finalf05

finalf05 - FINAL ECON2 FALL 05 Part II 1) (7pts) 1....

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FINAL – ECON2 – FALL 05 Part II 1) (7pts) 1. Economics: The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. (1pts) 2. GNP: The total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced. (2pts) 3. M1 is money that can be directly used for transaction. M1=currency held outside banks + demand deposits + traveler’s checks + other checkable deposits (2pts) 4. Frictional unemployment: The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. (2pts) 2) Limitations of the GDP Concept (7pts) Serious problems arise when we try to use GDP as a measure of happiness or well- being. a). GDP does not include all production. (2pts) 1. Underground market. 2. Household production. b). GDP is a gross level concept rather than an individual level concept. (2pts) 1. Population and per capita GDP. 2. Social fairness. Distribution of output. c). Wealth does not equal to welfare or standard of living. (3pts) Pollutions. Kinds of goods. (Gun/Bread) Health and Life expectancy. Leisure. Education. Freedom. Etc. 3) (7pts) a) Wealth effect—a higher price level decreases the amount of real wealth, which decreases the quantity of real GDP demanded. (2pts) b) Intertemporal substitution effect—an increase in the price level raises the interest rate, which reduces the quantity of real GDP demanded. (3pts) c) International substitution effect—an increase in the U.S. price level raises the price of U.S. goods relative to foreign goods. (2pts) 4) (7pts) a) Mercantilism i) Bullionism; (0.5pts) ii) Trade is a win-lose situation; (1.5pts) iii) Advocate government intervention. (1.5pts) b) Adam Smith’s critiques i) What matter are real resources, not amount of gold; (0.5pts) ii) Voluntary trade is a win-win situation; (1.5pts) iii) We can achieve an efficient allocation without government intervention (the “invisible hand”). (1.5pts)
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Part III, 1.A. (10pts) 1) Production Possibility Frontiers for Ekonland and Utopia. (1pts) 2) Ekonland’s opportunity cost of producing one pound of food is ½ a gallon of sunscreen. Ekonland’s opportunity cost of producing one gallon of sunscreen is 2 pounds of food. Utopia’s opportunity cost of producing one pound of food is 2 gallons of sunscreen. Utopia’s opportunity cost of producing one gallon of sunscreen is ½ a pound of food. (2pts) 3) Consumption Possibility Frontier in autarky is exactly the same as PPF. If both countries produce and consume 100 pounds of food and 100 gallons of sunscreen, their consumption and production levels are as shown below: (1pts)
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finalf05 - FINAL ECON2 FALL 05 Part II 1) (7pts) 1....

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