Note: No explanation is required. A correct answer is worth one point, no answer at all is zero points, and an INcorrect answer is MINUS one point. 

1. If Switzerland can produce 28 pounds of cheese or 80 cowbells in one day, while Austria can produce 24 pounds of cheese or 60 cowbells in one day, then Switzerland has a comparative advantage in cowbells.

2. If American cars and imported cars are substitutes, then a tax on imports of foreign cars will reduce the price of domestic cars.

3. Producers could raise their profits by making their products fall apart or go out of style faster.

4. If it snows in Florida and this reduces the number of oranges that will be available in a few months, the price of orange juice may rise after a few months --- but it will not rise immediately because the amount of orange juice currently available in stores and in storage is unaffected.

5. If the shoe industry is perfectly competitive and the marginal cost of producing shoes rises by one dollar per pair, then the price of a pair of shoes will rise by one dollar per pair.

6. A minimum wage rate (above the equilibrium wage) reduces employment.

7. Maximum legal prices on computer chips and other computer parts could reduce the costs of computers.

8. If catching and selling fresh fish is a perfectly competitive industry, then a tax of 50 cents per fish sold will raise the price of fish by 50 cents.

9. If marginal cost is above average cost, then average cost rises with output.

10. The perfect competition model says that in equilibrium, profits are zero.  But in real life, corporate profits are usually positive.  This indicates that we do not have perfect competition in real life.

11. A firm in a perfectly competitive industry chooses a quantity to produce so that marginal cost equals the price.

12. A monopoly maximizes profits by choosing to produce a quantity such that the marginal revenue minus the marginal cost is as large as possible.

13. A price-discriminating monopolist usually produces less than a monopolist who cannot price discriminate at all.

14. City streets are examples of common resources, and are overused relative to the social optimum.

15. One plus the real interest rate is the relative price of future goods in terms of current goods.

16. U.S. economic growth has been faster in the 20th century than in the 19th century, and faster in the 19th century than in earlier centuries.

17. If the demand for money is increasing over time, then the government will ultimately be forced to increase the money supply in order to keep up with the rise in demand.

18. An increase in the nominal interest rate raises the velocity of money.

19. Creditors gain and debtors lose from unexpected inflation.

20. The equilibrium real interest rate is set by the monetary policy of the Federal Reserve Board.

21. If prices are sticky in the short run, then an increase in government spending raises real GDP in the short run.

22. The expected rate of return on government bonds is higher than the expected rate of return on stocks.

23. What is the approximate size of (1 point each)

(a) U.S. nominal GDP?

(b) world nominal GDP?

(c) U.S. federal government spending

(either in dollars or as a fraction of GDP)?

(d) the U.S. federal government's deficit

(either in dollars or as a fraction of GDP)?

24. Suppose the interest rate is 10% per year. Calculate: (1 point each)

(a) the discounted present value

of $1000 paid one year from now.

(b) the discounted present value

of $1000 paid every year, forever.

25. What does it mean to say a situation is economically efficient? (3)

26. Write down an equation showing the relation between the nominal interest rate and the real interest rate. Explain what it means. (3)

27. What is a Federal Reserve open market operation? (1)

28. What is the difference between a person's average tax rate and her marginal tax rate? (2)

29. Suppose the demand curve for a product is

  x^d = 500 - 3p

where x^d is the quantity demanded and p is the price.  Suppose the supply curve for the product, with x^s the quantity supplies, is

x^s = 100 + 2p.

(a) Find the equilibrium price and quantity. (2)

(b) Suppose a per-unit tax of $10 is placed on the product.  Find the new equilibrium quantity, price to buyer, and price to seller. (3)

30. Define or explain: (2 points each)

(a) a stock option (describe a call option)

(b) the Federal Reserve discount rate

31. Draw a diagram to help discuss the effects of a maximum legal price on a good. (4)

32. Draw a diagram to help discuss the effects of an income tax on wages and employment. (4)

33. Suppose the government raises taxes to eliminate its budget deficit. What are the effects (a) according to the majority view? (b) according to the Ricardian view? (4)

34. (a) Draw a diagram to show the output and price charged by a monopoly seller, and show the deadweight social loss from the monopoly.

(b) How does your answer to part (a) change if the monopolist can perfectly price discriminate? (4)

35. Define a "rise in consumer confidence" as an increased desire of consumers to spend money on consumption and decreased willingness to save. Discuss the effects of a rise in consumer confidence on the real interest rate, savings, investment, and consumption. (4)

36. Gwendolyn can produce lemonade for $1 per gallon. (Her marginal cost and average cost are both $1 per gallon.) She faces the demand schedule in Table 13.3.

quantity

price demanded

$7 1

$6 2

$5 3

$4 4

$3 5

$2 6

$1 7

$0.50 8

(a) How much should she produce

and what price should she charge

to maximize her profit? (2)

(b) How big is her profit? (1)

(c) How much consumer surplus do her customers get? (1)

(d) How big is the deadweight social loss from Gwendolyn's monopoly? (1)

37. Comment: "If the government wanted to reduce unemployment, it could easily do so simply by hiring workers.  If the government hired 1000 people, then unemployment would fall by 1000 people."  (4)

38. Explain why some people believe the finite physical quantity of fixed and exhaustible natural resources will cause the rate of economic growth to fall in the future, and why other people believe economic growth will continue despite the finite physical quantity of fixed and exhaustible natural resources. (6 points)

39. Write down the equation showing the relation between inflation, the money supply, and other economic variables. Use a circular flow diagram to help explain what it means. (4)

40. What is a currency reform? What happens? In what way is a currency reform in reverse like inflation? (3)

41. Suppose prices are sticky in the short run and the Fed reduces the money supply. Draw a graph to show the effects on real GDP in the short run and the long run. (5)

 42. Use the aggregate-demand and aggregate-supply model with sticky prices in the short run to explain how a tax cut could "revive" an economy with low output. (5)

43. Comment: "The effects of government spending on the economy (e.g. output and interest rates) depends partly upon what goods the government buys." (4)

44. What is the efficient markets theory of stock prices? (4)

45. Explain why diversifying your investments reduces your risk. (4)

46. Explain: (10)

(a) the activist view in favor of discretionary government policies.

(b) the laissez-faire view in favor of rules for government policies.