Download Economics Education and Research Consortium

Kyiv School of Economics
MA Program in Economics
Admission Examination in Economics
Instructions:
Instructions:
1. Do not turn this page until told to do so.
2. You have two hours to answer the questions.
3. The exam consists of two parts: Macroeconomics and Microeconomics. Each part consists of
10 problems that are all equally weighted but have varying difficulty levels. For your
convenience, relatively harder questions are marked with an asterisk (*). Given that all
questions are equally weighted, it is advised to tackle easy questions first.
4. Answers in any language other than English will receive zero credit.
5. No dictionaries are allowed.
6. No calculators or other similar devices are permitted. Mobile phones must be switched off
for the duration of the exam.
7. Positively no cheating. If caught cheating, you will be asked to leave the room
immediately, and your grade for this exam will be zero.
July 7, 2009
Kyiv
Part I – Macroeconomics
1. Give three reasons why the consumer price index (CPI) is an imperfect measure of the
cost of living.
2. What is the maximum amount of money that can be created by the banking system out of
a new deposit of $1 000, if the required reserve rate is 2%? Explain.
3. Complete the following sentences using the words in brackets:
Monetary policy is the process by which the monetary authority of a country attempts to
influence the economy through changes in ______ (A: interest rates and taxation; B: government
spending and taxation; C: interest rates and the supply of money; D: government spending and
the supply of money.) The primary tool of monetary policy is _____ (A: open market operations;
B: changes in tax rates; C: changes in private credit market rates). Expansionary monetary policy
involves an open market ______ (A: sale: B: purchase) of various credit instruments, foreign
currencies of commodities. The goal is to _____ (A: lower; B: raise) domestic interest rates to
_______________ (A: stimulate; B: slow down) the economy.
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4. Complete the following sentences using the words in brackets:
The term ______ (A: natural; B: cyclical; C: frictional; D: structural) unemployment is used
for individuals who are either searching for jobs or waiting to take jobs in the near future.
The term ______ (A: natural; B: cyclical; C: frictional; D: structural) unemployment is used
to describe workers who are unemployed due to a mismatch either between their skills and
the skills required by the market or between their location and the location of job openings.
Unemployment caused by a deficiency of total spending is known as _____ (A: natural; B:
cyclical; C: frictional; D: structural) unemployment. Natural unemployment is equal to the
total ______ (A: structural and cyclical; B: frictional and cyclical; C: frictional and
structural) unemployment. The real level of domestic output associated with the natural rate
of unemployment is called the economy’s _____ (A: GDP gap; B: optimal output; C:
potential output).
5. Suppose that the velocity of money in a hypothetical economy is 6 and the nominal GDP
is $40 billion. What is the money supply in this economy?
6. (*) Consider a hypothetical economy with aggregate consumption C=200+0.4Y,
aggregate investment I=500+0.2Y, government spending G=500 and Net Exports
NX=800, where Y is the aggregate income. What is the level of aggregate consumption
in this economy? Explain.
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7. Draw the Laffer curve and explain its shape. Label your diagram carefully.
8. Explain why the aggregate supply curve is assumed to be horizontal (or upward-sloping)
in the short run but vertical in the long-run.
9. Explain why you agree or disagree with the following statement: “Ceteris paribus, a
nation whose interest rate is rising more rapidly than in other nations can expect the
international value of its currency to appreciate.”
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10. (*) Suppose that in a hypothetical economy the consumption basket is currently worth
$100. The inflations rate is known to be 200% per year. A saver puts $10 000 on a bank
account at the nominal interest rate of 170% per year.
a)
What is the purchasing power of this deposit at the end of the year?
b)
What is the real return on this deposit in one year?
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Part II – Microeconomics
1. Complete the following sentences using the words in brackets:
When transaction between a buyer and a seller directly affects a third party, the effect is called
a(n) _______ (A: adverse selection; B: moral hazard; C: externality). The _______ (A: adverse
selection; B: moral hazard; C: negative externality) problem is the tendency of one party to a
contract to change her or his behavior after the contract is signed in ways which could be costly
to the other party. The _______ (A: adverse selection; B: moral hazard; C: negative externality)
problem arises when information known by the first party to a contract is not known by the
second and, as a result, the second party incurs major costs. When there is a ______ (A:
negative; B: positive; C: neutral) externality, an overproduction of the related product occurs and
there is an overlocation of resources to this product. When there is a moral hazard problem,
private markets tend to _______ (A: underlocate; B: overlocate) resources to the related good or
service.
2. (*) Suppose that a consumer chooses an optimal bundle of goods X and Y. The consumer
is optimally choosing the basket of 5 units of good X and 4 units of good Y. The
marginal utilities are MUX=6 and MUY=4.5, and the consumer’s income is $32. What are
the prices of goods X and Y?
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3. There are two industrial firms in a region that pollute the air.
Firm
A
B
Initial pollution level
60 units
50 units
Cost of reducing pollution by 1 unit
$ 15
$ 10
The government wants to reduce pollution to 70 units, so it gives each firm 35 pollution permits.
a) What would be the cost of pollution reduction be if the permits cannot be traded?
b) (*) Suppose now that the firms are allowed to trade pollution permits. Given the
difference in the cost of pollution reduction, which firm will sell permits and what
maximum price can it charge?
c) (*) If the firms are allowed to trade pollution permits, what is the total cost of pollution
reduction?
4. Complete the following sentences using the words in brackets:
When a good is produced in the least costly way then _______ (A: allocative; B: productive)
efficiency is achieved. In this case, the market price of a product is equal to its ______ (A:
minimum average total cost; B: marginal cost) of production. When firms use resources to
produce the mix of goods and services that consumers want the most, then ______ (A:
allocative; B: productive) efficiency is achieved. In this case, the ______ (A: market price of the
product; B: marginal revenue of the firm) is equal to the firm’s ______ (A: minimum average
total cost; B: marginal cost) of production.
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5. Suppose that a technological advance reduces the cost of making computers. Computers
and software are complements. Use a supply and demand diagram to show what happens
to price, quantity, consumer surplus, and producer surplus in the market for computers
and in the market for software.
6. Using supply-demand diagram, explain what problems can appear if the government sets
a price ceiling on the market.
7. Draw a supply and demand diagram with a tax on the sale of good. Show the deadweight
loss and the tax revenue.
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8. A firm on a monopolistic market faces the marginal revenue schedule MR=8-2Q, where
Q is the firm’s production level. The marginal cost of the firm is $4. The fixed cost is
$10.
a) Determine the optimal production level. Show your calculations.
b) (*) Ceteris paribus, should the firm be producing in the short run? Explain.
c) (*) Ceteris paribus, should the firm continue producing in the long run? Explain.
9. Suppose that after a 10% increase in the price of the product that a firm sells the demand
for this product has decreased by 5%.
a) Is the demand for this product elastic or not?
b) Compute the price elasticity of this product (with respect to the initial point). Show your
calculations.
c) (*) How much has the total revenue of the firm changed by (in % terms)? Explain briefly.
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10. Consider the case of a pure monopoly depicted on the graph below:
Price and Costs
Demand
Curve A
P6
P5
Curve B
P4
P3
P2
P1
MR
Quantity
a) Curve A is the _____________ (Average Total Cost; Marginal Cost) curve.
b) Curve B is the _____________ (Average Total Cost; Marginal Cost) curve.
c) The monopoly price is given by _________ (P1, P2, P3, P4, P5, P6)
d) (*) Clearly mark the area corresponding to the monopoly’s total costs.
e) (*) Clearly mark the area corresponding to the monopoly’s deadweight loss.
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