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Exploring Microeconomics
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Chapter 6 / Exercise 02
Exploring Microeconomics
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Unformatted text preview: Econ 101 Midterm II Practice Problems 1. Which is NOT an example of why a farmer could produce much more in a day in 2017 than her/she could 100 years ago? a. Increase in research and knowledge about optimal growing seasons. b. Tractors that make harvesting easier. c. More efficient irrigation systems. d. More available hours to work. 2. Which of the following is an example of structural unemployment? a. Chiron is laid off after his company cannot afford to employ him during a recession b. Juan is laid off of his job at the auto plant after his job becomes automated c. Kevin leaves his job to look for a better paying job d. None of these are examples of structural unemployment 3. Country A has a population of 250 million. All of the citizens are over the age of 18. 100 million citizens go to college and choose not to work. 20 million citizens are looking for jobs, but they cannot find one. The rest are employed. Which of the following statements is true? a. The Labor Force participation rate is lower than the unemployment rate b. The Labor Force participation rate and the unemployment rate are equal c. The Employment rate is 42% d. None of the above are true 4. Which of the following would NOT result in an increase in the aggregate price level? a. OPEC decides to reduce its output, raising oil prices. b. The labor force collectively ages, resulting in worker productivity declining. c. A tax reform is implemented, drastically decreasing the amount of taxes business and households pay. d. The Federal Reserve begins contractionary monetary policy and reduces the quantity of money in circulation. 5. Why is the Aggregate Demand curve downward sloping? a. As prices rise, consumers buy other domestic goods b. Government spending and price level are inversely related c. An increase in price level reduces consumers' purchasing power d. As the price level increases, interest rates fall and investment spending decreases. e. None of the above 6. Which of the following doesn’t have an effect on LRAS? a. Price level b. Labor Supply c. Capital d. Technology 7. Which of the following would not be executed by the Federal Reserve? a. Increasing the discount rate b. Buys and sells U.S. government securities in the open market c. Setting the reserve requirements d. Decreasing corporate tax rates 8. Which of the following is an example of the discretionary fiscal policy? a. An interest rate increase is implemented to control inflation b. The operation of the progressive federal income tax c. A tax increase policy adopted to control inflation d. The existence of the welfare state 9. The United States GDP has been increasing at an unsustainable rate. What are examples of policies the United States Congress should pursue? a. Raise the interest rate b. Decrease the reserve rate c. Raise the tax rate for all income brackets d. Distribute a stimulus check to the head of each household 10. Which of the following actions is NOT conducted by the Federal Reserve? a. regulate banking system b. control the value of money c. control the supply of money d. make loans to individuals 11. If the bank reserve ratio is 20%, and banks don not hold excess reserves, when the Fed sells $30 million of bonds to the public, bank reserves a. decrease by $30 million and the money supply eventually decreases by $120 b. increase by $30 million and the money supply eventually increases by $150 c. decrease by $30 million and the money supply eventually decreases by $150 d. increase by $30 million and the money supply eventually increases by $120 12. Wells Fargo decides to implement new technology that will allow its customers to integrate their credit card information into their eyes. Customers will be able to checkout via retina scanners at every major retailer. Wells Fargo believes this will greatly increase the world’s amount of credit card users. The introduction of this new technology will a. Increase the money supply b. Decrease the money supply c. Increase the money demand d. Decrease the money demand 13. Suppose that Hershey’s, a chocolate company, purchases raw cocoa beans for $0.10 / tbsp. At the Hershey’s factory, the cocoa beans are roasted (increasing their value to $0.20/ tbsp.) and ground into cocoa powder (valued at $0.50/ tbsp.) This powder is then manufactured into a chocolate bar, sold for $1.00 /candy bar. How much value is added when 3 tbsp. of roasted cocoa beans are ground into cocoa powder? a. $0.30 b. $1.20 c. $0.90 d. $1.50 e. $0.40 Use the information below to answer the following two questions. Kardiac Arrest, a protein exclusive economy, only produces eggs and chicken wings. The typical consumer buys 40 cartons of eggs and 85 chicken wings each year. The base year is 2016. The table below gives the quantities produced and prices for 2016 and 2017. Quantities 2016 2017 Eggs (by carton) 200 275 Chicken wings 300 320 Price 2016 2017 Eggs (by carton) $3.10 $3.75 Chicken wings $1 $1.45 14. Which of the following statements is false? a. The consumer price index (CPI) for 2016 is equal to 100 b. The CPI inflation rate from 2016 to 2017 is equal to 20.74 c. The GDP Deflator for 2016 is equal to 100. d. The consumer price index (CPI) for 2017 is equal to 130.74 15. What is the GDP Deflator for Kardiac Arrest in 2017? a. 120.55 b. 100.00 c. 127.53 d. 130.65 Year Real GDP Per Capita, in billions 2015 $215 2016 $220 16. Alfonso Medici of Italy claims he will double the real GDP of Italy in just twenty five years. Looking at the GDP growth table below and assuming that the growth rate he has established in his first year in office will remain constant, decide whether he is right or wrong. a. Alfonso is wrong, it will double in about 30 years b. Alfonso is right, it will double in about 20 years c. Alfonso is wrong, it won’t double in about 40 years d. Alfonso is right, it will double in a bit over 2 years e. Not enough information to answer the question 17. Which of the following statements is true? a. Frictional unemployment can be reduced with job search websites, such as Indeed. b. The government can reduce cyclical unemployment by offering job training courses. c. Structural unemployment can only be reduced if people find a way to change their skill set to fit with changing industries. d. To reduce cyclical unemployment, the government must enact policies to reduce consumer spending. 18. In a podcast, a journalist claims that the Great Recession was nowhere near the scope of the Great Depression because at the worst of the latter, “over 25% of men, women and children were out of work,” more than double the height of the Great Recession’s unemployment rate. Why is this a misleading positive statement? a. The U.S. population is much greater now than it was in the 1930s, so the percentages are incomparable. b. The U.S. today has a much older population than it did in the 1930s, so less people are counted in the working-­‐age population today. c. Children don’t work in today’s U.S. economy. d. The journalist is using a positive statement to answer a normative question. 19. In the small country of Economerica, there are 6 thousand people employed, 1 thousand people unemployed, and 3 thousand people of working age not included in the labor force. Two thousand students graduate from the university and seek jobs in the country, but not one graduate is able to find one. All of the new graduates realize there is no chance of finding a job and return home to live with their parents. Ceteris Paribus, what would the new unemployment rate be in Economerica? a. 14.29% b. 16.67% c. 33.33% d. 22.22% 20. The President of Nambia, a fictional country, would like to lower her nation’s price level. Which of the following situations would unambiguously cause this? a. The President starts a smear campaign regarding the stability of their national economy, causing consumers to lose confidence in the economy while their nominal wages rise. b. Workers are able to increase their output per hour, and the government hires many local artists to begin a new public art project. c. The central bank of Nambia increases the reserve requirements for banks and the cost of aluminum falls. d. Employers who were once required to pay for their employees’ dental insurance are no longer required to and the government increases the income tax by 5%. 21. Which of the following would cause a movement along the short run aggregate supply curve? a. Autonomous cars can transport people while they focus on other tasks. These vehicles rise in popularity and people choose to spend this new found free time working. b. A cholera epidemic affects a large percent of the nation’s workforce c. An increased prevalence of solar power drives down energy prices. d. A popular new article predicts 17% inflation in the next year. 22. Which of the following would cause an outward shift of the aggregate production function? a. A bakery purchasing more ovens to increase their scone production b. The Economics Department adopts a new office hour software that streamlines the assistance process so that more students can be helped c. Alejandro buys three more tables to set up his DJ equipment on so that he can produce more simultaneous beats at parties d. All the above e. None of the above 23. Which of the following scenarios shifts aggregate supply in the short run and not in the long run? a. The number of workers in the labor force of Panem, a North American country, dramatically increases b. The country of Genovia introduces Pear Fiber, a technologically advanced system that gives all of its citizens free Wi-­‐Fi access from any location c. Nominal wages in Qumar, a fictional country, decrease by 25% d. A coffee company adopts an advanced technological system that quickly records and sorts its espresso beans 24. If Botswana had a -­‐3.5% growth rate between 2015 and 2016, and then it had a 3.5% increase between 2016-­‐2017, the GDP of 2015 and 2017 are the same. a. True b. False c. Not enough information d. I don’t like this question, and I refuse to answer it. 25. Which components of GDP would the following directly affect: Gary received a Medicaid reimbursement check from the government, so he put it into his bank account. a. Government spending b. Government spending and investment c. Investment d. None of the above 26. A recession hit the country of Qumar. 10 million people got fired due to the economic downturn and instead of searching for a new job, they all moved back in with their parents and stopped looking for a job. How did the labor force participation rate, the unemployment rate, and the employment-­‐population ratio change? a. The labor force participation rate increased and both the unemployment rate and the employment-­‐population ratio decreased. b. The unemployment rate increased and both the employment-­‐population ratio and the labor force participation rate decreased. c. The unemployment rate and the labor force participation rate decreased and the employment-­‐population ratio increased. d. They all increased. e. They all decreased. 27. Consider the following scenario. In West Korea the employment-­‐population ratio is increasing and the unemployment rate is remaining the same. What must be true about West Korea’s labor force participation rate? a. It is not changing. b. It is increasing. c. It is decreasing d. There is not enough information to tell. e. West Korea isn’t a country so this question is irrelevant 28. _______ Suppose that 1 CAD costs .8 USD. If in Niagara-­‐on-­‐the-­‐Lake a CD costs 10 CAD and in Buffalo it costs 8 USD, then __________________. a. Virgin Records will have an incentive to build more stores in the US b. Americans will buy CDs in Niagara-­‐on-­‐the-­‐Lake c. Purchasing power parity exists d. Mexicans will buy CDs in Buffalo 29. _______ If the Bank of England wants to depreciate the British pound against the US dollar, it could ______. a. sell foreign currency b. decrease the money supply c. sell British pounds d. buy British pounds 30. _______ The supply curve of US dollars shifts leftward. This could have been influenced by _______________. a. an increase in the USD dollar exchange rate b. a decrease in foreign interest rates without a similar decrease in American interest rates c. a rise in the expected future exchange rate d. a fall in the expected future exchange rate 31. There are 3 citizens in the nation of Spooksylvania: Vampire, Mummy, and Zombie. They all live and work within the country. In 2015, Vampire got paid $40 each to scare 2 monsters. Mummy received $20 per scare and had 3 customers and Zombie only scared 1 monster for $15. a. Calculate Spooksylvania’s GDP for 2015. $155 - The GDP can be calculated by adding up the value of all the services provided within the nation. 40(2) + 20(3) + 15(1) = 155 b. Does this differ from Spooksylvania’s GNP? Why or why not? This does not differ from the GNP since all work is being done within the nation. In 2017, Vampire got paid $50 per scare and had 2 customers, Mummy received $15 each to scare 3 customers, and Zombie received $25 for 1 scare. c. Calculate Spooksylvania’s nominal GDP for 2017. $170 – The nominal GDP can be calculated by adding up the value of all the services provided within the nation using the new year’s prices. 50(2) + 15(3) + 25(1) = 170 d. Calculate Spooksylvania’s real GDP for 2017 using 2015 as the base year. $155 – The real GDP can be calculated by adding up the value of all the services provided within the nation using the base year’s prices. 40(2) + 20(3) + 15(1) = 155 e. Does the real GDP from 2015 and 2017 differ? Why or why not? The real GDP from 2015 and 2017 do not differ. Even though the price for each scare changed, the amount of scares remained constant, keeping the real GDP constant. 32. You have been hired to a consulting firm to consult countries in dire need of macroeconomic assistance. You replaced Gary, who is known to make many mistakes. Your job now is to go through three of Gary’s policy recommendations and do two things with each: 1. Show whether Gary’s policy recommendation would help or hurt the client’s economy. If Gary’s recommendation isn’t correct, inform the client of what would happen if they took Gary’s advice. 2. Give your own policy recommendation, providing one monetary policy and one fiscal policy. 1st Client: Uramania Uramania is currently in a recessionary period. They are not concerned about inflation but want to return their output to its long term level. Gary recommended reducing the money supply and increasing government spending. 1. This would have an indeterminate result. I would depend on which policy would be bigger when implemented. If reducing the money supply had a bigger effect than increasing gov’t spending, this would have a negative effect because both P and Y would decrease. If increasing gov’t spending has a bigger impact, then this would have a positive effect, increasing both Y and P. 2. Uramania should increase the money supply and increase gov’t spending (or some other expansionary monetary and fiscal policies). 2nd Client: Bogsville Bogsville is currently in an inflationary period. They are more focused on keeping inflation low than keeping output high. Gary recommended decreasing the federal funds rate and implement a large infrastructure project that costs hundreds of billions of dollars. 1. This would have a negative effect on the economy. Both decreasing the federal funds rate and increasing gov’t spending would push the AD curve out. This would increase the price level, which is already too high. 2. Bogtown should increase the federal funds rate and decrease gov’t spending (or any other contractionary monetary and fiscal policies). 3rd Client: Mametown Mametown is currently at a stable and healthy level of output and inflation is currently at 0% year over year change. Gary recommended no change. 1. This would not be the most effective policy method. Although output is level and strong, inflation is incredibly low. 2. I would recommend expansionary monetary and fiscal policy in order to increase the price level in the short run. Then, in the long run, the AS will shift back, which will also increase the price level. This increase in the price level will help bring inflation up to a healthier level. 33. The government is operating currently in short run equilibrium so that there is a recessionary gap because people have heard about a mysterious bubble in the market and they are following their instinct to hold all their money. a. Please draw the current economy on the graph provided b. In an attempt to restore the economy to its long run equilibrium, the government has decided to cut its spending on goods and services by $20 million and increase its transfer payments by $30 million. If the marginal propensity to consume is .67, what will be the final effect on real GDP of these two actions? MPC = .67 è multiplier = 1/(1-­‐MPC) = 1/(1-­‐.67) = 3 Cut on services = -­‐20 * 3 = -­‐60 .67/(1-­‐.67) = 2 Rise in transfers = 30 * 2 = 60 Overall effect on real GDP = -­‐60 + 60 = 0 million c. Did these policies move the economy back towards long run equilibrium? No, the economy is in a recessionary gap and the end effect with both of these policies ended up with no change in output when it needs to increase d. Mr. Jefferson wants the US budget deficit to only be 2% of the $300 million GDP. If, before the plan exacted in part b), the government was spending $40 million on goods and services and $5 million on transfer payments, how much in tax revenue would the US need to collect after the plan in part b) for Mr. Jefferson to be happy? 300 million * .02 = 6 million -­‐6 million = x -­‐ 20 million – 35 million x = $49 million 34. The country of Tarheelia has had a steady economy and is currently operating at a long run equilibrium. a. On the graph provided, please draw the economy in long run equilibrium. b. Give one reason that the aggregate demand curve is downward sloping and give an explanation for why. • The wealth effect – people have less purchasing power because the same amount of money they had before won’t buy as much now • The interest rate effect – money is not worth as much anymore so banks charge a higher interest rate and the price level increases which discourages people from investing and spending money on goods c. The government has decided to cut taxes to try to encourage consumers to spend more on buying national championship gear. What will this reduction in taxes do to the economy of Tarheelia? Draw the change on the graph in part a. d. How will the economy adjust back to long run equilibrium? The output is above the long run equilibrium output, so unemployment is low and this will cause nominal wages to rise until the SRAS and AD(t) curves cross at the long run equilibrium output. 35. Macrolandia is a country. There have been many recent developments in the country and the president is curious about how the developments will impact the economy. As an economist, it is your responsibility to think about the following developments, and determine how and why they will affect the short-­‐run aggregate supply curve, the short-­‐run aggregate demand curve, or both. Assume each development is independent. a. The senate has passed a new law limiting the amount of hours that an employee can work from 40hr/week to 20hr/week. The aggregate supply curve will shift to the left since the amount of labor workers has decreased. b. A new office software that speeds Microsoft excel up is developed and released. The aggregate supply curve will shift to the right since employees can produce more spreadsheets in the same amount of time. c. A new cache of rare minerals is found and the government distributes a $1,000 stimulus check to households. The aggregate demand curve will shift to the right since households have increased wealth. d. The government cuts Medicare and Medicaid. The aggregate demand curve will shift to the left since...
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