Econ 102 Section 4 – Principles of Macroeconomics

Instructor: C. Burkart

Exam #2  [80 points total]

February 1, 2006


Questions 1 through 15 are worth 3 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.  Be sure to read each question carefully so that you know what it is asking and what each answer means.


1.      At which point is the economy in an economic expansion?


a.       A

b.      B

c.       C

d.      D

e.       E


2.      At which point is the economy in a recession?


a.       A

b.      B

c.       C

d.      D

e.       E


3.      The difference between microeconomics and macroeconomics is that:

a.       microeconomics studies businesses while macroeconomics studies people.

b.      microeconomics studies individual decision makers while macroeconomics studies the economy's overall performance.

c.       microeconomics studies the performance of the private sector, while macroeconomics studies the performance of government.

d.      microeconomics studies what is happening in the economy now, while macroeconomics studies what happened in the past.


4.      Macroeconomics studies topics such as:

a.       aggregate employment in the economy.

b.      economic growth.

c.       determinants of GDP.

d.      determinants of the price level and the rate of inflation.

e.      all of the above.





5.      Which of the following is not directly a component of GDP measured using the factor payments approach?

a.       Profits.

b.      Rent.

c.       Interest.

d.      Wages.

e.      Consumption.


6.      Which of the following statements about the measurement of U.S. GDP is true?

a.        All final goods produced by U.S. citizens are included in U.S. GDP.

b.       Sales of stocks and bonds are included in GDP.

c.        All final goods produced inside the U.S. are included in U.S. GDP.

d.       GDP measures the volume of total sales in the U.S. within a given time period.

e.        None of the above statements are true.


7.      The value of intermediate goods is:

a.        counted directly in GDP as part of investment.

b.       counted directly in GDP as part of net exports.

c.        counted indirectly in GDP as part of the value of final goods.

d.       not counted at all in GDP because they are not produced.


8.      Which of the following is not among the methods used to compute GDP?

a.       The factor payments approach.

b.      The expenditure approach.

c.       The government spending approach

d.      The value-added approach.


9.      Which of the following would not be included when using the expenditure approach to calculate GDP?

a.       The amount spent on goods and services such as food and clothing.

b.      The amount businesses spend on things such as machinery.

c.       The amount the government spends on things like tanks and office paper.

d.      The amount the government spends on things like income assistance programs and unemployment insurance.

e.       All of the above would be included using the expenditure approach


10.  Assume that net exports are -$340, private investment is $1500, tax revenues are $800, government purchases are $2000, and GDP (using the expenditure approach) is $9000.  In this case, consumption expenditures must be:

a.       $1840

b.      $12960

c.       $5840

d.      $4360

e.       $5160



11.  Suppose GDP for 2003 was $1500, wages and salaries were $800, rent payments were $200, consumption was $1000, and interest payments were $200.  What must the value of profits been?

a.       $200

b.      $500

c.       $0

d.      $100

e.      $300


12.  Suppose a computer manufacturer purchases a $100 case from a supplier, a $300 chip from another supplier, and sells the computers for $1000.  How much did the company contribute to GDP?

a.       $1000

b.      $900

c.       $700

d.      $600

e.       $400


13.  A real variable is one that is

a.       Not adjusted for the dollar’s changing value.

b.      Measured in current dollars

c.       Adjusted for the dollar’s changing value.

d.      Not measured in terms of goods and services

e.       Found not to be fake by the Inspector General of the Ministry of Silly Variables.


14.  Which of the following is included in GDP?

a.      The imputed rental value of a family-owned home

b.      The sale prices of all previously built homes

c.       Social security payments to retirees

d.      The salary of a U.S. scientist working in a foreign country

e.       Purchases of stocks and bonds

15.  Why do policymakers have the goal of stable prices?

a.       Stable prices always keep the economy in an expansion

b.      Firms make too much money when prices are rising

c.       Inflation is always associated with wars

d.      Inflation imposes costs on society

e.       Consumers always prefer lower prices











Question 16 [21 pts.]: Using the expenditure approach, which of the following would be directly counted as part of U.S. GDP in 2005?  In each case, state whether the action causes an increase in C, I, G, or NX (i.e., state whether or not it counts.  If it does, state the component to which it contributes).


a.       A new personal computer produced by IBM, which remained unsold at the year’s end.

Counted in GDP as an increase in inventories (“I”)

b.      A physician’s services to a household

Counted in GDP as consumption (“C”)

c.       Produce bought by a restaurant to serve to customers

Not counted.

d.      The purchase of 1,000 shares of Disney stock

Not Counted

e.       The sale of 50 acres of commercial-zoned land

Not Counted

f.        A real estate agent’s commission from the sale of property

Counted in GDP as consumption (a service is provided) (“C”)

g.       A transaction in which you clean a friend’s apartment in exchange for her fixing your car.

Not counted


Question 17 [14 pts.]: Calculate the total change in a year’s GDP for each of the following scenarios.  Explain your calculation very briefly (e.g., which approach you used) for full credit.


a.      General Electric uses $10 million worth of glass, steel, and plastic to produce dishwashers.  Wages and salaries in the dishwasher division are $40 million; the division’s only other expense is $15 million in interest that it pays on its bonds.  The division’s revenue for the year is $75 million.  (Hint: you can use either of our two methods to calculate this, one is easy, the other is more difficult)


Using the expenditure approach, GDP rises by $75 million, the value of final sales.




Using the factor payments approach: intermediate goods cost of $10 million will create an equal amount of factor payments elsewhere in the economy.  GE’s profit is its revenue minus its costs, or $75 million – ($10 + $40 + $15) = $10 million.  Finally, wages and salaries and interest paid by GE total $40 + $15 = $55 million.  Adding together all of the factor payments, we get $10 + $10 + $55 = $75 million.




b.      LameArtists, Inc. produces 100,000 new Britney Spears CDs that it prices at $15 apiece.  Ten thousand CDs are sold abroad, but the rest remain unsold on warehouse shelves.


GDP Rises by the full value of the CDs produced, or $15 x 100,000 = $1,500,000.