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Econ 109
Introduction to Economics-1
Final Exam
12/10/2001
Name_______________________
TA’s Name_______________________
Part I. (40 Points) Choose the best answer and mark it on your scantron sheet.
1. The process of "thinking like an economist" involves three basic items. Which
of the following five does not belong?
a. Economists use assumptions to simplify matters.
x. Economists deal only in items which have prices.
c. Economists explore the relationship between two variables, holding other
variables fixed.
d. Economists think in marginal terms.
e. Economists consider opportunity costs.
2. Which of the following is not a way we can use the study of microeconomics?
a. to understand how markets work
x. to understand the full impact of our trade deficit with Japan
c. to make personal or managerial decisions
d. to evaluate the merits of specific public policies
e. to help decide between two automobiles when we are buying a new car
3. The concept of opportunity cost is based on the principle of:
a. consumer spending.
b. wealth.
c. poverty.
x. scarcity.
e. individuality.
4. The principle of diminishing returns says that:
a. consumer loyalty is constantly decreasing.
b. all else equal, your dollars never buy all the things they previously could
have.
c. if inputs are reduced, then output will remain constant.
x. all else equal, as an input is increased, output increases, but at a
decreasing rate.
e. as you add inputs to a process, you always get more output.
5. Why do people specialize and trade?
x. Because each person can consume more by specializing and trading.
b. Because it is not possible to produce enough good to live on yourself.
c. Because each person is only good at producing one thing.
d. Because people have to have jobs in order to live.
e. all of the above
6. According to the theory of comparative advantage, specialization and free
trade will benefit
a. only the owner of a monopoly.
x. all trading parties who specialize in the production of the good in which they
have a comparative advantage.
c. only that trading party that has an absolute advantage in the production of all
goods.
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d. only the party which specializes the least.
e. only the party which specializes the most.
7. Market systems are desirable because
x. they facilitate exchange and specialization.
b. people cannot be self-sufficient.
c. exchange cannot take place without markets.
d. then everyone pays the same amount in taxes.
e. producers cannot specialize without markets.
8. All else equal, an increase in supply leads to
a. increased price and increased quantity.
b. decreased price and decreased quantity.
x. decreased price and increased quantity.
d. increased price and decreased quantity.
e. decreased price and decreased quantity.
9. Which of the following is an example of a government transfer payment?
a. the salary paid to a soldier
b. the purchase of a new car for the Department of Agriculture
c. the funding of a clinic to provide free vaccinations
x. the food stamps issued to persons in an antipoverty program
e. the funding of a new bridge in an urban area
10. Which of the following is not included in gross domestic product?
a. the cost of a new car
b. the purchase of a used house
c. The phone bill
d. the value of a meal you cook yourself
x. answers 2 and 4 only
11. If the cost of a basket of goods is $125 in 1989, $135 in 1990, and $150 for
1991, assuming 1991 is the base year, the CPI for 1989 is
a. 90.
b. 100.
c. 120.
d. 93.
x. 83.
12. Suppose you notice that when the price level falls, the real value of your money
increases. This induces you to increase your level of consumption. This is an
example of the
x. wealth effect.
b. interest rate effect.
c. real effect.
d. income effect.
e. international trade effect.
13. Which of the following is an example of an automatic stabilizer?
a. an increase in defense spending during an expansion
b. a decrease in social security benefits during a recession
c. an increase in welfare benefits during an expansion
x. a decrease in unemployment benefits paid out during an expansion
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e. an increase in taxes during a recession
14. High levels of inflation are often caused by
a. excessive money creation used to pay for a government budget surplus.
b. excessive borrowing from the public used to pay for a government budget
surplus.
c.excessive borrowing from the public used to pay for a government budget
deficit.
x. excessive money creation used to pay for a government budget deficit.
e. None of the above are true.
15. Which of the following is NOT a tool of the Federal Reserve?
a. open market operations
x. Government spending
c. the discount rate
d. the reserve requirement
e. All of the above are Fed tools.
16. If the Federal Reserve conducts an open market purchase of bonds,
x. the supply of money increases, causing interest rates to decrease.
b. the supply of money decreases, causing interest rates to decrease.
c. the supply of money increases, causing interest rates to increase.
d. the demand for money increases, causing interest rates to decrease.
e. the demand for money increases, causing interest rates to increase.
17. At levels of output where the firm's short-run average cost curve is increasing,
x. the marginal cost curve is above the short-run average cost curve.
b. the marginal cost curve is below the short-run average cost curve.
c. the marginal cost curve is equal to the short-run average cost curve.
d. the marginal cost curve may be above or below the short-run average cost
curve.
e. none of the above are true.
18. A firm's average fixed costs
x. are determined by dividing the total fixed cost by the amount produced.
b. are always larger than variable costs in the short- and long-run.
c. are the same no matter what quantity the firm produces.
d. are equal to zero only when the level of production is also zero.
e. always increase as output increases.
19. Assuming that capital is fixed, as the amount of labor in the economy
increases, total output
a. increases at an increasing rate.
b. decreases at a decreasing rate.
c. decreases at a constant rate.
x. increases at a decreasing rate.
e. increases at a constant rate.
20. An increase in the capital stock
x. shifts up the short-run production function, causing output to increase at all
positive levels of labor.
b. shifts down the short-run production function, causing output to increase at
all positive levels of labor.
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c. shifts up the short-run production function, causing output to decrease at all
positive levels of labor.
d. shifts down the short-run production function, causing output to decrease at
all positive levels of labor.
e. has no impact on the short-run production function.
21. A(n) _________ economy does not participate in international trade, while a(n)
_________ economy does trade internationally.
a. open, shut
b. shut, open
x. closed, open
d. private, public
e. vacant, full
22. Which of the following is an example of convergence?
a. The per capita GDP growth of a poor nation begins to fall.
b. The per capita GDP growth of a rich nation begins to rise.
c. The GDP per capita of a poor nation falls while the GDP per capita of a rich
nation rises.
d. The GDP per capita of a poor nation grows more slowly than that of a rich
nation.
x. The GDP per capita of a poor nation grows more quickly than that of a rich
nation.
23. National output that is not consumed is called
a. leftovers.
b. disposable income.
x. savings.
d. extra income.
e. net exports.
24. Suppose a newspaper publisher provides computers for all the reporters and
does not fire any employees. This firm is said to experience
x. capital deepening.
b. labor reduction.
c. investment deepening.
d. capital augmentation.
e. labor intensity.
25. If the real GDP growth rate of a country is 7%, how many years will it take for
real GDP to double?
a. 1 year
x. 10 years
c. 100 years
d. 1,000 years
e. None of the above is the correct calculation.
26. If the price of a hamburger is 3 marks in Germany and the exchange rate is 1.5
marks = $1, what is the dollar price of a hamburger in Germany?
a. $1
b. $0.5
c. $1.5
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x. $2.0
e. $3
27. A cost a firm has already paid or has already agreed to pay is a/an
a. implicit cost.
x. sunk cost.
c. explicit cost.
d. variable cost.
e. shut-down cost.
28. A curve showing the relationship between price and the quantity of output
supplied by an entire industry is a
a. short-run supply curve.
b. short-run marginal cost curve.
c. demand curve.
x. short-run market supply curve.
e. short-run average variable cost curve.
29. An industry with a positively sloped long-run supply curve is called
a. a constant cost industry.
b. a decreasing cost industry.
x. an increasing cost industry.
d. an inefficient industry.
e. a flat cost industry.
30. A monopolist will choose a level of output that sets
a. the price equal to the marginal cost.
b. marginal cost greater than marginal revenue.
c. marginal cost equal to the market demand curve.
x. marginal revenue equal to marginal cost.
e. marginal revenue greater than marginal cost.
31. A monopolist sets the price of a good by choosing the level of output and then
a. setting the price according to the marginal revenue curve.
x. setting the price according to the market demand curve.
c. setting the price according to the marginal cost curve.
d. setting the price according to the market supply curve.
e. setting the price according to the aggregate demand curve.
32. Monopolies
a. will set a higher price and a higher level of output than would be set under
perfect competition.
b. will set a lower price and a higher level of output than would be set under
perfect competition.
c. will set a lower price and a lower level of output than would be set under
perfect competition.
x. will set a higher price and a lower level of output than would be set under
perfect competition.
e. may set a higher price than would be set under perfect competition.
33. As compared to perfect competition, monopolies
x. reduce consumer surplus, create positive economic profits, and generate
deadweight loss.
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b. increase consumer surplus, create positive economic profits, and generate
deadweight loss.
c. reduce consumer surplus, create negative economic profits, and generate
deadweight loss.
d. reduce consumer surplus, create positive economic profits, and generate
deadweight gains.
e. increase consumer surplus, create negative economic profits, and generate
deadweight loss.
34. If two nations specialize in the production of the good in which they have a
a. comparative advantage and then participate in free trade, then for each nation
the consumption possibilities curve will be equal to the production
possibilities curve.
x. the consumption possibilities curve will be outside of the production
possibilities curve.
c. the consumption possibilities curve will be inside the production
possibilities curve.
d. the consumption possibilities curve may be inside or outside the production
possibilities curve.
e. None of the above are true.
35. A situation in which there is no trade between nations is known as
a. dumping.
b. absolute advantage.
c. an import quota.
x. autarky.
e. an infant industry.
36. According to the theory of purchasing power parity, if a basket of goods in the
United Kingdom cost £500 while an identical basket in the U.S. cost $1,000,
then the exchange rate between pounds and dollars will be
a. 2.0 pounds per dollar.
b. 1.5 pounds per dollar.
c. 1.0 pounds per dollar.
d. 0.75 pounds per dollar.
x. 0.5 pounds per dollar.
37. Which of the following is not a key factor in explaining poverty?
a. single parenthood
b. racial segregation
c. racial and gender discrimination
d. inadequate education
x. All of the above are factors that cause poverty.
38. If the public were asked to voluntarily pay for national defense, some people
would not pay for it even though they would still be consumers of national
defense. This is an example of
x. the free-rider problem.
b. the median voter rule.
c. external benefits.
d. subsidies.
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e. private goods.
39. To be considered a public good, a good must be
a. rival in consumption and nonexcludable.
b. nonrival in consumption and excludable.
x. nonrival in consumption and nonexcludable.
d. rival in consumption and excludable.
e. none of the above are true.
40. Which of the following is not an example of a public good?
a. national defense
b. law enforcement
x. the Medicare program
d. the interstate highway system
e. space exploration
Part II. ( 30 points) Fill in the blanks using the vocabulary below.
1. A tax on a particular good ( an excise tax) shifts the market supply curve __upward_.
2. A natural monopolist picks the output at which __marginal______ ___cost________
equals _marginal__________ __revenue_________ .
3. A natural monopoly occurs when the long-run cost curve lies entirely
__above_________ the demand curve of the typical firm in a two-firm market.
4. The advertising slogan for BMW is _the_____ _ultimate_________
__driving________ _machine__________, and is an example of using advertising as
a policy in _strategic__________ __planning___________ to gain market share.
5. The velocity of money is equal to ___nominal___ GDP divided by the money supply.
6. A firm that is losing money should continue to operate if the market price exceeds
short run _average________ __variable_________ ___cost_________ .
7. To increase the level of output, the Federal Reserve should conduct an open market
__sale__________ of bonds.
8. Looking at the production function, with the stock of capital fixed, output increases
with labor input but at a rate that __decreases___________ .
9. An increase in the stock of capital shifts the production function _upward_________.
10. About one third of M1 consists of _demand___________ _deposits____________ .
11. The age group with the highest poverty rate today is _under_______ _eighteen_____.
12. For a given level of GDP, the curve illustrating the relationship between a bad,
pollution, and a good, consumption, where some of the latter can be used (taxed) to
reduce the former, is called a _consumption__ __possibility___ __frontier_______.
13. Assuming constant returns to scale, for example, compared to competition, monopoly
redistributes income from _consumer_ __surplus___ to monopoly __profits______ .
14. Given the situation in question 13, above, monopoly is also inefficient, and some
__consumer_ _surplus_ is lost to society and is called _dead__ _weight__ _loss__ .
15. A country that runs a _deficit___ year after year on current account must
_import_________ capital and is called a __debtor_______ nation.
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Vocabulary
Above
Average fixed cost
Average variable cost
Autarky
Consumer surplus
Consumption possibility frontier
Creditor
Decreases
Dead weight loss
Debtor
Deficit
Demand deposits
Downward
Export
Gold Bars
Import
Increases
marginal cost
marginal revenue
nominal
over sixty-five
price
production possibility frontier
profits
purchase
real
sale
strategic planning
surplus
the mayor of truckville
the ultimate driving machine
total costs
under eighteen
upward
we are driven
Part III. (45 points) Answer all three questions.
1. Last Thursday’s Santa Barbara News-Press, along with The Wall Street Journal,
carried a story stating that the International Monetary Fund had refused to loan $1.3
billion to Argentina’s government. The IMF and other institutions, such as the World
Bank, have already loaned nearly $50 billion to Argentina this year. The Argentine
government is running a $2 billion budget deficit this month and may default on their
debts coming due. Currently, Argentina is maintaining an exchange rate with the US
dollar of 1, but reserves of foreign currency are running low. There was a run on the
banks by Argentines, who fear devaluation of the peso may be imminent. The
government responded by making it a crime to leave the country with more than $
1,000 . If this action does not prevent capital flight,
a. which curve will shift, the
demand for pesos or the
supply of pesos?
___supply_____________
b. Will this curve shift to the
right or to the left?
___right_________
c. Will the exchange rate,
$ per peso, rise of fall?
Demand for pesos
$ per peso
1
Supply of pesos
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____fall__________
Quantity of pesos
2. Suppose Microsoft can produce Windows operating systems with a constant returns
to scale technology and has essentially a 100 percent market share. Suppose also that
consumer demand for this operating system is linear, as illustrated in the diagram
below.
Price of a Windows
Operating System
Consumer demand curve for Windows operating
system
p
LRMC
MR
q
Units of Windows per year
a. Draw in the long run marginal cost curve, and label it LRMC.
b. Draw in the marginal revenue curve and label it MR.
c. Illustrate the output produced, q, and the price charged, p, in the diagram.
Does the consumer pay a price equal to, above, or below the marginal cost of
production? __above____________
3. The pollution-consumption possibility frontier (PCPF) illustrated in the figure
illustrates the tradeoff between consumption and pollution for a given level of GDP.
This figure assumes a country can divide its GDP between consumption and
expenditures to reduce pollution.
a. If a country tries to consume
most of its output (GDP), what
will the level of pollution be?
____high____________
pollution
b. According to this PCPF, can this
country drive pollution to zero?
___no______
c. Why not? _diminishing returns ________
_(to expenditures on pollution reduction)____
Pollution-Consumption
Possibility Frontier
consumption
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IV. (60 points) Answer all three questions.
1. There is considerable economic and political interest in globalization and
international trade around the world. In fact, world trade is growing more rapidly that
world GDP. At the same time, developed countries like the United States use a
tremendous amount of energy and emit carbon dioxide and other pollutants that may
endanger the environment.
a. Discuss the tension between growth and pollution. Is growth the problem or the
solution, or do we know?
b. What is the alternative to growth in world GDP? World population is growing
rapidly and may exceed eight billion people in fifty years.
c. Without continuing economic development and growth in world GDP, would the
planet, or much of it, face a Malthusian fate in fifty or one hundred years?
2. In a recent opinion piece, New York Times columnist Thomas Friedman wrote:
“ While the Bush administration was pushing missile defense
as its priority before Sept. 11, some of us thought otherwise. We
began by asking a simple question. What are the real threats to U.S.
security? The answers were: nuclear proliferation, missile
proliferation, terrorism, mafias, rogue states, and financial contagion.”
a. What is financial contagion?
b. Has the world experienced an international financial or monetary crisis that
spread from one country to many countries within the past five years ?
c. Why is such a crisis, if not contained, a threat to U.S. security? What can the U.S.
do to try to contain financial contagion, if an international crisis is triggered?
3. Explain the connection between international trade, market structure, and economic
efficiency.
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a. Under autarky, what market structure is necessary to insure efficiency and
consumer welfare?
b. If a country suffers from pockets of inefficient industry or commerce with
monopoly power, how can international competition help this country eliminate
this inefficiency over time?
Essay Answers
1.
Outline
i.
Growth in GDP per capita improves the economic welfare of common
people
ii.
Growth uses natural resources and causes pollution.
iii.
Population growth is highest for the less developed countries. If they do
not grow and develop economically, their large populations could face a
Malthusian fate.
Growth is not an unmixed blessing. Increases in income per capita improve the
living standards of working people. At the same time, economic development brings with
it problems such as pollution. For example, developed countries use a lot of fuel and
generate a lot of carbon dioxide. But there is also pollution of rivers, lakes, and oceans to
contend with.
There may be no alternative to growth. In the face of rapid population increases in
the less developed countries, a failure to improve their economic situation would
condemn them to a Malthusian fate.
Ironically, it is the developed countries that have the resources to finance
pollution reduction policies. So perhaps the best we can hope for are more enlightened
policies around the world to combat pollution. For global problems such as warming, and
pollution of the oceans, this will require cooperation among countries as well as wise
domestic programs to finance pollution abatement.
2.
Outline
i.
financial contagion: international financial crises
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example: Thailand in 1997, collapse there spread to other Asian countries
and to South America
iii.
If the world is plunged into recession, then the US economy suffers
iv.
Treasuries and central banks, especially in developed countries need to
cooperate and arrange loans for countries in crisis.
Financial contagion refers to countries who face capital flight, and whose
problems may trigger similar difficulties in their neighbors and trading partners. A recent
example is the case of Thailand in 1997. It had been developing rapidly, perhaps too
rapidly. In the euphoria of success, questionable speculative investments in condos, golf
courses, and the like were undertaken. Like many developing countries, Thailand did not
have a large reserve of foreign currency, since this is often used to import machinery etc.
needed for development. Japan, a large trading partner with Thailand was in a recession
of long duration and closed some automobile plants, which helped to trigger the crisis.
Foreign investors decided to cash in and repatriate as much of their money as possible,
and Thailand was forced to devalue their currency, the Baht.
This experience in Thailand, which had been doing well economically, raised
questions about other countries, and soon Malaysia, the Philippines, Korea and other
countries were in trouble. The situation was exacerbated by currency speculators who try
to make money by destabilizing a target country’s currency.
The US Treasury worked with other countries and with the International
Monetary Fund to arrange loans for the countries in trouble, to prevent an international
crisis in confidence. As it was, the crisis spread to Brazil and Argentina before it was
contained.
The danger to the United States is that our modern economy is much more
international in nature, and we could not escape the effects of a world recession.
Containment depends on loans and there is only so much money that can be mobilized if
a lot of countries need to be helped simultaneously. Lastly, the response is one of
cooperation among developed countries trying to protect their own interests. But it does
cost money and the US taxpayer helps foot the bill. Whether world financial leaders
always will be wise enough and quick enough to contain the contagion is an open
question.
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Outline
i.
Under autarky, or economic isolation with no international trade a country
must rely on its own anti-trust policies to foster competitive markets.
ii.
With international trade, pockets of monopoly power within a country will
face world competition, and over time their monopoly power will likely be
eroded.
iii.
World trade and world competition makes markets more competitive and
industries have to compete to survive. The increased competition leads to
a more efficient allocation of resources benefiting the consumer.
If a country is isolated economically, then market structure depends on domestic
anti-trust policy and domestic politics. With world trade, domestic industries face
competition from abroad and their long term survival depends upon efficiency and being
able to sell at a competitive low cost. Consequently, globalization and the fact that world
trade is growing faster than world GDP helps countries become more efficient. Their
markets and their industries and services have to be competitive to survive in the world
marketplace. Low cost production through the efficient allocation of resources is a
benefit to the consumer. Trade helps to break down monopoly power.