Class Handout 4-
1. Which one of the following is counted in GDP for the United States?
a. Cars produced at Toyota's plant in Indiana. Toyota is a Japanese company.
b. Cars produced by the American company Ford at their plant in Ontario, Canada.
2. Discouraged workers are people who are currently not working who
a. want a job, but have given up looking for one.
b. used to have a job, but no longer want a job.
3. The price paid for taking out a loan is the interest rate. Holding everything else constant, if the interest rate increases,
a. the demand for loans decreases.
b. the total amount of money loaned out will decrease.
c. there is no change in the market for loans.
d. the outcome is uncertain-the law of demand does not hold for loans.
Use the following graph to answer the next two questions.
4. Which of the following equations is a correct representation of the demand curve described in the graph above?
a. Q = 300 - 15P
b. Q = 20 - (1/15)P
c. P = 20 - 300Q
d. Q = 300 - 20P
5. What is the consumer surplus if the equilibrium price is $8?
a. $1500
b. $1080
c. $2160
d. $12
6. The following information is available for the country of Wonderland:
|
Year
|
Inflation rate relative to previous year
|
|
2000
|
10%
|
|
2001
|
10%
|
|
2002
|
5%
|
What is the total inflation rate (i.e. the total percentage rise in the price level) over the entire period?
a. 25%
b. 27.05%
c. 20.34%
d. 30.25%
7. Which of the following is not counted in the civilian labor force?
a. a factory worker who is currently laid off
b. a full-time student who is not working and is not currently looking for a job
c. a small business owner who has not yet earned a positive profit
d. an unemployed individual who is not working but looking for a job
8. Assume in a SMALL OPEN economy the domestic market demand curve is QD = 1200 - 4P and the domestic market supply curve is QS = 2P and the world price is $100. What will be the Deadweight Loss in this economy if a tariff of $50 is imposed?
a. $ 15000
b. $ 7500
c. $ 10000
d. $ 5000
9. The real wage per hour and the inflation rate in 2001 and 2002 are given in the table below (base year 2000)
|
Year
|
Real wage/hour
|
Inflation rate
|
|
2001
|
$18.80
|
10%
|
|
2002
|
$20.00
|
10%
|
The nominal wage and the CPI in 2002 were:
a. $ 24.20 and 121
b. $ 22.50 and 110
c. $ 21.50 and 107.5
d. $ 25.60 and 121
Answer the next two questions using the information below
The country of Wowza produces only three goods: 1) shirts, 2) pants, and 3) cotton. All the cotton is used to produce the other two goods. The following table describes Wowza's production during the years 1999 and 2000. Use the table to answer the next two questions.
|
|
1999
|
2000
|
|
Good
|
Quantity
|
Price/Unit
|
Quantity
|
Price/Unit
|
|
Shirts
|
11
|
$4
|
10
|
$4
|
|
Pants
|
4
|
$9
|
10
|
$8
|
|
Cotton
|
5
|
$4
|
10
|
$4
|
10. What is the Nominal GDP of Wowza in 1999?
a. $ 20
b. $ 80
c. $ 100
d. $ 160
11. The base year is 1999. What is Wowza's growth rate of Nominal GDP from 1999 to 2000?
a. 50%
b. 60%
c. 150%
d. 160%
12. The existence of an "underground economy" causes measured GDP to overestimate actual output.
a. True.
b. False.
13. One of the reasons the aggregate production function shows diminishing returns to labor is that as the number of workers increases:
a. The quantity of land and capital in the economy decreases.
b. The quantity of land and capital per worker decreases.
14. Fiscal Policies in the Classical model
a. Could be quite useful when the economy is in a recession.
b. Are unnecessary, because the economy will achieve the full employment level of output and employment automatically.
Answer the next question using the information below:
The demand and the supply of labor in the country of Simpleland are:
LS = 4w - 10
LD = 80 - 2w
The aggregate production function is:
Real GDP (in billions) = 60 - 2500/200 + Quantity of Labor
15. The real GDP corresponding to the full employment level of output is:
a. $10 billion.
b. $40 billion.
c. $50 billion.
d. $100 billion.
Answer the next two questions using the information below:
Consider an economy described by the following parameters:
G=1000
X-M=50
I=1400
T=500
C=2000+0.9(Y-T)
Where G is government expenditure, (X-M) is net exports, I is the level of planned investment, T are lump-sum taxes on income, C is household consumption and (Y-T) is disposable income.
16. The level of autonomous consumption and the MPC in this economy are, respectively:
a. 2000 and 0.9.
b. 1550 and 0.9.
c. 1450 and 9.
d. 1550 and 0.1.
17. The equilibrium level of income is:
a. $35,500.
b. $40,000.
c. $30,500.
d. $40,500.
Answer the next three questions using the information below:
Consider the following information about the country of Simpleland
G = $600
T = $800
I = $1000 - 5000 iR
S = $320 + 1000 iR
(Hint: in this problem, the real interest rate is written as a decimal: e.g., if the real interest rate is 10%, it is written as iR=0.10).
18. What is the equilibrium real interest rate?
a. 4%
b. 6%
c. 8%
d. 10%
19. In equilibrium, what is the amount of injections in this economy? Assume this is a closed economy.
a. $2,000
b. $1,500
c. $1,200
d. $1,000
20. Suppose that the government decides to increase G by $120. Assuming that aggregate income does not change, which of the following is the most plausible effect of this policy?
a. The rise in G partially crowds out private sector spending. Indeed, because of the increase in the equilibrium interest rate, private investment increases by $100.
b. The rise in G completely crowds out private sector spending. Indeed, because of the increase in the equilibrium interest rate, investment decreases by $120.
c. The rise in G partially crowds out private sector spending. Indeed, because of the increase in the equilibrium interest rate, private consumption increases by $20 and private investment decreases by $ 100.
d. The rise in G completely crowds out private sector spending. Indeed, because of the increase in the equilibrium interest rate, private consumption decreases by $20 and private investment decreases by $ 100.
21. Boston and Chicago both produce athletic socks in two colors, red and white. The PPFs for both Boston and Chicago are linear. Currently both cities produce at a point on their PPFs such that they each produce both colors of socks. If Boston spends all of its resources producing one color of socks, it can either produce 2,000 red socks or 1,000 white socks. If Chicago spends all of its resources producing one color of socks, it can either produce 3,000 red socks or 4,000 white socks. Which of the following statements is FALSE?
a. Boston has a comparative advantage in producing red socks.
b. Chicago has an absolute advantage in producing both red and white socks.
c. Boston has an absolute advantage in producing red socks.
d. Boston and Chicago can both benefit from trade.
Use the following information to answer the next two questions.
The following table shows the number of workers needed to produce one crate of guns or one ton of butter in the US and in China in a day. Assume that there are 120 workers in each country.
|
|
One Crate of Guns
|
One Ton of Butter
|
|
U.S
|
12 workers
|
24 workers
|
|
China
|
20 workers
|
30 workers
|
22. Which of the following statements is TRUE?
a. The opportunity cost of 2 tons of butter in China is 3/2 crates of guns.
b. The opportunity cost of 2 tons of butter in China is 4/3 crates of guns.
c. The opportunity cost of 2 tons of butter in the U.S is 1 crate of guns.
d. The opportunity cost of 2 tons of butter in the U.S. is 4 crates of guns.
23. If China and the US both completely specialize in the good that they have a comparative advantage in (in other words, each country only produces 1 good), how much will be produced each day?
a. 10 crates of guns and 4 tons of butter.
b. 12 crates of guns and 30 tons of butter.
c. 6 crates of guns and 5 tons of butter.
d. 20 crates of guns and 24 crates of butter.
Use the following Classical model of a closed economy to answer this question.
Y = C + SP + T - TR
SG = T - TR - G
Y = C + I + G + (X - M)
NS = SP + SG
NS = Y - C - G
In equilibrium, leakages = injections
24. Furthermore, assume consumption is $3,000; private saving is $1,500 and taxes are $500. There are no government transfers. Injections in this economy equal
a. $2,000.
b. $1,500
c. $3,000.
d. $1,000.
25. Use the following Classical model of an open economy to answer this question.
Y = C + SP + T - TR
SG = T - TR - G
Y = C + I + G + (X - M)
NS = SP + SG
NS = Y - C - G
KI = M - X
In equilibrium, leakages = injections
Furthermore, assume the government is running a balanced budget; firms are investing $300; and government expenditures are $200. The loanable funds market is in equilibrium. If capital inflows are $200, which of the following answers must be TRUE?
a. NS = SP = $200.
b. NS = SP = $100.
c. NS = $100; SP = $0.
d. NS = $100; SP = $50.
Use the following information to answer the next two questions.
Consider the market for loanable funds in an economy. The business demand for funds is given by
R = 8 - (1/3)I,
where I is investment (measured in millions of dollars) and r is the interest rate (percentage).
The private savings function is: r = SP + 1,
where Sp is private savings (measured in millions of dollars).
The government is initially running a deficit of $4 million. However, they decide to balance their budget and eliminate the deficit by cutting spending (so that government savings becomes zero). This country is running a trade deficit of $1 million both before and after the change in government savings.
26. What is the change in business investment as a result of this decrease in government spending?
a. Investment decreases by $2 million.
b. Investment decreases by $3 million.
c. Investment increases by $3 million.
d. There is no change in investment.
27. What is the change in consumption by households due to this change in government spending?
a. Consumption decreases by $1 million.
b. Consumption increases by $1 million.
c. Consumption decreases by $2 million.
d. Consumption increases by $2 million.
28. BiCi Credit is a bank operating in the country of Moneyland. The reserves that BiCi credit holds in an account with Moneyland Central Bank are considered:
a. Liabilities in the balance sheet of BiCi Credit.
b. Assets in the balance sheet of Moneyland Central Bank.
c. Liabilities in the balance sheet of Moneyland Central Bank.
d. They are not accounted for in the balance sheets of either BiCi Credit or Moneyland Central Bank.
29. Suppose the demand and supply of money are given by the following equations:
Demand: MD = 10,000 - 2,000r
Supply: MS = 5,000
In the above equations, r is the interest rate, MD is money demand, and MS is money supply. Furthermore, suppose that the interest rate is currently 4% (r = 4 in the above equation). Which of the following is TRUE?
a. People will want to hold money since banks are paying relatively high interest rates.
b. People will want to buy bonds and thus, the interest rate will rise.
c. People will want to buy bonds and this increased demand for bonds will lead to lower interest rates.
d. People will want to sell bonds, and this decreased demand for bonds will lead to higher interest rates.
30. Which of the following is most likely to be a consequence of an open market purchase of bonds by the Federal Reserve?
a. The money supply will increase, the price of bonds will fall, the interest rate will fall, and output will increase.
b. The money supply will increase, the price of bonds will increase, the interest rate will fall, and output will increase.
c. The money supply will decrease, the price of bonds will fall, the interest rate will increase, and output will decrease.
d. The money supply will decrease, the price of bonds will increase, the interest rate will rise, and output will fall.
31. Suppose the Fed increases the level of reserves in an economy by $500 through an open market purchase. In which of the following situations will this $500 increase in reserves have the largest short run effect on the money supply?
a. People hold all of the new reserves as currency.
b. People hold the new reserves as equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent.
c. People hold the new reserves as demand deposits, and banks maintain a reserve ratio of 50 percent.
d. People hold the new reserves as demand deposits, and banks maintain a reserve ratio of 10 percent.
32. According to the aggregate supply and demand model, holding everything else constant, a decrease in the aggregate price level leads to which of the following sequences?
a. The money demand curve will shift to the right, the interest rate will increase, the aggregate expenditure line will shift downward, and there will be movement upward along the aggregate demand curve.
b. The money demand curve will shift to the left, the interest rate will fall, the aggregate expenditure line will shift upward, and there will be movement downward along the aggregate demand curve.
c. The money demand curve will shift to the left, the interest rate will fall, the aggregate expenditure line will shift downward, and there will be movement upward along the aggregate demand curve.
d. The money demand curve will shift to the right, the interest rate will fall, the aggregate expenditure line will shift upward, and there will be movement downward along the aggregate demand curve.
Answer the next two questions using the following information.
Money Supply: MS = 7,000
Money Demand: MD = 8,000 - 10,000r (e.g. 5% would mean that r = 0.05)
C = 10,000 + 0.8(Y-T) - 200P
I = 5,000 - 6,000r
G = 2,000
T = 2,000
X - M = 1,200
Aggregate Demand (AD): Y = C + I + G + (X-M)
Aggregate Supply (AS): Y = 7,000P
33. What is the equilibrium level of output (Y) and the equilibrium level of investment (I)?
a. 70,000; 4,400.
b. 120,000; 4,400
c. 80,000; 6,000.
d. 110,000; 6,000.
34. Think about the aggregate demand and aggregate supply model when answering this question. Suppose the economy is in equilibrium but operating below full-employment output. What will happen in the long run in this economy?
a. Nothing will happen. There is no need for adjustment in this market.
b. Adjustment in the labor market will cause an outward shift in the short-run aggregate supply curve, bringing us back to equilibrium with the long-run aggregate supply curve at the full employment output.
c. Adjustment in the money market will cause an inward shift in the short-run aggregate supply curve, bringing us to equilibrium with the long-run aggregate supply curve at the full employment output.
d. Adjustment in the output market will cause an outward shift in the short-run aggregate supply curve to bring us back to equilibrium with the long-run aggregate supply curve at the full employment output.
Use the following Keynesian Model of a closed economy to answer the next two questions.
Y = C + S + T
AE = C + I + G
Y = AE in equilibrium
C = a + b(Y - T)
The aggregate consumption function of Badgerland is linear in disposable income (Y - T). Assume that the economy is in equilibrium each year.
|
Year
|
Y
|
T
|
C
|
I
|
G
|
S
|
|
2004
|
1000
|
100
|
830
|
70
|
|
|
|
2005
|
1200
|
150
|
|
|
200
|
115
|
|
2006
|
1500
|
200
|
|
100
|
|
|
35. The consumption in 2005 is ___; the consumption in 2006 is ___.
a. 935; 1000.
b. 900; 1100.
c. 900; 1000.
d. 935; 1110.
36. What is the nominal growth rate of government spending (G) between 2004 and 2006?
a. 190%
b. 150%
c. 90%
d. 50%