Midterm1AnswerKey

Midterm1AnswerKey - i i . if” - . Econ 2202 - Midterm i n...

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Unformatted text preview: i i . if” - . Econ 2202 - Midterm i n Spring 2009 - Marouia Khraiche - NAME: Muitiple choice (2 pts each} ‘ . V 1. You are a baker. You paid $150K in wages, $50K for dough, $20K for power, $5K in interest for a business loan, $25K in taxes, and made a profit of $10K. How much did you contribution to GDP using the product C h? | gpgggici QM “£3304: '3 new» 33:12am a: non B) $85K 259 t. o éfmdfir Em $190K “pawl? w) $260K 2. The income-expenditure identity is best paraphrased as @ail spending generates income. 8) all profits are used for investment spending. C) on average, consumers cannot save. D) On average, gmernment can spend no more than what it collects in income taxes. 4. 3. Value added is equal to the value of a firm’s production minus A) ail of its costs of production. B) labor costs. 0 investment expenditures. intermediate goods used in production. (.3 4. The expenditure components of. GDP inciude 2111 of the foilowing except A) consumption. 13) investment. C) net exports. D net factor payments. D For the foiiowing question(s), suppose an ecommy produces only bread and computers. Assume that all production is consumed in each year, and that price and quantity data are given in the table beiow. Year 2t Year 2 Good Quantity Price Goo d Quanlity Prise Bread Wit): $10 Bread gfi $15 Com «text: 10 $50 Computers .530 $00 5. if Year 1 is the base year, the real GDP of Year 2 is A) $800. $1050. B $1900. D $2400. 6. The nominal GDP of Year 1 is $800. B) $1050. 0) $1900. D) 82400. #1:)“ & ’-' an} “$15.? at} (:3 my“ me... _ i ate t2? 7. If Year 1 is the base year, the growth of real GDP is approximater A) 100%. . 133) 109.5%. {charm}. D) 148%. 8. If Year 1 is the base year, the CPI for Year 2 is approximately A) 100.0. B) 126.3. 131.3. 1)) 181.0. (1. y at i i : 9. In Dakistan, 3M people work, 0.5M are unemployed and get U1 benefits, 0.1M are unemployed without UI _ benefits and 3M have no intention to work. The unemployment rate is (to the nearest %) A) 7%. B) 9%. 14%. 17%. 10. The defining feature of business Cycles is that they A) are inherently bad. . B represent the nnderiying trend of reai GDP in the economy. @are fluctuations about trend in real GDP. D) measure prospects for future growth in the economy. C” 11. Predicting'husiness cycles is difficnit because A) they are very persistent. B) the weather changes unpredictably. D 0) statistics lie. ) their frequency is irregular. 12. Positive correlation between x and y impiies that when X is high, y is high. A when x is high, y is low. ' 0) when x is zero, y is positive. D) x and y are positively unrelated. 13. If deviations horn trend in a macroeconomic variable are negatively correlated with deviations from trend in real GDP, that variable is said to be M” A) aseiess in predicting future movements in real GDP. 6’ B procyciicai. C countercyciical. D) acyciicai. 14. Reai consumption tends to be procyclical and less variable than real GDP. ). procyclicai and more variable than real GDP. 76% i C) countercyclical and less variable than real GDP. D) conntercyclical and more variable than real GDP. 15. Real investment tends to be A prccyclicai and less variable than real GDP. (5 procyclical and more variable than real GDP. g C) countercyclicai and less variabie than real GDP. D) countercyclical and more variable than reai GDP. 16. Which of the following is not a correct characterization of the US. business cycle? A) Employment is procyclicaia ‘3 B) Consumption is procy'clical. : -‘ 0 Real wages are procyclicais Prices are procyclical. 17'. We assume that the representative consumer’s preferences exhibit the properties that A they evolve over time and that more is always preferred to less. more is preferred to iess and that the consumer prefers diversity. g C) the conSurner iikes diversity and that more is sometimes preferred to less. D) more is sometimes preferred to less and that consumption and leisure are both normal goods. 18. A normal good is one whose consumption rises when income rises. Assuming leisure is a normal good implies that @311 increase in taxes decreases the demand for ieésore. households maximize utility. A” C) preferences over consumption are well defined. 1)) an increase in the wage decreases demand for leisure. 19. The fact that indifference curves are downward sloping A) is not true. ® follows from the fact that more is preferred to less. 0) follows from the property that the consumer iikes diversity in his or her consumption bundle. D) follows from the property that consumption and leisure are normal goods. 20. The fact that indifference curves are bowed in toward the origin A). is not true. B) foliows from the fact that more is preferred to less. 6/ © follows from the property that the consumer hires diversity in his or her consumption bundle. D) follows from the property that consumption and leisure are normal goods. 21. The substitution effect measures g) the responses of quantities to changes in the relative prices of goods. A the responses of relative prices to changes in the demand for goods. 0) how two goods can be used for the same purpose. D) the responses of quantities to changes in the retative qualities of goods. 22. A competitive equilibrium may fail to be Pareto optimai due to all of the fotlowing except C? inequality. B externaiities. ‘74" C) distorting taxes. D) non—price—taking firms. 23. The presence of a distorting tax on wage income can result in A) MPN < MRI-LC. b B) MRTgp < MRSLO. ' C) MPN < w. @MRSLC < MPN. 24. Labor demand is decreasing in the wage because A) the substitution effect is larger than the income effect. C. the income effect is larger than the substitution effect. é) the contribution to production of each additional unit of labor decreases. D) the marginal product of labor is increasing in iabor. 25. In a competitive equilibrium all thesereiationships hold but one. Which one? A) N d u N S. B) Y m G‘ + C. C)G’=T D @wmz. short answar questions: You must show ALL you;. work to receive credit Q1 Consider a. one%period economy inhabited by one household. who can either work in a firm or enjoy fl ieisure (l), The household is endowed with in units of time. When working, the househoid earns wage (w) which it can use to purchase consumption goods whose price is 1. The household also derives utility from consumption (c). Preferences are U(c, I) m 21n(c} —§— 4111(1) for the household. Firms hire labor only and produce with technoiogy y m z 3‘ (N d) a 31W. Assume that the dividends are distributed to the households. Suppose the government spends an amount G. (a) Derive the production possibilities frontier. State the equilibrium conditions needed to derive it. ‘- W: N s z, N :27 egg is /V2M“»Q ":1> threw-QB {it Cm er. 7/ mgr, C: 4" {:9 s "ECMWQB C; e me ,.. (:57 Q: (1)) What is the intuitive definition of the production possibilities frontier. ur- {c) Solve the Social Planner’s problem for a. Planner who maximizes the welfare of the household. b MW W a{ W‘WM [o 59/ "2‘7? eye/m (ET/"We. WW e Wee 4e gflm op TLC“ 1-: S'de 6% (OFF: e»? Nfii‘iel‘fi’d‘r H!sz 3 i We“... / > v! 7— H)“ “a” Q ((1) Assume that z 2 1, h w 1000, G = 90. Draw a graph illustrating the competitive equilibrium. Show on the graph: (i)consumpt§on bundle chosen by the social planner (ii) intercepts (iii)slopes. WM W C. -: ghagh “in; 3 (leeeWVQJWQ O C r 1%) —,Q M..___..__ ~ (e) Derive the wage Eevel in this economy. Explain. (f) Derive the profit level. Explain. K" 7T: Pey'w—UJN > 93:£*_3‘1’=%:\J) wee ~ 201%me :0 (g) Assume that total factor productivity decreases. Explain the efi‘ect on: f" ‘3 1. production \P SlMi “f x "I'm ii. wage / -- . k.“ V \t/ gmfifl W235i: iii. coasumption K I) \1/ 6m Lg w \I/ pflé film 5/ gig Wmfiigxmfiwf 5%..» iv. labor supply ‘ /l\ 51an flew-2%; 3 I) ,va Ci if) v. welfare (higher er lower inciif‘ference curve?) Lama Wfiiflele "m ' .:$ “7“ “J” (11) Given your answer in the previous part, is the change in z a goodéandidate for explaining business cycle fluctuations? Explain why and why not. What must hold? Explain. M cf J/ ) CV” 1:3) cc‘nfi r13 Wtajw zit/3 amigo (1) According to the textbook, since World War II, there have been many important technological innovations in the United States. Also, key observations from post—World War II US. data are that aggregate output and consumption have increased steadily, real wage increased and hours worked per employed person remained roughly constant. Is the model presented in (Q1) consistent with such long run trends in the data? What must hold? Explain. “. . :b to) go m M. We? pm; (We “ft-WWW”) VT «it C7” $Vd‘P molded} (2.4:: no moqu/ti‘ce’f 325% IV “I’D V'EWM Me, com yew 4" $Er mm?“ Cl th dt-"Lrue ‘ ‘ _Q_2 Ronald‘s preferences for consumption and leisure can be expressed. as: U {0, L) x 40L. There are 168 ‘ hours in the week available to be allocate between leisure and work. Roneid earns $10 per hour. He also receives a weekly dividend payment of $240 regardless of how much he works. Let Par—1. {3.) Graph the budget Constraint and draw a possible optimal bundie consumed by Ronaid. Make sure you Show the (i)intercepts and {iiJslope ' ‘ {fl in as. iiiér‘w’w‘hi $50“— 0 g; Whirligl %\ -“‘ WW yyyyyyyyyy r.» 5 C, ‘ . ,3? i \N L, t»; g i“ fig are r am Mam w w worm” SW34 erei mi u - . M “r magssrv «mmhmmwsi i {Dc g I . i i . - % limos” was s i o r to?) (b) Write down explicitly how you w0uld derive the optimal bundle: Le. i. Explain what is being; maximized ii. What is the budget constraint ‘. ' iii. Derive the expression that must be satisfied for the bundle chosen to be optimal (Hint: What must be set equal to What?) ' ' if it MlmWrueew 9 l I {l l ifiklmim Mi. .3? w.., is.) to r w r h. :> 240 4. word» 1i.— a U3 ~ 4 C m MW, Wfi> Q ‘ #3 i 365‘" lg jg €37 weep “M «7%» (iii > Mag.) 2 a“ 5:? i0 Lé"; “1+3 WW. 0! . val-“NJ! qux gig???” twp? _l (c) How would you find out how many hours Ronald works? Wage—119i”? 1/31,»: mid" (d) Assume that the dividend Rnnaid received decreasas to $140. -Without caiculating anything, use - income effect anti substitution effect arguments ‘to explain whether Ronald’s consumption and . leisure hours would increase, decrease or stay that saxhe. wk; ‘ i i ‘. x w u ‘ ‘ B I m M‘ [afquamg 1611?": (“film (L); a - HA “4; $1,,a’k-ifiww-f255 ".311? Ma? ‘ {w , ' _ S _$ - ‘ ' ° m f ‘ If}. ' , __"'__ . 2232* 33w 3%! $5; fijrfiflé-fii}é ‘”$”‘“%~§::m §fi='-»€3“¥’“3- Mm" W m WWW Wm My awgw ti? MQEAA 63%;} (9) Graph the changes in the previous part and Show the new consumption bundle. ...
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This note was uploaded on 10/27/2009 for the course ECON 2202 taught by Professor Staff during the Spring '08 term at UConn.

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Midterm1AnswerKey - i i . if” - . Econ 2202 - Midterm i n...

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