1. Suppose that Toyota (a Japanese company) produced 90,000 Camrys in the United States in 2011 and during 2011 sold 69,000 to U.S. customers and exported 14,000 to foreign buyers. The remaining Camrys were sold to U.S. customers in 2012. How many of these Camrys would count as a part of U.S. GDP in 2011?
a. 0
b. 69,000
c. 76,000
d. 83,000
e. 90,000
2. Suppose that the production function for the economy is: Y = AK3/4 L1/4. Then
a. Capital is more plentiful than labor.
b. Capital is a more expensive input that labor.
c. Capital has a larger share in national income than does labor.
d. Diminishing returns to capital are three times greater than are diminishing returns to labor.
e. None of the above.
3. Suppose that the economy has full-employment output of 5,000. Government purchases are 1,000. The consumption and investment functions are given by:
C = 3,000 - 2,000r + 0.10Y
I = 1,000 - 4000r
where Y equals output and r is the real interest rate. The equilibrium real interest rate is equal to:
a. 1.25%
b. 2.50%
c. 5.00%
d. 8.33%
e. 25.00%
4. If a severe freeze destroys much of the crop of a small open agricultural country, then:
a. Net foreign lending would increase.
b. Net foreign lending would decrease.
c. The real interest rate would increase.
d. The real interest rate would decrease.
e. The desired investment curve would shift to the left.
f. The desired investment curve would shift to the right.
5. The domestic real interest rate would increase in a large open economy if:
a. Residents of a large open foreign economy were more willing to save.
b. Residents of a small open foreign economy were more willing to save.
c. There was a temporary negative supply shock in the domestic economy.
d. There was a temporary negative supply shock in a small open foreign economy.
e. The government imposed capital controls that prohibit foreign borrowing and lending by domestic residents when the current account was in surplus.
B. Analytical Question (35 points).Answer the following question based on the standard models of analysis developed in class. The information in the various parts of the question is sequential and cumulative. Be sure to show and discuss each individual effect and not just the net effect of the exogenous shocks.
1. The Production Function, the Labor Market, and the Capital Market.Suppose that the economy is initially at its potential output level with a labor supply curve that is a positive function of the real wage rate and a capital stock that is fixed.
a. Based only on this information use a Production Function diagram (on the left) and a Labor Market diagram (on the right) to clearly and accurately show the economy's initialequilibrium levels of (1) economic output, (2) employment, and (3) the real wage rate. These diagrams should be drawn in BLACK.
b. Based only on the information above, use a Production Function diagram (on the left) and a Capital Market diagram (on the right) to clearly and accurately show the economy's initial equilibrium levels of (1) economic output, (2) the capital stock, and (3) the real rental cost of capital. These diagrams should be drawn in BLACK.
c. Provide an economic explanation of what you have shown in your diagrams above
d. Suppose that there is a significant increase (relative to the growth in the labor force) in the number of workers who are retiring.Incorporating only this additional information, clearly and accurately show in your diagrams above what effects this would have on equilibrium (1) economic output, (2) employment, (3) the real wage rate, (4) the capital stock, and (5) the real rental cost of capital. These effects should be drawn in RED.
e. Provide an economic explanation of what you have shown in your diagrams above. Discuss what happens to equilibrium (1) economic output, (2) employment, (3) the real wage rate, (4) the capital stock, and (5) the real rental cost of capital. Be sure to explain why these changes take place.
f. In addition, suppose that the retiring workers possessed higher than average work skills. Incorporating only this additional information, clearly and accurately show in your diagrams above what effects this would have on equilibrium (1) economic output, (2) employment, (3) the real wage rate, (4) the capital stock, and (5) the real rental cost of capital. These effects should be drawn in BLUE.
g. Provide an economic explanation of what you have shown in your diagrams above. Discuss what happens to equilibrium (1) economic output, (2) employment, (3) the real wage rate, (4) the capital stock, and (5) the real rental cost of capital. Be sure to explain why these changes take place.