because
long-term bonds are riskier
c. The term junk bonds refers to bonds that have been resold many times.
d. None of the above is correct

12. (4pts) According to the definitions of national saving and public saving, if Y, C, and G remained
the same, an increase in taxes would
a. raise national saving and public saving
b. raise national saving and raise public saving
c. leave national saving and public saving unchanged
d. leave national saving unchanged and raise public saving

13. (4pts) Quality Motors is a Japanese-owned company that produces automobiles; all of its
automobiles are produced in American plants. In 2007, Quality Motors produced $20 million
worth of automobiles, with $12 million in sales to Americans, $6 million in sales to Canadians,
and $2 million worth of automobiles added to Quality Motors’ inventory. The transactions just
described contribute how much to U.S. GDP for 2007? ( )
a. $12 million
b. $14 million
c. $18 million
d. $20 million

14. (4pts) People who are unemployed because wages are, for some reason, set above the level that
brings labor supply and demand into equilibrium are best classified as
a. cyclically unemployed
b. structurally unemployed
c. frictionally unemployed
d. discouraged workers

Page | 3
ECO108/Spring 2011 Instructor: Jieruo Liu

15. (4pts) The CPI differs from the GDP deflator in that
a. the CPI is a price index, while the GDP deflator is an inflation index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator
c. increases in the prices of foreign produced goods that are sold to U.S. consumers show
up in the CPI but not in the GDP deflator
d. increases in the prices of domestically produced goods that are sold to the U.S.
government show up in the CPI but not in the GDP deflator

16. (4pts) A wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located
in Connecticut that uses workers who live in Connecticut. As a result
a. U.S. investment, GDP, and GNP all increase by the same amount
b. U.S. investment increases, but GDP and GNP are unaffected by the purchase.
c. U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a
smaller amount
d. U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a
smaller amount

17. (4pts) Unemployment compensation is

a. part of GDP because it represents income.
b. part of GDP because the recipients must have worked in the past to qualify
c. not part of GDP because it is a transfer payment
d. not part of GDP because the payments reduce business profits

18. (4pts) The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of
milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon,
shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk
cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the
base year, what was Aquilonia’s inflation rate in 2006?
a. 4 percent
b. 11 percent
c. 19.6 percent
d. 24.4 percent

19. (4pts) During recessions, banks typically choose to hold more excess reserves relative to their
deposits. This action
a. increases the money multiplier and increases the money supply.
b. decreases the money multiplier and decreases the money supply
c. does not change the money multiplier, but increases the money supply.
d. does not change the money multiplier, but decreases the money supply

Page | 4
ECO108/Spring 2011 Instructor: Jieruo Liu

20. (4pts) Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises
from $8 to $10. If the CPI rises from 150 to 175, then people likely will buy
a. more milk and more T-shirts.
b. more milk and fewer T-shirts.
c. less milk and fewer T-shirts
d. less milk and more T-shirts

21. (20pts) The table below contains data for the country of Mini Island, which produces only
pretzels and books. The base year is 2006.

Year Price Quantity Price of Quantity of

of Pretzels of Pretzels Books Books
2005 $4.00 90 $1.50 150
2006 $4.00 100 $2.00 180
2007 $5.00 120 $2.50 200
2008 $6.00 150 $3.50 200

a. (8pts each, 16pts in total) Calculate Mini Island’s GDP deflator in 2005 and 2008.
b. (2pts each, 4pts in total) GDP is a widely used indicator of the economic power of an
economy, yet it does not measure everything. Name two things that GDP does not
measure.

Answer Key:

a. Note that the base year is 2006!

Nominal GDP: 2005 = 4*90 + 1.5*150 = 585
2008 = 6*150 + 3.5*200 = 1600
Real GDP: 2005 = 4*90+2*150=660
2008 = 4*150+2*200=1000
GDP deflator: in 2005 = (585/660) * 100 = 88.6
In 2008 = (1600/1000) *100 = 160

Grading policy: for each year, if you did wrong on either nominal GDP or real GDP, you got 4 pts for that
year; if you got both wrong, you got nothing; if you both right but made a mistake in calculating the final
GDP deflator, you got 8 pts.
b. Anything that belongs to the following:

In short, GDP Does Not Value

i. the quality of the environment
ii. leisure time
iii. non-market activity, such as the child care a parent provides his or her child at home
iv. an equitable distribution of income

Page | 5