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Multiple Choice(50):

Problem 1(8):              Problem 10(6):

Problem 2(4):              Problem 11(6):

Problem 3(4):              Problem 12(12):

Problem 4(8):              Problem 13(8):

Problem 5(8):              Problem 14(13):

Problem 6(9):              Problem 15(6):

Problem 7(9):              Problem 16(5):

Problem 8(6):              Problem 17(7):

Problem 9(6):              

1. The nominal GDP is

   • [a.] the dollar value of all goods and services produced in the economy in some year.
   • [b.] the dollar value of all goods and services sold in the economy in some year.
   • [c.] the dollar value of all final market goods and services produced in the economy in a given year.
   • [d.] all of the above.

2. If real GDP grows at a rate of 4% in a country, and the country's population growth rate is 2%, then real GDP per capita is growing at a rate of

   • [a.] -2%.
   • [b.] 2%.
   • [c.] 6%.
   • [d.] 8%.

3. If nominal GDP in some year is $6000, the price level is 1.5, and the unemployment rate is 6 percent, then real GDP is

   • [a.] $60,000.
   • [b.] $36,000.
   • [c.] $9,000.
   • [d.] $4,000.

4. If real GDP grows at a rate of 4 percent per year, then real GDP will

   • [a.] double in approximately 18 years.
   • [b.] quadruple in approximately 18 years.
   • [c.] double in approximately 36 years
   • [d.] quadruple in approximately 36 years.

5. Which of the following is considered to be the perfect price index?

   • [a.] the CPI
   • [b.] the PPI
   • [c.] the GDP deflater
   • [d.] none of the above

6. The four categories of expenditures that make up the GDP are

   • [a.] consumption, investment, exports, and government purchases of goods and services.
   • [b.] consumption, investment, imports, and government purchases of goods and services.
   • [c.] consumption, investment, net exports, and government purchases of goods and services.
   • [d.] consumption, investment, net exports, and government transfer payments.

7. A sheep rancher sells some wool to a wool processing company for $10. The processed wool is sold to a wool suit manufacturer for $50. The manufactured wool suit is sold to a department store for $200. The department store sells the wool suit to a consumer for $250. How much will these transaction contribute to GDP?

   • [a.] $250
   • [b.] $500
   • [c.] $510
   • [d.] $10

8. If in an economy the money supply is $1000, the velocity of money is 5, and the real GDP is $2500, the price level is

   • [a.] .5
   • [b.] 2
   • [c.] 5
   • [d.] 12.5

9. If you put $500 in the bank at 10% interest for two years, after two years you will have

   • [a.] $600.
   • [b.] $605.
   • [c.] $660.
   • [d.] $665.

10. If the interest rate falls, then the discounted present value of a given sum will

    • [a.] increase.
    • [b.] increase only if the initial interest rate was over 10 percent.
    • [c.] decrease only if the initial interest rate was under 10 percent.
    • [d.] decrease.

11. The real interest rate is expressed in terms of

    • [a.] dollars.
    • [b.] goods.
    • [c.] unadjusted dollars.
    • [d.] dollars adjusted for unemployment.

12. If the nominal interest rate is .09 and the rate of inflation is .01, then the real interest rate is

    • [a.] 9.0
    • [b.] .9
    • [c.] .1
    • [d.] .08

13. Suppose a person has no initial wealth, an income of $50,000 this year an income of $50,000 next year, and the interest rate is 10%. If this person consumes nothing this year, the most she can consume next year is

    • [a.] $75,000.
    • [b.] $100,000.
    • [c.] $105,000.
    • [d.] $110,000.

14. Crowding out refers to the way government borrowing could

    • [a.] reduce saving.
    • [b.] reduce the supply of loans.
    • [c.] reduce investment.
    • [d.] reduce the demand for bonds.

15. Evidence indicates that most of the time, most people prefer to

    • [a.] save much more today than in future years.
    • [b.] consume much more today than in future years.
    • [c.] consume much less today than in future years.
    • [d.] smooth their consumption over time.

16. In which time period was growth in the U.S. fastest?

    • [a.] 1800-1855.
    • [b.] 1855-1900.
    • [c.] 1900-1950.
    • [d.] 1950-1990.

17. If people expect lower future income they will

    • [a.] spend less and save more today.
    • [b.] spend more and save more today.
    • [c.] spend less today and spend more in the future.
    • [d.] spend less today and save less today.

18. If most firms finance their purchases of capital goods by using their own money rather than by borrowing, an increase in the real interest rate will

    • [a.] not affect investment.
    • [b.] reduce saving.
    • [c.] reduce investment.
    • [d.] not affect saving.

19. If the nominal interest rate falls from 10 percent to 7 percent, and the inflation rate falls from 5 percent to 2 percent, then

    • [a.] investment will rise because the nominal interest rate has fallen.
    • [b.] investment will fall because the nominal interest rate has fallen.
    • [c.] investment will rise because the inflation rate has decreased.
    • [d.] investment will not change.

20. The total demand for loans is equal to

    • [a.] investment demand plus saving demand.
    • [b.] investment demand minus saving demand.
    • [c.] investment demand plus the government budget deficit.
    • [d.] the government budget deficit minus saving demand.

21. In the Ricardian view of budget deficits, government borrowing today is the same as

    • [a.] an increase in current government spending.
    • [b.] an increase in future government spending.
    • [c.] an increase in future taxes.
    • [d.] a decrease in future taxes.

22. When an economy is at full employment this means

    • [a.] unemployment is zero.
    • [b.] all jobs are filled.
    • [c.] the labor market is in equilibrium.
    • [d.] all of the above.

23. If the number of job losses each month is 2 million and 1/5 of unemployed people find jobs, then equilibrium unemployment is

    • [a.] 2 million.
    • [b.] 5 million.
    • [c.] 10 million.
    • [d.] 15 million.

24. Technical progress means that more output can be produced with

    • [a.] more labor.
    • [b.] more highly skilled labor.
    • [c.] more capital.
    • [d.] the same amount of capital and labor.

25. Which of the following would tend to increase the officially measured GDP?

    • [a.] more parents stay at home to provide care for their children.
    • [b.] more people start doing their own home repairs.
    • [c.] production of marijuana is legalized.
    • [d.] all of the above.

1. Suppose the interest rate is 4%.

   • [a.] What is the discounted present value of receiving $2500 next year? (2 points)
   • [b.] What is the discounted present value of receiving $2500 in two years? (2 points)

   • [c.] What is the discounted present value of receiving $2500 every year for 4 years, starting next year? (2 points)
   • [d.] If you won a lottery and were given the choice of receiving $2500 every year for 4 years, starting next year, or receiving $400 every year forever, which would you choose? (2 points)

2. When firms are making investment decisions, do they take the real interest rate or the nominal interest rate into account? Why? (4 points)

3. Suppose the nominal interest rate is 8%, inflation is 10%, and you invest $1000 for a year. What happens to the purchasing power of your $1000 (precisely)? (4 points)

4. • [a.] Draw the circular flow of money between firms and people. (2 points)

   • [b.] Write down an equation that relates GDP, the money supply, the price level, and the velocity of money. Suppose GDP is 100, the money supply is 150, and the velocity of money is 4, what is the price level? (2 points)

   • [c.] Suppose GDP grows 2%, the price level rises 5%, the money supply falls 3%, how must the velocity of money change? (2 points)
   • [d.] What does the equation of exchange tell us about aggregate demand? (2 points)

5. Suppose we have the following information about Libraryville, an economy which produces two goods, books and bread:
   Table 1: Libraryville's economy

   year	Books	Price of books	Bread	Price of bread	Nominal GDP	Real GDP
   1994	10	5	6	2
   1995	10		7	4	98
   1996	12	7	9	6
   1997	14	8		7	182

   • [a.] Fill in the empty values in the table, use 1995 as the base year when calculating real GDP. (4 points)

   • [b.] What is the GDP price deflater in 1996, in 1995 dollars? How much did the price level increase between 1995 and 1996? (2 points)
   • [c.] Suppose the population growth rate of Libraryville is 5%. What is the rate of economic growth over this time period? (2 points)

6. Suppose the government is running a budget surplus. It decides to permanently increase spending. It permanently increases taxes on savings income just enough to pay for the spending increase. The government spending has no effect on the return to private investment. Graphically show what happens to the interest rate, savings, and investment, and comment on how this change might affect consumption. (9 points)

7. Suppose there is no government deficit. The government cuts taxes with no change in spending. What are the two views on how consumers respond to increases in the deficit? Describe graphically what will happen under both views, make sure you comment on crowding out, and when and why it occurs. (9 points)

8. Suppose we have an industry that pollutes. If we only care about efficiency, is it better for this industry to be perfectly competitive or a monopoly? A graph may help. (6 points)

9. Explain the Coase theorem. (6 points)

10. Suppose a friend of yours tells you, ``...when the price rises, demand falls, but when demand falls, the price falls, so the relationship between price and demand is both positive and negative..." What's wrong with your friend's statement? (6 points)

11. Draw two production possibilities frontiers, one which demonstrates the principle of increasing costs and one which does not. Explain what the principle of increasing costs means. (6 points)

12. Suppose that in Rochester the demand for one bedroom apartments is given by, Q^d = 1000-P, and the supply is, Q^s = P-200.

    • [a.] Graph the supply and demand curves. What is the equilibrium quantity and quantity of apartments rented? Label it on your graph. What are the gains from trade? Label them on your graph. (5 points)

    • [b.] Suppose the city decides to impose rent control on one bedroom apartments. City council passes a law that $550 is the maximum rent a landlord can charge for a one bedroom apartment. How many one bedroom apartments are rented now? Is there are shortage or a surplus? How big is it? Draw a new graph, illustrating the effects of rent control on price and quantity. Label the shortage or the surplus. Label the gains from trade now. How have they changed? (6 points)

    • [c.] What might happen as a result of this policy? (1 point)

13. Supply and demand

    • [a.] Because of all of the rain in Southern California, farmers have been unable to plant their lettuce crops. What effect will this have on the market for lettuce? Illustrate this using a graph. What effect will this have on the market for salad dressing? Illustrate this using another graph. (4points)

    • [b.] The world cup (soccer) will be held in France this summer. Many americans are planning on attending. What effect will the world cup have on air fares from the United States to Europe? Illustrate this using a graph. What effect will the world cup have on the market for soccer balls? Illustrate this graphically. (4 points)

14. Suppose that we have a demand curve given by, P = 10-2Q, marginal revenue given by, MR = 10-4Q, and marginal and average cost given by, MC = AC = 2.

    • [a.] What is the profit maximizing quantity for a monopolist? What is the corresponding price? What are the monopolist's profits? What is the consumer surplus under monopoly? What is the dead weight loss under monopoly? (5 points)

    • [b.] What is the efficient quantity to produce? What is the consumer surplus given this quantity? What is the dead weight loss? (3 points)

    • [c.] Suppose that this monopolist can perfectly price discriminate. What are the monopolist's profits now? What is the resulting consumer surplus? What is the dead weight loss? (3 points)

    • [d.] How much would the monopolist in this example be willing to pay in order to perfectly price discriminate? (2 points)

15. Suppose we have a duopoly. These two firms can form a cartel and charge the monopoly price of 10, or cheat and charge a price of 9. The table below gives each firm's payoffs, in profits, given the two possible strategies.
    Table 2: Duopoly

    	Firm 2, p=10	Firm 2, p=9
    Firm 1, p=10	12,10	4,15
    Firm 1, p=9	18,-4	7,7

    • [a.] Define Nash Equilibrium. (2 points)

    • [b.] What is the Nash Equilibrium for this game? Why? (4 points)

16. Suppose that the price of an IBM computer (or compatible) rises from $2000 to $2400, and the quantity demanded of a Macintosh computer rises from 500,000 to 550,000. What is the cross price elasticity of demand between IBM computers and Macintosh computers? Are these two goods substitutes or complements? (5 points)

17. Suppose there is a price taking firm who has total cost given by, TC(Q) = 2Q²+60, marginal cost given by, MC(Q) = 4Q, and price, P = 20.

    • [a.] What is the profit maximizing quantity for this firm to produce? What is the maximum profit? (4 points)
    • [b.] Suppose that this firm has TFC(Q) = 60 and TVC(Q) = 2Q², will this firm operate or shut down in the short run? (3 points)