Eastern Mediterranean University

Department of Economics
2016-2017 Spring Semester
Econ 102 – Midterm Exam

EXAM BOOKLET: A 13th April 2017

Name:______________________ Student No:_________________

Group:______________________ Duration: 90 minutes

Part I: Multiple Choice Questions (2 points each)

1. Economists use the term inflation to describe a situation in which

a. some prices are rising faster than others.
b. the economy's overall price level is rising.
c. the economy's overall price level is high, but not necessarily rising.
d. the economy's overall output of goods and services is rising faster than the economy's
overall price level.

2. The CPI is a measure of the overall cost of

a. inputs purchased by a typical producer.
b. goods and services bought by a typical consumer.
c. goods and services produced in the economy.
d. stocks on the New York Stock Exchange.

3. The price index in the first year is 110, in the second year is 100, and in the third year
is 96. The economy experienced
a. 9.1% deflation between the first and second years, and 4% deflation between the
second and third years.
b. 10% inflation between the first and second years, and 4% inflation between the
second and third years.
c. 10% deflation between the first and second years, and 4% deflation between the
second and third years.
d. 10% deflation between the first and second years, and 8.7% deflation between the
second and third years.

4. By far the largest category of goods and services in the CPI basket is
a. housing b. transportation c. food and apparel d. food and beverages

5. Suppose that in 2006, the producer price index increases by 2 percent. As a result,
economists most likely will predict that
a. GDP will increase in 2007.
b. the producer price index will increase by more than 2 percent in 2007.
c. interest rates will fall in the near future.

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d. the consumer price index will increase in the future.

6. Which of the following is NOT a widely acknowledged problem with the CPI as a
measure of the cost of living?
a. substitution bias b. introduction of new goods
c. unmeasured quality change d. unmeasured price change

7. The natural rate of unemployment is the

a. unemployment rate that would prevail with zero inflation.
b. rate associated with the highest possible level of GDP.
c. difference between the long-run and short-run unemployment rates.
d. amount of unemployment that the economy normally experiences

8. The labor force equals the

a. number of people who are employed.
b. number of people who are unemployed.
c. number of people employed plus the number of people unemployed.
d. adult population.

9. A college student who is not working or looking for a job is counted as

a. neither employed nor part of the labor force.
b. unemployed and in the labor force.
c. unemployed, but not in the labor force.
d. employed and in the labor force.

10. The labor-force participation rate is defined as

a. (Employed ÷ Adult Population) × 100.
b. (Employed ÷ Labor Force) × 100.
c. (Labor Force ÷ Adult Population) × 100.
d. (Adult Population ÷ Labor Force) × 100.

11. For an economy as a whole,

a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. household spending on goods must equal household spending on services.

12. Gross domestic product is defined as

a. the market value of all final goods and services produced within a country in a given
period of time.
b. the market value of all tangible goods produced within a country in a given period of
time.
c. the quantity of all final goods and services supplied within a country in a given period
of time.
d. the quantity of all final goods and services demanded within a country in a given
period of time.

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13. Which of the following is NOT included in GDP of USA?
a. unpaid house-work
b. services such as those provided by lawyers and hair stylists
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States

14. Over the last few decades, Americans have chosen to cook less at home and eat more
at restaurants. This change in behavior, by itself, has
a. reduced measured GDP.
b. not affected measured GDP.
c. increased measured GDP only to the extent that the value of the restaurant meals
exceeded the value of meals previously cooked at home.
d. increased measured GDP by the full value of the restaurant meals.

15. A steel company sells some steel to a bicycle company for $100. The bicycle
company uses the steel to produce a bicycle, which it sells for $200. Taken together,
these two transactions contribute
a. $100 to GDP b. $200 to GDP c. $300 to GDP
d. between $200 and $300 to GDP, depending on the profit earned by the bicycle
company when it sold the bicycle.

16. An Italian company operates a pasta restaurant in the U.S. The profits from this pasta
restaurant are included in
a. U.S. GNP and Italian GNP b. U.S. GDP and Italian GDP
c. U.S. GDP and Italian GNP d. U.S. GNP and Italian GDP

17. A nation's standard of living is measured by its

a. real GDP b. real GDP per person.
c. nominal GDP d. nominal GDP per person.

18. The average amount of goods and services produced from each hour of a worker's
time is called
a. per capita GDP b. per capita GNP c. productivity d. human capital

19. Which of the following is a determinant of productivity?

a. human capital per worker b. physical capital per worker
c. natural resources per worker d. All of the above are correct

20. Human capital is the

a. knowledge and skills that workers acquire through education, training, and
experience.
b. stock of equipment and structures that is used to produce goods and services.
c. total number of hours worked in an economy.
d. same thing as technological knowledge.

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21. 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.

22. For a profit-maximizing competitive firm, the value of marginal product curve is
a. always rising.
b. falling only when marginal product is rising.
c. the labor supply curve.
d. the labor demand curve.

23. Which of the following events can cause the labor-supply curve to shift?
a. an increase in the wage rate
b. an increase in the price of output
c. an increase in the rate of immigration
d. a technological advance

24. Other things the same, a higher interest rate induces people to
a. save more, so the supply of loanable funds slopes upward.
b. save less, so the supply of loanable funds slopes downward.
c. invest more, so the supply of loanable funds slopes upward.
d. invest less, so the supply of loanable funds slopes downward.

25. Suppose that the market for labor is initially in equilibrium. A decrease in the price of
output will cause the equilibrium wage
a. and the equilibrium quantity of labor to rise.
b. and the equilibrium quantity of labor to fall.
c. to rise and the equilibrium quantity of labor to fall.
d. to fall and the equilibrium quantity of labor to rise.

26. Because of diminishing returns, a factor in abundant supply has a

a. high marginal product and a high rental price.
b. high marginal product and a low rental price.
c. low marginal product and a high rental price.
d. low marginal product and a low rental price.

27. The fact that borrowers sometimes default on their loans by declaring bankruptcy is
directly related to the characteristic of a bond called
a. interest risk b. term risk c. private risk d. credit risk.

28. We associate the term debt finance with

a. the bond market, and we associate the term equity finance with the stock market.
b. the stock market, and we associate the term equity finance with the bond market.
c. financial intermediaries, and we associate the term equity finance with financial
markets.

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 d. financial markets, and we associate the term equity finance with financial
intermediaries.

29. A bond buyer is a

a. saver. Bond buyers must hold their bonds until maturity.
b. saver. Bond buyers may sell their bonds prior to maturity.
c. borrower. Bond buyers must hold their bonds until maturity.
d. borrower. Bond buyers may sell their bonds prior to maturity.

30. In a closed economy, what does (T - G) represent?

a. national saving
b. investment
c. private saving
d. public saving

Part II: Essay Questions

1. Consider the following daily production data for Best Cupcakes, Inc. Best Cupcakes
sells cupcakes for $2 each and pays the workers a wage of $325 per day.

Labor (number Quantity (cupcakes Marginal Product of Value of the Marginal

of workers) per day) Labor (cupcakes per day) Product of Labor
0 0 - -

1 200

2 380

3 540

4 680

a. Fill the table above. (4 pts)

b. How many workers Best Cupcakes will hire? Explain. ( 4 pts)

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2. Table below, gives the prices of Apples and Bread. Assume that CPI (Consumer
Price Index) basket includes only 2 Apples and 4 Bread.

Year Apples Bread

2002 $1.00 $2.00
2003 $1.00 $1.50
2004 $2.00 $2.00

a. Calculate the cost of the basket for the years 2002, 2003 and 2004. (6 pts)

b. Using 2002 as the base year, calculate the CPI for 2003. (3 pts)

c. Using 2002 as the base year, calculate the Inflation rate in 2004. (6 pts)

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3. Table below, shows the data for people aged 16 and over in the imaginary country of
Meditor.
1. Not in labor force: 80 million
2. Unemployed: 10 million
3. Employed: 150 million

a. What is the adult population in Meditor? (3 pts)

b. What is the labor force in Meditor? (3 pts)

c. What is the unemployment rate in Meditor? (4 pts)

d. What is the labor-force participation rate in Meditor? (4 pts)

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4. Table below, presents the prices and quantities of Sandwiches and Magazines
produced in a country. Use 2006 as the base year.

Year Price of Quantity of Price of Quantity of

Sandwiches Sandwiches Magazines Magazines
2006 $4.00 100 $2.00 180
2007 $5.00 120 $2.50 200
2008 $6.00 150 $3.50 200

a. Calculate the Nominal GDP in 2007. (3 pts)

b. Calculate the Real GDP in 2008. (3 pts)

c. Calculate the GDP-deflator in 2007. (3 pts)