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Unformatted text preview: ANSWERS TO FINAL EXAM, ECONOMICS 5, FALL 2006—D. RICHARDS NAME: _____________________________________________ DATE _____________________ 1. (4 points) Adverse selection suggests that: Answer a. The price of a bottle of a wine is a good indicator of its quality. b. Automobile makers will offer low cost financing for less affluent consumers. c. Tenured faculty will be more responsive to student needs than untenured faculty. d. Banks charging high interest rates on loans may have only very risky borrowers. 2. (4 points) If the savings rate exceeds capital’s share of income then Answer a. Labor productivity growth will exceed the long-run growth rate of real gdp. b. The rate of return on capital will be less than the long-run growth rate of real gdp. c. Consumption per capita will grow faster than the long-run growth rate of real gdp. d. Private savings must exceed public savings. 3. (4 points) In the short run, a competitive firm will produce positive output Answer a. So long as price covers average variable cost. b. So long as price covers average cost. c. So long as price covers marginal cost. d. So long as accounting profit is positive. 4. (4 points) Markets for products that exhibit network externalities, e.g., telephones Answer a. Tend to be characterized by monopolistic competition. b. Tend to arise when production enjoys large scale economies. c. Tend to be heavily concentrated among just a few firms. d. Tend to arise when demand is inelastic. 5. (4 points) When inflation is rising Answer a. National income tends to be above national expenditure. b. National income tends to be below national expenditure. c. Unemployment tends to be above its natural rate. d. Unemployment tends to be below its natural rate. 6. (16 points) Consider the following data for Everland. It has a constant money growth rate of 5%. Likewise, the velocity of money grows at a constant rate of 1%. Everland’s labor force also has a constant growth rate of 1.4%, and output per worker grows annually at 1.8%. In total, private and public savings combined equals 15% of real gdp. The relationship between inflation and unemployment in Everland is described by the following equation: e t t t U 44444 . 2 π π +- = where e t t and π π are actual and expected, inflation, respectively, and U t is the unemployment rate, all in period t. a. What is the long-run rate of growth of output, g Y , in Everland? a. GDP = Output = (Output/Worker)xWorkers. So, growth of GDP equals growth of output per worker PLUS growth of workers = 1.4% + 1.8% = 3.2%. b. What is the long-run equilibrium rate of unemployment in Everland? b. In the long run, actual inflation t π expected inflation e t π must be equal. Making this substitution in the long-run Phillips Curve equation then yields: t U 44444 . 2- = ⇒ U t = 4.5.0% in the long run....
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This note was uploaded on 03/30/2008 for the course EC 5 taught by Professor Richards during the Spring '08 term at Tufts.
- Spring '08