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201Fin02Fall-solutions

# 201Fin02Fall-solutions - Econ 201 Prof Gordon Fall 2002...

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Econ 201 – Prof. Gordon Northwestern University Final Exam Fall 2002 Department of Economics December 10, 2002 Answer Key PART A: Multiple choice (1 pt. each, 45 pts. total) Question Answer Question Answer Question Answer 1 C 16 A 31 A 2 D 17 D 32 D 3 D 18 A 33 C 4 C 19 C 34 C 5 B 20 D 35 D 6 B 21 A 36 C 7 B 22 D 37 C 8 A 23 B 38 B 9 A 24 B 39 B 10 A 25 B 40 B 11 C 26 B 41 C 12 B 27 B 42 A 13 B 28 D 43 D 14 C 29 C 44 A 15 A 30 D 45 C

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PART B: Short Answer (45 pts. total) 1. Consider the following economy: Autonomous consumption = 14 T = (1/9)*Y G = 10 I = 16 X = 11 M = (2/15)*Y a) Suppose that households save 12 when disposable income is 65 and 26 when disposable income is 100. What is the marginal propensity to consume in Kiribati? MPS = (26-12)/(100-65)=14/35=2/5 MPC = 1- MPS = 3/5 b) What is consumption function? C = a + b (Y – T) C = 14 + (3/5) (Y – 1/9Y) C = 14 + (8/15) Y c) What is the multiplier? Multiplier = 1 / (1 – (b (1 - t) – m)) Multiplier = 1 / (1 – ((3/5) (8/9) – (2/15))) Multiplier = 1 / (1 – ((3/5) (8/9) – (2/15))) Multiplier = 5/3 d) What is the equilibrium expenditure in this economy? Y = AE = 14 + (8/15) Y + 10 + 16 + 11 – (2/15) Y Y = 51 + (2/5) Y Y = 85 e) If Real GDP (Y) is equal 80, what is the unplanned inventory change? AE = 51 + (2/5) (80) AE = 83 Unplanned inventory change = AE –Y = 83 – 80 = 3
2. In the country of La Sarre, only two goods are produced: cranberries and maple syrup. The following table represents the production possibility frontier: Cranberries (kilos) Maple syrup (liters) 100 0 80 100 60 200 40 300 20 400 0 500 a) What is the opportunity cost of producing one kilo of cranberries? OC = 5 liters of maple syrup b) In the graph, draw the production possibility frontier of La Sarre. Make sure to label you axes properly. See part e)

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201Fin02Fall-solutions - Econ 201 Prof Gordon Fall 2002...

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