There are 60 points on this exam; the number of points appears in parentheses after each question.

Print your name AND sign your name in the spaces provided below.  Also write your social security (University ID) number.

PRINT NAME

SIGN NAME

Soc. Sec. # Recitation Day/Time

Write your NAME, SOCIAL SECURITY NUMBER, and RECITATION SECTION on the answer book. There are 60 points on this exam.

1. Each year in the United States, households in the top fifth of the income distribution (the 20 percent with the highest incomes) get about ______________ of all the income in the economy.

(a) one-third (b) one-half (c) three-quarters

2. Households in the bottom fifth get about ______________ of all the income in the economy.

(a) 1 percent (b) 5 percent (c) 10 percent

3. World food production per person has ________ in the past several decades.

(a) increased (b) stayed about the same (c) decreased

4. On average, there is ______ income inequality in richer countries than poorer countries.

(a) more (b) about the same (c) less

5. Over the last 200-300 years, economic growth has become

(a) slowed down (b) stayed about the same (c) become faster

6. Nominal GNP (or GDP) in the United States is about _________. (Answer with a number.)

7. Nominal GNP (or GDP) in the world is about _________. (Answer with a number.)

8. What is the connection between the real interest rate and the nominal interest rate?

9. What do economists mean by the rate of economic growth?

10. What is the free-rider problem?

11. If the real interest rises, do goods now become cheaper or more expensive compared to goods in the future? Explain why. (2 points)

12. Name some countries that have had high economic growth, and some that have had low economic growth. (2 points)

13. Comment: "If the demand for money rises over time, then eventually the government will be forced to increase the supply." (2 points)

14. Explain: "Prejudice is free, but discrimination has costs." (3 points)

15. Read the accompanying excerpt from a Wall Street Journal story (April 13, 1993).

(Note that 18% per month is about 730% per year.) (5 points)

(a) Explain the connection between the growth rate of the money supply and inflation.

(b) Explain why an increase in the nominal interest rate reduces the demand for money.

(c) Explain why an increase in the growth rate of the money supply might temporarily raise the inflation rate by an even larger amount.

16. Draw the basic supply-demand diagram with a negative externality. Show (for 9 points)

(a) the marginal private cost of the good,

(b) the marginal social cost of the good,

(c) the marginal cost to others from the good,

(d) the marginal private benefit of the good,

(e) the marginal social benefit of the good,

(f) the economically efficient amount of output of the good,

(g) the perfect-competition equilibrium amount of output,

(h) the equilibrium price of the good, and

(i) the deadweight social loss from the externality.

17. A "fall in consumer confidence" occurs when people tend to spend less money and save more money (due to worries about job loss). Use graphs and discuss the effects of a fall in consumer confidence on the real interest rate, savings, investment, and real GNP (or GDP). (5 points)

18. (12 points) Turkeys run wild on Turkey Island. The island is not the property of anyone in particular, and people are free to go there to hunt turkeys and sell them to food wholesalers. But Turkey Island is small, so hunters sometimes interfere with each other. If one hunter is on Turkey Island, he gets 20 turkeys on an average day. If two hunters are there, they each get 15 turkeys on average. If three hunters are on the island at once, they each get 12 turkeys on average. If four hunters are there, they will each get 9 turkeys on an average day. With more than four hunters, no one gets any turkeys. People can earn $80 a day in some other job. (This $80 reflects the social value of the goods they produce in that other job.) A turkey-hunter can sell turkeys for $10 each.

(a) In long run equilibrium, how many people would come hunt turkeys on Turkey Island when anyone is free to do so? Why?

(b) What is the economically efficient number of hunters on the island? Why? Is there overhunting, underhunting, or the economically efficient amount of hunting?

(c) Suppose the island were owned by someone interested in earning as large a profit as possible. What is the maximum price that someone would be willing to pay to hunt turkeys on the island for a day if he were the only hunter allowed? What is the maximum price per day that someone would pay to hunt on the island if one other person were also allowed to hunt? What is the maximum price per day a person would pay if there were two other hunters allowed on the island? Three others?

(d) How many hunters would the owner of the island allow to maximize his own profits from owning the island? How much profit would he make? If the island is owned, is there overhunting, underhunting, or the "right" amount of hunting for economic efficiency?

19. Explain and discuss (with some PRO and CON arguments on) the following ideas of fairness or justice in assessing the distribution of income in an economy. (6 points)

(a) egalitarianism,

(b) utiliarianism,

20. Will the finite quantity of natural resources cause economic growth to slow down and stop in the future? Present arguments on both sides of the issue. (6 points)