AMERICAN UNIVERSITY IN BULGARIA

ECO 102- Principles of Macroeconomics

Professor Erdinc Midterm Examination (sample)

Total Points= 100 Points

Part 1 (32 Points Total): Multiple Choice Questions

1) (4 Points) Suppose the nominal GDP in Godava was $100 billion during 1994. The
price index in 1994 was 150 and the inflation rate between 1993 and 1994 was 20%.
Which of the following gives the real GDP in 1992 prices as well as in 1993 prices?
(Base year=1992).

a) Around 48.4 billion (1992) and 76.3 billion (1993)

b) Around 66.67 billion (1992) and 83.3 billion (1993)
c) Around 66.67 billion (1992) and 94.3 billion (1993)
d) Around 80 billion (1992) and 104.3 billion (1993)
e) None of the above

2) (4 Points) Private investment on physical capital can be stimulated if

a) banks extend less credit

b) banks raise interest rates
c) foreign investors commit more resources to the domestic economy in the form of
lending
d) there is a general level of pessimism in the business environment
e) none of the above.

3) (4 Points) Which of the following increases the supply of pain killers produced in
Eastern Europe?

a) A scientific breakthrough undertaken by the Eastern European researchers which

identifies a new and powerful ingredient which enhances the effectiveness of the
drug.
b) An improvement in the packaging and appearance of the product.
c) A new Western European standard applied to all drugs produced in Europe which
raises the cost of producing pain killers in Eastern Europe.
d) a and b.
e) all of the above.

4) (4 Points) The growth rate of potential GDP depends, among other factors, on

a) The rate of technological progress

b) The growth rate of the labor force
c) The rate of growth of the capital stock
d) The rate of improvement in institutions such as democracy, and rule of law
e) All of the above

5) (4 Points) Lines, ration coupons and black markets are symptoms of

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 a) free markets.
b) price ceilings.
c) price floors
d) barter economies
e) none of the above

6) (4 Points) Which of the following transactions would be included in GDP for

2001?

a) On January 5, 2001 Chris Carter sold 100 shares of stock of the IBM
Corporation
b) Bonita Delgado purchases a new 2001 Oldsmobile on March 10, 2001.
c) Nadav Daniel buys a used desk from the “Struggling Students Used Furniture”
store on May 9, 2001.
d) Levi Lathan purchases a 75-year old penthouse on Lake Shore Drive in
Chicago, Illinois, on June 23, 2001.
e) Trish grows oregano in her backyard to use in her homemade pesto sauce in
2001.

7) (4 Points) Last year your job at the university cafeteria paid you $9 an hour
and the price of a ten-minute long distance call to your girlfriend in California
was $4. This year your cafeteria job pays $9.90 per hour and the ten-minute
phone call now costs $4.10. You are

a) worse off because the phone call is now relatively more expensive
b) worse off because of inflation.
c) better off because your wage rate went up.
d) better off because the phone call now costs less work.
e) None of the above

8) (4 Points) If you as a lender want an increase in purchasing power of 4 percent

from making a loan and you set the nominal interest rate at 9 percent, then your

a) real rate of interest is 13 percent.

b) expected rate of inflation is 5 percent.
c) expected rate of inflation is 13 percent.
d) real rate of interest is 36 percent
e) none of the above

Part 2 (64 Points Total): Short Essays and Problems

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Problem 1: A Macroeconomic model for Bulgaria is given as follows: Suppose the
full-employment output, YF= 8500 while the components of PAE (Aggregate
Expenditures) are C=500+0.8Yd, assuming that total taxes are fixed at T=300, I=320,
G=700, NX(Exports)=400

a) (5 Points) Find the short-run equilibrium output in this economy and the
recessionary gap if it exists.
b) (5 Points) What is the new equilibrium output if G increases by 20 (from 700
to 720) ? Is this sufficient to close the gap?
c) (5 Points) Using the multiplier approach, show how much of a total increase in
G and an equivalent increase in T (balanced budget multiplier needed) are
needed to close the recessionary gap in part (a).?
d) (5 Points) Suppose that due to a cut in interest rates, both autonomous
consumption and investment increase by 50 units. Calculate the effect on the
equilibrium output using the multiplier approach and show graphically how the
PAE line shifts. Is there a recessionary gap still?
e) (5 Points) What happens to the effectiveness of expansionary fiscal policy (a
rise in G or a fall in T) in closing the recessionary gap if the marginal propensity
to consume out of disposable income is 0.6 rather than 0.8? (Hint: what is the
effect on the size of the expenditure multiplier?)

Problem 2: Assume that England can produce 800 tons of wool or 200 tons of wine
while Portugal can produce 300 tons of wool or 100 tons of wine with given
resources. If England consumes 400 units of wool, and if the international terms of
trade is 3.5 units of wool per wine, then answer the following questions.

a) Determine the pattern of specialization and explain the reason behind it.
b) With trade, what is the total output of wine and wool?
c) How much is the gains from trade for England? For Portugal? (in terms of wine)
d) If the international terms of trade shifts from 3.5 units of wool per wine to 3.25
units of wool per wine, which country benefits more from trade in terms of
increased consumption?

Problem 3: What do we mean by “structural unemployment”? In Russia, after the

collapse of communism, there was a substantial increase in structural unemployment.
Give a reason for this phenomenon.

Problem 4: Use the hypothetical data given below to answer the indicated questions. (Data
are expressed in billions of dollars.)

a. Calculate the CPI for the year 2000 taking 1996 as the base year.

1996 2000
Price Basket Price Basket

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$1 10 Bread $2 12 Bread
$30 5 Jeans $35 6 Jeans

b. Fill in the blanks in the following table of GDP statistics (in $ Billions). Show all
your work for full credit.

1996 2000
Nominal GDP 8,500 9,000
Real GDP 8,500 -----
GDP Deflator __ 105

Problem 5: Explain how each of the following factors affect the current income (through
which component) and output in the US by carefully identifying the component of total
expenditure which is changing , direction of change as well as the direction of shift in PAE:

a) A stock market boom raises the real wealth of the consumers.

b) Asian and European economies increase their imports of computers from the US.

c) The US government decides to cut its spending on social security and Medicare (perceived
by some observers as being suicidal in the election year).

d) President Trump attempts to eliminate the “American Carnage”or loss of jobs to foreign
countries by imposing trade restrictions on foreign goods