Download Practice Exam - Matthew H. Shapiro

Econ 1102 Practice Final
Name:
(2 RP)
(+2 RP for writing name as it appears on the class roster)
Section #:
(2 RP)
(+2 RP for section enrolled in)
TA Name:
(2RP)
(+2 RP for correct TA name)
Non-programmable calculators only
No cell phones, no notes
Time limit: 120 minutes
Each page may have has its own directions. Follow the directions carefully.
Clearly indicate which question you are answering.
Correctly answering extra questions on a page will generate Replacement Points for that
page only.
For full credit, graphs must be completely LABELED and math work shown.
Be sure to justify your answers clearly and precisely for full credit,.
Rambling, incoherent or illegible responses shall be penalized even if correct. Points are
rewarded for answers consistent with those your instructor would give to the same question.
This exam is 9 pages (including this front page), numbered 1-9.
GOOD LUCK!
RP:_____1:________ 2:_________3:_________4:_________
5:______ 6:______7:_______8:______
Total:_________
QUESTIONS 1 (25 pts, 8RP)
1.
(8 pts)
Draw and label a flow diagram with three agents: consumers, profit earning firms, rest of
world and three places of exchange: factor market, output market, financial market. On your diagram,
clearly mark each component we use to calculate GDP.
(12 pts) Give one example of an economic policy that Econland could implement to encourage
growth. Using supply-demand graph analysis, what are the potential negative effects of the economic
policy you recommended? Clearly discuss surplus, quantity and price effects. Be sure to mention If
there is an additional effect on the general economy (i.e. government budget problems,
unemployment).
(5 pts) Draw the Econland PPF in 1982, placing bread on the x-axis. Indicate a point where this
economy might be if it is producing efficiently. Inefficiently. Show how the PPF moves if the economy
experiences war.
(2 RP) Define an Economic System
(4 RP) List 4 characteristics of the market system.
(2 RP) Define Economic Growth
2.
3.
4.
5.
6.
Save
1.
Consumption
Expenditure
Wages
Rent
Consumers
Economic
Output Market
Investment
Factor Market
Profits
Revenue
Firms
Financial
Market
Costs
Repay
GROUP B
Exports
Repay
Rest of World
Imports
Loan
2. A rebate on food to increase health and nutrition of workers, would increase demand for food.
Quantity of food purchased in equilibrium would increase, price of food would increase as well.
Total, Consumer and Producer Surplus would increase. Unless the government increases taxes
somewhere else, it will have a budget deficit (spend more than it earns in taxes). If the government
increases taxes on a different good, it would generate a dead-weight loss for that good.
3.
Efficient
150
War
Inefficient
0
9000
Page 2 of 11
4. A set of institutional arrangements to determine how to distribute scarce resources to satisfy peoples
wants.
5. Any four of the following:
a. Extensive Private Property Rights
b. Freedom of Enterprise and Choice
c. Self Interest as the primary motivating force
d. Competition
e. Existence of market and prices
f. Active, but limited government
6. An increase in RGDP per capita.
Page 3 of 11
QUESTIONS 2 (25 pts, 25 RP)
(2 pts) What is the official size of Econland’s population?
(2 pts) What is the size of the Econland’s labor force?
(2 pts) How many people are unemployed in Econland?
(2 pts) What is the participation rate in Econland?
(5 pts) What is the Econland’s Nominal GDP in 2000?
(3 pts) What is the Econland’s Real GDP in 2000?
(2 pts) Suppose RGDP is $20,000 in 2005, and population is the same as it was 2000. Has Econland
experienced growth or a recession?
14. (2 pts) What is the GDP Deflator in 2000?
15. (5 pts) What is CPI inflation from 1982 to 2000?
16. (2 RP) Define Gross Domestic Product (GDP):
17. (5 RP) State 1 reason why economists use real GDP per capita to study growth instead of Nominal
GDP per capita. Why don’t economists use Real GDP to study growth?
18. (5 RP) Suppose that USA unemployment rate falls from 9.7% to 9.3%. State and explain one reason
why this number alone NOT a clear sign that more people are finding jobs. Name at least one other
economic indicator we should know before we can reach the conclusion that more people are finding
jobs, and briefly explain why this additional information helps.
19. (3 RP) What is the Natural Rate Hypothesis?
20. In April 2010, the European Union declared that travelling for tourism is a basic human right and plan
to have taxpayers pay up to 30% of travelling costs for youth and the elderly tourists in the EU.
a. (5 RP) Why may you expect GDP for individual countries in the EU to decrease under this plan?
b. (5 RP) Why may GDP for at least one country in the EU increase (you don’t need to name a
country, just explain why GDP may increase).
7. 15+50+10+5+20=100
8. 50+10=60
9. 10
10. (60/100)=0.6=60% (Answer Q12/ Answer Q11)
11. Bread in 2000: 6000 thousand. Flour purchased by consumers: 200-6000/100=200-60=140
[6000*3.50+140*15]=21000+2100=$23,100 thousand (or $23,100,000)
12. RGDP_00=[6000*2.00+140*10] = 12000+1400=$13,400 thousand
13. Growth
14. Nominal/Real=(23,100/13,400)x100=172
15. CPI_2000: (2*3.5/2*2)=1.75
CPI Inflation: ((1.75-1)/1)*100 = 75
16. The market value of final goods and services produced within the borders of a given country within a
given period of time (+0.5 for each highlighted)
17. Nominal GDP can be misleading because it doesn’t adjust for different prices over time. Use Real per
capita so that we can see how much output each person receives – for welfare to improve, need each
person to be receiving more.
18. Example: Maybe some of the unemployed become discouraged workers, instead of finding jobs.
Therefore, the decrease unemployment is because people have given up looking, not because they
have found a job. Examples of additional info (only need 1):
a. Participation Rate – can see if people are leaving the labor force as discouraged workers
b. Employment number – can see if there are literally more people working.
c. Labor Force.—can see how many are employed and unemployed with the unemployed rate.
d. Unemployed number-can see if the labor force is increasing or not.
e. Number of discouraged workers
19. The claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate
of inflation.
20. (a) To fund the plan the government needs to increase expenditures, G – BUT this G will probably not
stay within the country as people are using it to travel to different countries. So, either the government
increases taxes and decreases C or it runs a deficit and decreases I through crowding out, without a
matching increase in G.
(b)The countries to which people are travelling to will experience an increase in C (from tourism),
which will be reflected as an increase in GDP.
7.
8.
9.
10.
11.
12.
13.
Page 4 of 11
QUESTIONS 3 (25 pts, 25RP)
21. (8 pts) Gina has $100 to spend or save. Suppose that inflation=0%. She could:
i. Buy $100 of stocks in a company, BigBubble for a year. There is a 90% chance that
BigBubble collapses and she loses all her money, a 9% chance that it gives her a 100%
interest, and a 1% chance that it gives her a 2000% interest.
ii. Put it in a jar on her bookshelf.
iii. Spend $100 on a 1 year Tbill that pays 7% real interest.
Which option would give her the highest expected yield a year from now?
22. (4 pts) How much would you need to invest this year if you would want $5000 a year from now, and
real interest rates are 5%?
23. (2 pt) Suppose someone in Econland saves $500 in 1970 by putting burying money in their back
yard. How much is that money worth in nominal terms in 2000?
24. (3 pts) Suppose instead that they invested their money in the bank at a nominal interest rate of 18%
from 1970 to 2000 when inflation is 5%. What is the real interest rate they earn?
25. (3 pts) What is the equivalent value of $2500 in 2000 in 1970 if Cost of living in 1970 is 35 and Cost
of living in 2000 is 42? (I.e how much money would you need in 1982 to buy the same amount of stuff
as you can with $2500 in 2000)
26. (2 pt)What is the value of money in the economy if average price level is $10?
27. (3 pts) What is the velocity of money in the economy if price level is $10, RGDP is 5000, money
supply is $8000?
28. (2 RP) What is the Central Bank of the USA called?
29. (3 RP) Define Fractional Reserve Banking.
30. (6 RP) A friend of yours needs to take out a 5 year loan to pay tuition. They can choose between two
loans: One has a 3% interest for the duration of the loan. The other loan has an adjustable interest
rate – it will change with the interest rate in the loanable funds market (currently 2.75%). Based on
what you’ve learnt in this class, which loan would you advise your friend to take, and why?
31. (4 RP) What is crowding out, and how is it caused by expansionary fiscal policy?
32. (2 RP) If there is a recession, will the Central Bank use expansionary or contractionary monetary
policy?
33. (2 RP) If there is a recession, will the government use expansionary or contractionary fiscal policy?
34. (6 RP) Define the 3 tools of monetary policy
21. Of the three options, buying the Tbill is the best.
(a) After 1 year: 0.90(0)*100+0.09*(1+1)*100+0.01*(1+20)*100 =0 + 18+21= $39
(b) $100
(c) After 1 year: 100*(1.07) = $107
22. $5000 = P*(1.05) ; P=$4761.90
23. $500
24. 13%
25. 2500*(35/42)=$2083.3333
26. V=1/P = 1/$10=0.10
27. V=P*Y/M = ($10*5000)/$8000 = 6.25
28. Federal Reserve Bank
29. Banking system in which banks are required to keep a percentage (fraction) of checkable deposits in
cash or with the central bank.
30. Choose fixed interest rate. Due to the recession interest rates are currently low. When the recession
ends, the Fed will tighten money supply, increasing interest rates, thereby increasing the interest rate
of the adjustable rate loan.
31. Crowding out is the decrease in investment that results from decrease in public savings/expansionary
fiscal policy. With expansionary fiscal policy, the public savings decreases, therefore the supply of
loanable funds decreases. This results in a higher interest rate and a lower demand for loans in the
new equilibrium in the loanable funds market (full credit if explained with diagrams instead).
32. Expansionary Monetary Policy
33.
Expansionary Fiscal Policy
34. Reserve Ratio (RR): Regulations on the minimum amount of reserves that banks must hold against
deposits; Open-Market Operations: The purchase and sale of US government bonds by the Fed
Discount Rate: The interest rate on the loans that the Fed makes to the banks.
Page 5 of 11
35.
36.
37.
38.
39.
40.
41.
42.
43.
QUESTIONS 4 (25 pts, 18RP)
For the following questions, use the data for Econland in 2005.
(4 pts) What is the Money Supply in this economy?
(3 pts) What is demand for Loanable funds?
(3 pts) How much does Initial Spending in the Output Market need to change to return the Econland
to the AD-AS Equilibrium?
(5 pts) If the Government decides to change taxes to achieve this objective, what will the new level of
taxes be?
(5 pts) If the Central Bank implements OMOs to return the economy to the AD-AS Equilibrium, what
value of bonds will the Fed buy/sell to close the GDP gap?
(4 RP) The four components of aggregate demand are:
(8 RP) In 2010, Haiti experienced a large earthquake. Explain how each of the following events
changes the price level: the loss of life, damage to infrastructure, inflow of monetary aid, and inflow of
goods aid. (You are NOT asked to find the overall change in price)
(4 RP) Correctly name 2 groups of economic thought and what they believe to be the main cause of
economic fluctuations.
(2 RP)List 2 reasons in favour OR List 2 reasons against a balanced government budget.
35. Money Multiplier = 1/RR = 1/(0.05) = 20
Money Supply = (20)x(400)=$8000
36. Money Demand = Money Supply
8000 = 12000-2000i => i=2%
Loanable Funds Demand = 1000-100(2)=$800
37. Need to increase GDP by $6000-$5000=$1000.=>Change GDP=$1000
Change GDP=(1/(1-MPC)*(ChangeInitialSpending)
1000=(1/1-0.95)*ChangeInit=>1000/20=ChangeInit => ChangeInitialSpending = $50
38. ChangeInitial=ChangeConsumption= $50
ChangeConsumption=MPC*ChangeTax
$50=MPC*ChangeTax
ChangeTax=$52.63
$52.63=TaxOld-TaxNew
Taxnew=$200-$52.63 = $147.37 (+1 correct new level of taxes)
39. ChangeInvestment=ChangeInitialSpending=$50
New Loanable Funds Demand = $800+$50=$850
$850=1000-100i (+1: Correct use of loanable funds equation)
i=1.5% (Interest rate has to be 3.5%) (+0.5 Correct interest rate)
Money Demand = 12000 – 2000(1.5) = $9000 = Money Supply
$9000 = 20 * InitialDeposits (+1: correct MS)
Initial Deposits = $450 (+0.5 correct answer)
Fed buys $450-$400 = $50 of Bonds.
40. Consumption, Investment, Government purchases, Net Export
41. Earthquake kills a bunch of people => AD decreases => decrease local prices
Earthquake damages infrastructure => AS decreases =>Increase local prices
Inflow of monetary aid => AD increases =>Increase local prices,
Inflow of “goods” aid => AS increases =>decrease local prices
42.
a. New Keynesians: Unexpected shocks to either aggregate demand or aggreagate supply
interacting with sticky prices
b. Monetarists: Inappropriate Government Policy (esp. monetary policy)
c. Real Business Cycle: Shocks to Real Factors
d. Coordination Failure: People lack a way to coordinate their actions, and therefore we have events
that result from people’s expectations, rather than anything fundamental to the economy.
43. Pro: Places a burden on a future taxpayer, Lower National Savings
Con: Tax Burden is not large compared to a person’s lifetime income, Budget deficit has to be seen
in the picture
Page 6 of 11
QUESTIONS 5 (25 pts)
44. (3 pts) Draw the joint equilibrium in the loanable funds, NCO and Foreign Exchange Markets.
45. (2 pts) Suppose the government is trying to maintain fixed exchange rate but runs a budget deficit.
What policy can the government or central bank implement to return the RER to the pre-budget deficit
level?
46. (3 pts) What happens to the Real Exchange Rate, Interest Rates, Net Capital Outflows, and the
Trade Balance after the government implements the policy above to return RER to the pre-deficit
level?
47. (2 pts) Define Fixed Exchange Rate
48. (2 pts) Define Flexible Exchange Rate
49. (3 pts) What are 3 disadvantages of a Flexible Exchange Rate?
50. (1 pt) What is currently the most common exchange rate system?
51. ( 4 pts) List 4 ways in which the government can control the exchange rate.
52. (5 pts) Between September 2002 and September 2003, the exchange rate between the euro and the
dollar changed from 1.02 euros per dollar to 0.87 euro per dollar. What effect would you expect this
change to have on GDP and Net Exports in Europe and America?
44.
.
Interest Rate
Interest Rate
Loanable Funds
Real
Exchange
Rate
NCO
Supply of Dollars,
from NCO
Demand for dollars (for
net exports)
D
Quantity of US$ exchanged into foreign currency (=NX)
45. Expansionary Monetary Policy
46. Decrease Interest Rate, Increase NCO, and Decrease RER and Increases NX
47. Governments determine exchange rates and make necessary adjustments in their economies to
maintain those rates.
48. Demand and supply determine exchange rates and no government intervention occurs
49. Uncertainty and Diminished Trade; Terms of Trade Changes; Instability
50. Managed Exchange Rate Float
51. Trade Policies, Exchange Rate controls and Rationing, Domestic Macroeconomic Adjustment,
Currency Intervention
52. USA: Net Exports to Europe Increases, GDP Increases
Europe: Net Exports to USA Decreases, GDP decrease
Page 7 of 11
QUESTIONS 6 (25 pts)
Price of Nickel
3.00
2.50
2.00
20
40
Tons of Nickel
53. (8 pts) Using the given economic data, construct the large country trade equilibrium between USA
and Canada in Nickel. What is the world price of Nickel? How much imported/exported What is
demand and production of nickel in Canada?
54. (2 pts) Consider Austria and Switzerland. Which country has absolute advantage in Skis? Which
country has absolute advantage in Snowboards? Which country has comparative advantage in skis?
Which country has comparative advantage in snowboards?
55. (5 pts) Suppose that before trade both Austria and Switzerland produced at C, and after trade the
country with the comparative advantage in skis produces at B, and the country with the country
advantage in snowboards produces at E. What is global production gain from trade?
56. (5 pts) What are the limits of the terms of trade between Austria and Switzerland?
57. (5 pts) Suppose terms of Trade set 1 ski = 1 snowboard, Switzerland consumes 500 skis, and
production plans are as described in 62. What are the import, export, and consumption plans after
trade?
53. Canada: At Price 2.50, Net exports of 20; at price 2.00, Net imports of 0
USA: At Price 2.00, Net imports of 40; at price 3.00, Net imports of 0
Price is 2.50, Imports/Exports =20
Canada: Produces 30, Consumes 10
54. Switzerland has absolute advantage in Skis and Snowboards.
Switzerland: 800 skis=400 snowboards => 2 skis = 1 snowboards
=> OC of 1 ski = 0.5 snowboards
Austria: 100 skis=200 snowboards => 1 skis = 2 snowboards.
=> OC of 1 ski is 2 snowboards.
Switzerland has Comp. Adv. in skis, Austria has Comp. Adv. in snowboards
55. Before trade: Switzerland (400 skis, 200), Austria (50 skis, 100)
After trade: Switzerland (600 skis, 100), Austria (0 skis, 200 snow)
Before Trade Total: (450 skis, 300 snowboards)
After Trade: (600 skis, 300 Snowboards)
Gain 150 skis, 0 snowboards
56. Minimum Terms of Trade: 1 ski = 0.5 snowboard; Max Terms of Trade: 1 ski = 2 snowboard
57. Switzerland consumes 500 skis, produces 600, therefore must export 100 skis and import 100
snowboards. Austria Produces 200 snowboards, exports 100 => consumes 100 snowboards
Switzerland produces (600 skis,100 snow), consumes (500 skis, 200 snow)
Austria produces (0 skis, 200), consumes (100 skis, 100 snowboards)
Page 8 of 11
QUESTIONS 7 (25 pts)
58. (1 pt) Suppose Coca-Cola sells for $2 in the USA, and the nominal exchange rate is $2=€1. What is
the approximate price of Coca-Cola in Euros?
59. (4 pts) Now suppose the exchange rate is $1=€1. What is the approximate price of Coca-Cola in
Euros? Has the Euro appreciated or depreciated relative to the dollar?
60. (2 pts) Suppose that the exchange rate is $1=€2 and Coca-Cola sells for $1 in the USA, and €2 in
Europe. What is the Real Exchange Rate?
61. (2 pts) What should the nominal exchange rate be for PPP to hold in the example above?
62. (1 pts) What should the real exchange rate be for PPP to hold in the example above?
63. (5 pts) Suppose that a country goes from a trade deficit to a trade surplus. Which is larger with a
trade surplus, imports or exports? What happens to NX, NCO and GDP?
64. (4 pts) A common argument for a “Buy-American” clause is as follows: The wage of foreign workers
is so far below that of American workers that there is no way that Americans companies can remain
competitive. To save American jobs, the government should pass a law mandating that all Federal
projects use American-made products, thereby boosting demand for the goods made by American
firms, and saving the American manufacturing sector. Evaluate this argument based on information
from this class (Hint: This statement is not necessarily right or wrong - you are free to agree or
disagree, as long as you can make a coherent, economics-based argument for your position.
58.
59.
60.
61.
62.
63.
64.
P*=eP = (€1/$2) $2=€1
Coca-cola is €1
P*=eP = (€1/$1) $2=€2
Now, Coca-Cola is €2. Euro has depreciated.
RER=(eP)/P* =(€2/$1)*($1 per American Coke/ €2 per Euro coke)
= 1 European Cola/ 1 American Cola
PPP implies: (1/P) = (e/P*)
e=P*/P =€2/$1
€2 for $1
PPP ALWAYS implies that RER=1
Exports are larger than imports. NX becomes positive, NCO becomes positive, GDP increases.
Full Points for a coherent, economics based arguments either for or against a Buy-American
clause.
Page 9 of 11
QUESTIONS 8 (23 pts)
Luxembourg
Price of Wood
(Euro’s)
200
150
100
50
20
30
40
Tons of Wood
50
65. (2 pts) Luxembourg decides to impose an import ban (an import quota of 0 tons). Calculate the price,
quantity demanded, quantity domestically produced, and quantity of wood imported.
66. (4 pts) The world price of wood is €200. Calculate the price, quantity demanded, quantity
domestically produced, and quantity of wood imported.
67. (4 pts) The world price of wood is €50. Calculate the price, quantity demanded, quantity domestically
produced, and quantity of wood imported.
68. (4 pts) The government of Luxembourg decides to impose €50 import tariff when the world price is
€50. Calculate the price, quantity demanded, quantity domestically produced, and quantity of wood
imported.
69. (5 pts) What are 2 effects of a trade barrier? How do they relate to the justification for a trade barrier?
70.
71.
72.
73.
74.
75.
The answers to the following questions are all based on the data analysis
(1 pt) Is the USA a net importer or net exporter of services?
(1 pt) Is the USA a net importer or net exporter of goods?
(1 pt) Which country is the most expensive to live in 2011?
(1 pt) True or False: The USA has the largest marketable debt as a percentage of GDP in the world.
(1 pt) True or False: Percent of employment in agriculture is increasing over time
(1 pt) True or False: The USA country is the least expensive to live in 2011.
65. Price is €150, 30 tons demanded, 30 produced, 0 imported
66. Price is €200, demands 20, produces 40, Exports 20 tons
67. Price is €50, demands 50, produces 0, Imports 50 tons
68. Price is €50 + €50=€100, Produces 20, Demands 40, Imports 20.
69.
a. Decline in consumption (Equality decrease, Job decreases)
b. Increase in production for domestic market (Job increase)
c. Decline in imports (Equality decrease, Job increase)
d. Decline in exports (Job decreases)
e. Higher cost through lost economies of scale (Job decrease)
f. Decreased variety (Equality decrease)
70. Net exporter
71. Net Importer
72. Switzerland
73. False
74. False
75. False
Page 10 of 11
ECONOMIC DATA
You have the following observations about production in Econland in 1982.
Goods
Bread
Flour
(thousands)
Plan A
9000
0
Plan B
8000
60
Plan C
5000
100
Plan D
1000
130
Plan E
0
150
Econland produces Bread and Flour.
 The bread producers buy and use 1 bag of flour for every 100 loaves of bread.
 All the bread and the remaining flour is purchased by consumers.
Base Year=1982
Basket: 2 loaves of bread
Year
Loaves of
Nominal Price
Bags of Flour Nominal Price of
Bread
of Bread
Produced
Flour
Produced
1982
5000 thousand
$2.00
100 thousand
$10.00
2000
6000 thousand
$3.50
200 thousand
$15.00
Econland collects this data about its population in 2000
Not Employed,
Students
Employed
Retirees
Seeking Job
15
50
10
Not Employed,
Not Seeking Job
Homeless
20
5
5
Natural Rate of Output: $6000
Loanable Funds Demand = 1000 –100i
MPC=0.95
Government Purchases: $200
Tax Revenue: $200
USA
CANADA
Price of Nickel (US$)
Price of Nickel (US$)
Econland in 2005
RGDP: $5000
Money Demand =12000-2000i
Initial Deposits=$400
Reserve Ratio: 5%
Price Level: $10.00
4.00
3.00
2.00
30
50
2.50
2.00
1.50
70
10
30
20
Tons of Nickel
Tons of Nickel
Skis
Snowboards
A
800
0
Switzerland PPF
B
C
D
600
400
200
100
200
300
E
0
400
Skis
Snowboards
A
100
0
Austria PPF
B
C
D
75
50
25
50
100
150
E
0
200
Page 11 of 11