Download Quiz: Introductory Macroeconomics

Test 1: Introductory Macroeconomics
Date: 2/21/06
Name:
Part 1: Multiple choice (Each question is worth 3 points)
1. Ex-London School of Economics student Mick Jagger sang, "You can't always get
what you want, but if you try sometime, you just might find you can get what you
need." Another statement of the basic economic principle expressed in this lyric is
that
a.
b.
c.
d.
ANSWER:
rational decisions are not always possible.
you can allocate your resources to what gives you the highest value.
you can create the supply to meet your own demand.
you can maximize social welfare by making optimal decisions.
___B___
2. Above is a production possibility frontier for barley and wheat. The picture shows
that the opportunity cost of one more bushel of wheat is
a.
b.
c.
d.
higher at B than at D.
lower at B than at D.
equal at B and D.
impossible to determine from the information given.
ANSWER:
__B____
3. In the above picture, assume this economy is currently operating at point D. What
is the opportunity cost of increasing wheat production by 200 by moving to B?
a.
b.
c.
d.
about 200 bushels of wheat
200 bushels of soybeans
Infinite, B cannot be produced at any cost.
0
ANSWER:
___D___
4. Some medical authorities announced in the late 1980s that an acne medicine
named Retin-A also had previously unknown wrinkle-reducing properties. An
economist would expect to find that, after this announcement, the price of Retin-A
____ and the quantity sold ____.
a.
b.
c.
d.
rose; fell
rose; rose
fell; fell
fell; rose
ANSWER:
___B___
5. We observe that the price of food rises and the quantity purchased also rises. This
means the
a.
b.
c.
d.
supply curve shifted to the left.
demand curve shifted to the right.
demand curve shifted to the left.
supply curve shifted to the right.
ANSWER:
___B___
6. You are a collector of antique coins. You purchase a silver dollar minted in 1898.
Is this sale included in GDP for the current year?
a.
b.
c.
d.
Yes, provided the coin is in mint condition.
No, it is not.
No, unless the coin has been in circulation.
Yes, it is.
ANSWER:
___B___
7. Dissatisfaction with public school education has led many parents to try home
schooling for their children. If parents cut back on their jobs outside the home in
order to spend time teaching their children at home, how will this affect GDP?
a.
b.
c.
d.
GDP will increase.
Real GDP will increase and nominal GDP will decrease.
Both real and nominal GDP will increase.
GDP will decrease.
ANSWER:
___D___
8. During 2000, which of the following countries had the lowest average
unemployment rates?
a.
b.
c.
d.
Canada
Italy
Germany
United States
ANSWER:
___D___
9. Last year your job at the university cafeteria paid you $9 an hour and the price of a
ten-minute long distance call to your girlfriend in California was $4. This year
your cafeteria job pays $9.90 per hour and the ten-minute phone call now costs
$4.10. You are clearly
a.
b.
c.
d.
worse off because of inflation.
worse off because the phone call is now relatively more expensive.
better off because your wage rate went up.
better off because the phone call now costs less work.
ANSWER:
___D___
10. U.S. imports are most likely to increase when
a.
b.
c.
d.
U.S. GDP decreases.
U.S. unemployment rates fall.
U.S. prices fall.
foreign prices rise.
ANSWER:
___B___
Part 2: Free-response questions
Question 1 (40 points)
Consider the market for green beans. Suppose that the table below summarizes
the demand and supply of green beans at a variety of different prices.
Quantity supplied
(in barrels)
Price
$4
$5
$6
$7
$8
$9
$10
Quantity demanded
(in barrels)
6
24
8
20
10
16
12
12
14
8
16
4
18
0
A) On the graph below, draw the demand and supply lines. Carefully label
the demand line D and the supply line S. Clearly label the equilibrium E
on your graph. (4 points)
$10
$6
$9
E*
S = S*
Price (per barrel)
$5
$8
D*
$4
$7
E
$3
$6
D
$2
$5
$1
$4
0
800
51,200
10 2,000 2,400
15
1,600
2,800 20
3,200
Quantity
Quantity (in
barrels)(in barrels)
B) What are the equilibrium price and output levels? (3 points each)
Equilibrium output = 12 barrels of green beans
Equilibrium price = $7 per barrel
C) Now suppose that the government wants to increase the production of green
beans in the economy. To do this, the government agrees to give $3 to every
consumer who purchases a barrel of green beans.
In the below table, enter in the values for demand and supply that will apply for
the prices between $7 and $10 after the government policy of giving $3 to
consumers who buy green beans has been implemented. (8 pts)
Price
Quantity supplied Quantity demanded Quantity supplied Quantity demanded
(before subsidy)
(before subsidy)
(after subsidy)
(after subsidy)
$7
12
12
12
24
$8
14
8
14
20
16
16
$9
16
4
$10
18
0
18
12
D) On the graph from A), depict the demand and supply lines that apply after the
tax increase by drawing any needed lines and labeling the demand line D* and the
supply line S*. Clearly label the equilibrium E* on your graph. (4 points)
E) What are the new equilibrium output and price levels? (5 points each)
Equilibrium output = 16 barrels of green beans
Equilibrium price = $9 per barrel
F) In two short sentences, compare the change in price to the amount of the
subsidy that that government gives to consumers. Does the price of a barrel of
green beans change more? Less? Are the changes the same? Why? (8 points)
The price of a barrel of green beans changes by only $2, as compared to the $3
subsidy. The price changes by less because the subsidy causes producers to
expand production as the price increases, which holds down the overall increase
in the price.
Question 2 (30 points)
Macronesia has the following consumption function:
C = 300 + 0.75 (Y – T)
Firms in Macronesia always invest $900 and net exports are $-100, to start.
Government spending is $1300 and taxes are $1200. Assume that taxes and net
exports do not depend on income?
A) Find the equilibrium level of GDP in the economy. (10 points)
Total demand = Z  C  I  G  X  IM
 300  0.75(Y  T )  900  1300  100
 2400  0.75(Y  1200)
 1500  0.75Y
We know that in equilibrium, Z =Y. To find equilibrium, substitute Y in for Z.
Y  1500  0.75Y  0.25Y  1500
Y  6000
B) Suppose investment spending increases to $1100. How does equilibrium
GDP change? Show all steps. (10 points)
Total demand = Z  C  I  G  X  IM
 300  0.75(Y  T )  1100  1300  100
 2400  0.75(Y  1200)
 1700  0.75Y
Again, in equilibrium, Z =Y.
Y  1700  0.75Y  0.25Y  1700
Y  6800
C) Go back to the economy from part A), so I = $900. Suppose that the
government decides that it wants to increase equilibrium GDP by exactly $40. By
how much should it increase government spending to achieve this goal?
(Hint: Think about the multiplier) (10 points)
The multiplier for the economy is 4. This is apparent from part B), since an
increase in investment of $200 leads to an increase in equilibrium output of $800.
Also, since imports and taxes do not depend on income, the simple formula for
the multiplier applies:
Multiplier 
1
4
1  MPC
So if we want to achieve an increase in equilibrium output of $40, we want to
increase G by $10.
D) Extra-credit: In parts A) through C), we assumed that imports and taxes did
not depend on income. Now suppose that imports fall by $0.10 every time
income goes up by $1 (X-IM =0.1Y) and that income is taxed at a 20% rate (so
that taxes go up by $0.20 when income goes up by $1). What is the multiplier in
this economy now? (5 points)
Total demand = Z  300  I  G  X  IM
 300  0.75(Y  0.2Y )  I  G  0.1Y
 300  I  G  0.75(0.8Y )  0.1Y
 300  I  G  0.5Y
Now use the equilibrium condition, Z = Y, to solve for equilibrium output:
Y  300  I  G  0.5Y  Y 
1
(300  I  G)
1  0.5
Y  2(300  I  G)
This equation shows that, if I or G go up by $1, output goes up by $2. So the
multiplier for this economy is 2.