Reference no: EM131022134

First Midterm

PART I: MULTIPLE-CHOICE QUESTIONS

1. Which of the following statements is a positive statement?
a. The use of fossil fuels is contributing to global warming.
b. Accounting firms should be more heavily regulated by the government.
c. The demise of Enron would not have occurred if we had effective campaign finance reform.
d. Welfare programs may adversely affect work incentives for the recipients of welfare.
e. All of the above are positive statements.
f. (a) and (d) are positive statements.

2. A production possibilities frontier is bowed out from the origin because of
a. Scarcity of resources.
b. The failure of technology to advance in a continuous manner.
c. Specialization of resources.
d. Opportunity cost.
e. Underemployment of resources.

3. As you move upward along a bowed out from the origin production possibilities frontier, the opportunity cost of producing more of the good measured on the y-axis
a. Equals the increase in the number of y units produced.
b. Remains constant.
c. Decreases.
d. Increases.
e. Cannot be measured without additional information.

4. Suppose Country Z's production possibility frontier for the production of guns (G) and butter (B) is given by the following linear equation:

G = 100 - 10B

Where G is measured on the y-axis and B is measured on the x-axis. Furthermore, suppose that Country A's production possibility frontier for the same two goods is given by

G = 50 - 2B
If these are the only two economies in the problem and they are producing only these two goods, then which of the following statements is true?
a. The opportunity cost of producing more G for Country Z is .1 B.
b. The opportunity cost of producing more G for Country A is 5B.
c. Country Z has an absolute advantage in producing G.
d. Country A has a comparative advantage in producing B.
e. All of the above are correct.
f. (a) and (c) are correct.
g. (a), (c), and (d) are correct.

5. To find the market demand curve for a private good
a. Hold price constant and sum together the quantities demanded by all consumers at that price: repeat this procedure for other prices.
b. Hold quantity constant and sum together the prices that people are willing to pay for that quantity; repeat this procedure for other quantities.
c. Take the individual demand curve and multiply it by the number of people in the market.
d. Find out how much of the good suppliers are willing to supply at each price since suppliers willingness to supply the good will determine how much of the good is available at each price.
e. Look at historical figures to see how many units of the good the market has consumed on average over the past five years.

6. Consider the market for bicycles. What will happen in this market if the price of labor increases while the price of scooters decreases?
a. The equilibrium price will increase while the equilibrium quantity will decrease.
b. The equilibrium price will decrease while the equilibrium quantity will decrease.
c. The equilibrium price will be indeterminate while the equilibrium quantity will increase.
d. The equilibrium price will be indeterminate while the equilibrium quantity will decrease.
e. The equilibrium price will increase while the equilibrium quantity will be indeterminate.

Use the information below to answer the next three questions.

Consider a market for widgets described by the following demand and supply equations:

Demand: Q = 500 - P

Supply : Q = 4P - 400

7. In equilibrium, the consumer surplus in this market is equal to ______ while the producer surplus is equal to __________.
a. $102,400; $25,600
b. $51,200; $12,800
c. $180; $100
d. $320; $80
e. $64,000; $64,000

8. Suppose the government decides that consumption of this product is too high and should be reduced by 20 units. In order to obtain this goal the government will legislate an excise tax of ________ on producers of the good.
a. $15 per unit
b. $20 per unit
c. $25 per unit
d. $30 per unit
e. $35 per unit

9. The imposition of the tax imposed in question 8 will reduce consumer surplus by ____, create a deadweight loss of ______, and provide tax revenue equal to _______.
a. $45,000: $0; $6000
b. $6000; $0; $6000
c. $6200; $250; $7500
d. $6200; $0; $200
e. $6200; $200; $7500

10. Which of the following statements is true?
a. An increase in the price of the good will cause demand to decrease.
b. A decrease in factor prices will cause a rightward shift in the supply curve.
c. The economic incidence of excise taxes always falls on consumers.
d. (a) and (b)
e. (a), (b), and (c)

11. The most prominent role for money is to serve as a
a. form of credit.
b. source of income.
c. means of payment.
d. standard of value.
e. store of value.

12. GDP
a. Provides a measure of the nation's well being.
b. Includes the value of leisure.
c. Is adjusted downward for the cost of pollution generated in producing goods and services.
d. Per capita measures the standard of living an economy has.
e. None of the above is true.

13. Gross investment in a year
a. Includes depreciation and therefore overstates the level of new investment that occurs in a year.
b. Will equal the amount of capital at the end of the year.
c. Includes new home construction.
d. All of the above are true.
e. (a) and (c)

Answer the next three questions using the information provided in the table below.

	Prices in 2000	Quantities in 2000	Prices in 2001	Quantities in 2001
Bikes	$200	500	$300	600
Cars	$10,000	200	$9000	260
CDs	$10	300	X	400

Assume that the economy depicted in the above table produces only three goods: bikes, cars, and CDs.

14. Suppose you are told that nominal GDP is 20% greater in 2001 than it was in 2000. What is the value of nominal GDP in 2001?
a. $6,309,000
b. $2,556,000
c. $2,103,000
d. $2,523,600
e. Cannot be determined without more information

15. The price for a CD in 2001 is
a. the same as the price for a CD in 2000 in nominal terms.
b. the same as the price for a CD in 2001 in real terms.
c. 10% lower in 2001 than it was in 2000 in nominal terms.
d. 20% lower in 2001 than it was in 2000.
e. 20% higher in 2001 than it was in 2000.

16. Using 2000 as the base year, a "simple" calculation of real GDP for 2000 would equal ______ and a "simple" calculation of real GDP for 2001 would equal _______.
a. 100; 120
b. 100; 80
c. $2,523,600; $3,028,320
d. $2,103,000; $2,523,600
e. This cannot be calculated without additional information.

17. Which of the following is true?
a. The civilian labor force includes everyone 16 years or older except those who are serving in the military.
b. The unemployment rate is equal to the number of unemployed divided by the civilian labor force.
c. The unemployment rate overstates the level of unemployment due to its treatment of discouraged workers.
d. (a), (b), and (c)
e. (b) and (c)

18. Along a given production function
a. Diminishing marginal returns to capital is illustrated.
b. As you hire more and more labor, labor productivity increases.
c. The hiring of additional labor will cause the aggregate production function to shift upwards.
d. Increases in output are possible only through increases in the use of capital or changes in technology.
e. None of the above is true.

19. In the Classical Model, when the government increases the government deficit (e.g., government spending increases while taxes stay constant) this will
a. Cause interest rates to fall.
b. Cause private investment spending to decrease.
c. Cause the supply of loanable funds curve to shift to the right.
d. Cause the demand for loanable funds curve to shift to the right.
e. Cause the equilibrium quantity of loanable funds to increase.
f. (a), (b), and (d)
g. (b) and (d)
h. (b), (d), and (e)

20. Suppose that the supply of labor increases while simultaneously the demand for labor decreases. Holding everything else constant, we know
a. That the equilibrium wage will fall while the equilibrium quantity of labor increases.
b. That the equilibrium wage will rise while the equilibrium quantity of labor decreases.
c. That the equilibrium wage and equilibrium quantity of labor will both decrease.
d. That the equilibrium wage and equilibrium quantity of labor will both increase.
e. None of the above.

21. Growth in the economy due to increases in the supply of labor, holding everything else constant, will
a. Result in lower wages.
b. Result in higher wages.
c. Result in lower labor productivity.
d. Result in higher labor productivity.
e. (a) and (c)
f. (a) and (d)
g. (b) and (c)
h. (b) and (d)

22. Which of the following is true?
a. In the simple circular flow model total spending is equal to total income: this illustrates Say's Law where supply creates its own demand.
b. Say's Law is the Classical Model implies that firms in the aggregate can sell their output and that the economy will be at full employment.
c. Say's Law implies that leakages will equal injections.
d. (a), (b), and (c)
e. (b) and (c)

23. Which of the following is true?
a. If real GDP grows at a faster rate than population during the year then the standard of living in an economy will increase.
b. Unemployment implies wasted resources but does not affect the standard of living.
c. Transactions costs are greater in a barter system than in a system that uses money.
d. The circular flow diagram of the economy provides a simple model of the relationship between the goods market and the product market.
e. All of the above are true.
f. (a), (c), and (d)
g. (c) and (d)

24. An economy at full employment
a. Has eliminated frictional unemployment.
b. Has eliminated structural unemployment.
c. Has minimized seasonal unemployment.
d. Has eliminated cyclical unemployment.
e. All of the above occur at full employment.

25. Which of the following is true?
a. The CPI is calculated using a fixed market basket of goods.
b. The CPI overstates inflation due to substitution bias: i.e., it does not allow consumers to substitute relatively cheaper goods for relatively more expensive goods
c. The CPI in the base year equals 100 on a 100-point scale.
d. The CPI is a measure of the price level in the economy.
e. All of the above.
f. (a), (c), and (d)
g. (a) and (c)

26. If the demand for money is greater than the supply of money, we know
a. Interest rates will decrease.
b. People want to buy bonds.
c. People want to sell bonds.
d. (a) and (b)
e. (b) and (c)

27. Which of the following is true?
a. In the Classical Model of the economy the labor market is always in equilibrium.
b. In the Classical Model there is no frictional or structural unemployment.
c. The Classical Model always achieves full employment.
d. (b) and (c)
e. (a) and (c)

28. In calculating GDP it is important to
a. Avoid double counting: i.e., counting goods as final goods that were used as intermediate goods.
b. Remember to count wage income as well as the prices of final goods and services produced in an economy during the time period.
c. Exclude items that were produced in previous years since GDP counts only current production.
d. Include an approximation of the value of illegal activities since there is a significant amount of production associated with the illegal economy.
e. All of the above are true.
f. (a), (b), and (c)
g. (a), (c), and (d)
h. (a) and (c)

29. Which of the following is true?
a. GDP measured using the expenditure approach sums up business expenditures on land, labor, capital and entrepreneurial ability.
b. GDP measured using the value added approach will yield a different, and less accurate, measure of GDP than will GDP measured using the factor income approach.
c. GDP is always greater than GNP.
d. GDP is equal to the sum of consumption spending, investment spending, government spending and taxation, and net export spending.
e. GDP for a year can be calculated by multiplying the price of each final good or service by the quantity of each final good or service and then summing these products.

30. Suppose Bob loans Joe $100 for a year. Bob charges Joe 10% interest on the loan anticipating that his real return on the loan will be 6%. If inflation for the year is 5%, then
a. Joe will be better off than Bob.
b. Bob will be better off than Joe.
c. Joe will pay Bob $105 at the end of the year.
d. Joe will pay Bob $106 at the end of the year.
e. Joe will pay Bob 11% on the loan.

PART II: PROBLEMS

1. Suppose there are two countries that both produce bananas and sardines. Both countries face linear production possibility frontiers. Country A can produce 250 bananas and 0 sardines or 0 bananas or 125 sardines or any combination that lies on the line that these two points are on. Country B can produce 400 bananas and 50 sardines or 80 bananas and 400 sardines or any combination that lies on the line that these two points are on. In this problem assume that sardines are measured on the vertical axis and can be abbreviated as S while bananas are measured on the horizontal axis and can be abbreviated as B.

a. What is the equation for Country A's production possibility frontier? Write this equation in slope-intercept form.

b. What is the equation for Country B's production possibility frontier? Write this equation in slope-intercept form.

c. For country A, what is the opportunity cost of producing 10 more bananas?

d. For country B, what is the opportunity cost of producing 20 more sardines?

e. Which country has the comparative advantage in producing sardines?

f. Which country has the absolute advantage in producing sardines?

2. Suppose there are three individuals in a market. Individual A's demand for the good is given by P = -2Q + 100; Individual B's demand for the good is given by P = -2Q + 100; and Individual C's demand for the good is given by P = -4Q + 200.

a. What is the equation for the market demand for this good if there are only these three individuals in the market? (hint: you will need to specify a range of quantities that corresponds to a particular market demand curve)

b. If the market price is $50, how many units will Individual A demand?

c. If the market price is $50, how many units will Individual B demand?

d. If the market price is $50, how many units will Individual C demand?

e. If the market supply curve is given by P = Q + 30, then what is the equilibrium price and quantity in this market?

3. Suppose there are eight individuals in an economy. Each of these individuals is described below. After each individual is a blank: on this blank identify whether or not this individual is employed (E), unemployed (U), or not in the civilian labor force (NLF).

a. Joe is fifteen years old and works at his parents restaurant without pay sixteen hours a week. _________________
b. Mike is seventeen years old and works at his parents dry cleaners without pay five hours a week. __________________
c. Claire, a homemaker for seventeen years, applied for a job three weeks ago. _________________________
d. Susy is under investigation for alleged wrongdoing and is absent from her job without pay. _________________________
e. Clark would like to find work, but has not applied for a job in six weeks due to sickness and some traveling he has been doing. _________________
f. Jerry is in the military and learning to fly jets. _____________________
g. Jimbo is institutionalized due to his mental problems. _______________________

PART III: ESSAY

Thus far in the semester we have discussed many topics: select three broad ideas that you have been introduced to and discuss their relevance and importance. Be sure to identify the three ideas and then provide a supporting argument for why each is important. Your answer will be graded on its clarity and the strength of the arguments you offer.