Part I (50%) - Multiple Choice (2% each). On a scantron form, mark the single best answer. Put your name on the scantron, and turn it in with this exam. You have 50 minutes to complete this exam.
1. Which of the following statements is an example of normative economics?
a. The high budget deficits of the 1980s caused the trade deficits.2. If a country is operating inside its production possibilities curve:
b. During recessions, output falls and unemployment increases.
c. Interest rates should be reduced to encouraged investment.
d. Expansionary monetary policy will reduce interest rates.
a. some resources may be idle.3. The concept of rationality refers to:
b. resources are equally well equipped for the production of any good.
c. it can only increase production of one good by decreasing production of another.
d. an increase in total production requires an increase in total resources.
a. the assumption that individuals have sensible goals.4. If two countries, both of which produce guns and butter, have different marginal rates of transformation between guns and butter, we know that:
b. the assumption that individuals and firms weigh the costs and benefits of their choices.
c. the assumption that individuals and firms are certain of the consequences of their choices.
d. the fact of scarcity.
a. there is no basis for specialization or trade between the two countries.5. Which of the following is not a basis of comparative advantage?
b. specialization will lead to an increase in the total amount of goods produced.
c. neither country has a comparative advantage.
d. each country has an absolute advantage in the production of one of the goods.
a. natural endowments6. Which of the following factors is most likely to lead to a shift in the demand curve for movie tickets?
b. acquired endowments
c. superior knowledge
d. protectionism
a. a change in the price of attending a movie7. If the market price is above equilibrium, then:
b. a change in the size of movie theaters
c. a change in the price of video rentals
d. an increased supply of movies
a. there is excess supply.8. If supply for a product is perfectly price-inelastic, the supply curve is:
b. there is excess demand.
c. firms will not be able to sell all that they would like.
d. demand will decrease.
a. horizontal.9. If Japan can produce either 30 automobiles or 45 computers from a given quantity of resources, and the United States, using the same resources, can produce either 40 automobiles or 50 computers, which of the following statements is true?
b. vertical.
c. upward sloping.
d. undefined.
a. Japan has a comparative advantage in the production of automobiles.10. A recent regulation requires tuna fishing companies to use nets that allow dolphins to escape from the nets.
b. The United States has a comparative advantage in the production of computers.
c. The United States has a comparative advantage in the production of both goods.
d. Japan has a comparative advantage in the production of computers.
a. reduce; supply; fall11. If the price of a product increases from $5.00 to $5.50 and as a result the quantity-supplied increases from 200 to 240, the elasticity of supply for this product in this price range is:
b. increase; demand; rise
c. reduce; demand; rise
d. reduce; demand; fall
a. infinite.12. Suppose that nominal gross domestic product in 1996 equals $8,000 billion and the price index, which was 100 in 1987, equals 200. Real gross domestic product in 1996, measured in terms of 1987 prices, equals:
b. less that one.
c. equal to one.
d. greater than one.
a. $40 billion.13. The value-added approach to GDP:
b. $80 billion.
c. $4,000 billion.
d. $16,000 billion.
a. adds the differences between each firm's revenues and its cost of intermediate goods.14. If the price of a normal good increases, the:
b. adds all income received by individuals and governments in the economy.
c. subtracts the inflation rate from the nominal GDP.
d. adds the total money value of goods and services purchased by their ultimate users.
a. income effect will oppose and dominate the substitution effect, so that consumption increases.15. As the real wage rate increases, the substitution effect:
b. income and substitution effects each lead to reduced consumption of the good.
c. substitution effect will oppose and dominate the income effect, so that consumption decreases.
d. income and substitution effects will cancel each other out and leave the demand for the good unchanged.
a. reduces leisure time and there is no income effect.16. One reason the aggregate demand curve is downward sloping is that:
b. reduces leisure time and the income effect reinforces the substitution effect.
c. increases leisure time and the income effect opposes the substitution effect.
d. reduces leisure time and the income effect opposes the substitution effect.
a. as the price level falls, households' real wealth increases and they increase their consumption.17. The Department of Labor survey probably:
b. as the price level falls, households' real wealth falls and they increase their consumption.
c. as the price level rises, households' real wealth falls and they increase their consumption.
d. as the price level falls, households' real wealth increases and they reduce their consumption.
a. overestimates the true unemployment rate in that some discouraged workers have given up hope of finding a job.18. If the nominal rate of interest is 12 percent and the rate of inflation is 8 percent, the real rate of interest is:
b. underestimates the true unemployment rate in that some discouraged workers have given up hope of finding a job.
c. underestimates the true unemployment rate in that some individuals who respond that they are actively seeking work are not.
d. overestimates the true unemployment rate in that some individuals who respond that they are actively seeking work are actually working part-time.
a. 8 percent.19. Consider the general equilibrium of a closed economy based on the competitive model. Crowding out refers to a situation in which, when the government raises its spending and pays for it by increasing taxes:
b. 20 percent.
c. 4 percent.
d. minus 4 percent.
a. consumption and saving are encouraged, the real interest rate rises, and investment fall.20. When money is neutral, an increase in the money supply affects only the equilibrium:
b. consumption and saving are discouraged, the real interest rate falls, and investment falls.
c. consumption and saving are discourages, the real interest rate falls, and investment rises.
d. consumption and saving are discouraged, the real interest rate rises, and investment falls.
a. level of output.21. In a small open economy:
b. price level.
c. level of investment.
d. real wage.
a. interest rates are determined on international capital markets.22. If the exchange rate between the dollar and the yen changes from 100 yen per dollar to 125 yen per dollar:
b. interest rates adjust to equate the domestic demand and supply of funds.
c. the supply of savings is perfectly inelastic.
d. the demand for funds is perfectly inelastic.
a. the yen is now worth more than before.23. If the exchange rate between the dollar and the yen changes from 100 yen per dollar to 125 yen per dollar:
b. this represents a depreciation of the dollar.
c. this represents an appreciation of the yen.
d. this represents an appreciation of the dollar.
a. Japanese goods become relatively more expensive in the United States, reducing the U.S. quantity-demanded for Japanese yen.24. In a small open economy, attempts to promote private saving will:
b. U.S. goods become relatively cheaper in Japan, reducing Japanese quantity-demanded for U.S. dollars.
c. Japanese goods become relatively cheaper in the United States, increasing the U.S. quantity-demanded for yen.
d. U.S. goods become relatively more expensive in Japan, increasing the Japanese quantity-demanded for dollars.
a. reduce the amount of foreign borrowing but have no effect on equilibrium investment.25. For the United States, increased private savings will likely:
b. reduce the amount of foreign borrowing but increase the level of equilibrium investment.
c. increase both the amount of foreign borrowing and the level of equilibrium investment.
d. increase the amount of foreign borrowing but reduce the level of equilibrium investment.
a. reduce the budget deficit.
b. increase investment.
c. leave interest rates and investment unchanged.
d. cause the dollar to appreciate.
Part II (50%) - Problems and Graphs. Label your graphs carefully,
but don't worry about drawing your graphs to precise scale. Use the back
of the page if necessary, noting where your answer continues.
1. (8%) Use a supply and demand model to illustrate what would happen to the U.S. stock market (i.e., stock prices and the amount of trading) if an event such as a financial crisis in Asia made savers suddenly very nervous about the riskiness of the stocks they held.
2. (10%) Assume the labor market is in market-clearing equilibrium, and then a growth of business investment increases the productivity of workers. What would happen to the equilibrium real wage and employment levels in the labor market? How would your answer change if the wage rate was set by contract, and difficult to change in the short-run? Show on a graph, and explain.
3. Suppose Joe receives a lump-sum gift from his uncle Alfred of $100,000, and he must choose whether to spend the money now or in the future (for simplicity, assume Joe only has two years left to live). If he saves this money, he earns 10% interest, and he expects no inflation to erode his future purchasing power.
a. (10%) Graph his opportunity set for current consumption (CC) and future consumption (CF). What is his opportunity cost for $1 worth of current consumption? If he chooses to consume $60,000 now, how much does he save or borrow? Show these answers on your graph.4. (12%) For an large open economy with a government sector, use a graph to illustrate supply and demand for each of the three major aggregate markets (remember to name them), plus a fourth graph for the foreign exchange market. Label each carefully, and below each graph give the appropriate equation that describes equilibrium.
b. (10%) What happens to his budget constraint if the interest rate rises to 15%? Show on a new graph below. What is the direction of the income and substitution effects on Joe's current and future consumption? Show this with arrows on your graph. What will happen to Joe's preferred amount of saving or borrowing?
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