Eco100PesandoSolvedTest3s

Eco100PesandoSolvedTest3s - Page 1 of 7 Last Name: First...

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Unformatted text preview: Page 1 of 7 Last Name: First Name: Student Number: Economics 100 Professor James E. Pesando Term Test 3 — March 10, 2006 Length: 55 minutes answer ALL questions in the space provided Aids: Pen/ Pencil and non-programmable calculator please enter the multiple choice answers in the box below: examiner’s report: 1 _ Page 2 of 7 Question 1 (21 points) C = 10 + 0.8 YD T = 5 + 0.25Y I = 30 The price level is fixed. All amounts are in $billions. G = 25 X = 14 M = 0.1Y (a) What is the marginal propensity to save out of disposal income? What is the marginal propensity to consume out of national income? (b) What is the equilibrium level of national income? Show your calculation. (c) What is the level of unintended inventory investment at the equilibrium ‘ level of national income? Why? (d) If the government increases employment insurance benefits (payments to unemployed workers) and the level of taxes by $2 billion, what happens to the equilibrium level of national income? Explain your answer. Page 3 of 7 Question 2 (15 points) Three families use a private road to drive to their cottages. After a cold winter, the road needs to be maintained. The cost for maintenance is $1000. Each of the families has a different value for a well—maintained road. Family 1: $400 Family 2: $300 Family 3: $600 (a) Should the road be maintained? Why? (b) Will the road be maintained? Why? Suppose the law allows any family to order the road to be maintained. However, this family will have to pay 50% of the cost and the other two families will only have to pay 25% each. (c) Does this change your result from part (b)? Explain? Page 4 of 7 Question 3 (16 points) An economy produces three goods: Pizza, Beer and Textbooks Consumption in the past three years is as follows: Beer 1 Textbooks Quantity I Price Quantity l Price 150 12 10 100 120 12 10 110 100 I 15 10 120 Calculate the following: (a) Nominal GDP for 2003 and 2004 (b) Real GDP for 2004 (2003 base year) (0) GDP Deflator for 2004 (2003 base year). What is the inflation rate in 2004 using the GDP deflator? (d) Would the inflation rate in 2004 differ from that in part (c) if calculated using the CPI (2003 base year)? Explain your answer. Page 5 of 7 Question 4 (10 points) State whether or not each of the following serves to increase GDP. (a) A 4th year student works as a private tutor for EC0100 for $2 5/hour (b) A used car salesman buys a 1972 VW Beetle for $500 and sells it to a collector for $1000 (0) Workers are paid $10 per hour to clean up after oil spills on the street (d) A father drives his neighbour’s children to school before he goes to work, since his neighbour helped mend the fence that divides their properties. Question 5 (10 points) The Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS) schedules intersect at a level of real GDP that is equal to $600 billion. Potential real GDP in this economy is $600 billion. The slope of the AE schedule in the economy is 0.5. The government increases its expenditures by $5 billion. What is the change in the equilibrium level of real GDP Explain your answers (a) in the short run? (b) in the long run? Page 6 of 7 Question 6 Multiple Choice (28 points) 1. The production of a good involves a positive externality. Which of the following statements about the production of this good is true? a) b) C) d) e) A per unit tax could be imposed on the producer to achieve the socially optimal level of production. Marginal social benefit is less than marginal private benefit. Marginal social cost is more than marginal private cost. Without government intervention, the market will produce too much of this good. A subsidy to producers could increase production to the socially optimal level. If the AE function is horizontal, then the multiplier is a) b) C) d) 6) zero. between zero and one. one. greater than one. less than zero. In an open economy with government, with the price level fixed, an increase in the equilibrium level of income could be caused by a) b) C) d) e) an increase in taxes at all levels of income. a decrease in the desired level of saving at all levels of income. a decrease in government spending. an increase in the desired level of imports at all levels of income. none of the above. When prices are flexible and national income exceeds potential output: a) b) C) d) e) the LRAS curve shifts to the left the SRAS curve shifts to the right the AD curve shifts to the left the AD curve shifts to the right none of the above Which of the following adjustments describes what will happen when the economy is in a recessionary gap? 3) b) C) d) 6) wages do not adjust, but the AD curve shifts to the right wages fall, unit costs fall and the AD curve shifts rightward wages rise, unit costs rise and the SRAS curve shifts leftward wages fall, unit costs rise and the SRAS curve shifts leftward wages fall, unit costs fall, and the SRAS curve shifts rightward Page 7 of 7 The last unit of output produced at a paper mill has a value to society of $10 and a social cost of $15. The private cost to the company is $10 and the market price is $10. Then the a) market is in equilibrium, but a lower output would make society better off. b) market is in equilibrium, but a higher output would make society better off. c) output and price are too low for market equilibrium. (1) output is too low, and price is too high, for market equilibrium. e) output is too high, and price is too low, for market equilibrium. If transaction costs are low and property rights exist, then according to the Coase Theorem: a) deadweight losses result due to positive externalities. b) deadweight losses result due to negative externalities. c) private transactions cannot be efficient. (1) government should try to remedy the problem of externalities. 6) none of the above. Private firms are not likely to fund the socially optimal amount of basic research because basic research: a) b) C) d) 6) has no payoff. yields benefits that cannot be measured in dollars. provides long-term but not short-term benefits. produces benefits to society as a whole, including those who do not pay for it. none of the above, since the market will provide the optimal amount of research. Answers: Test #3 (March 10th, 2006) l. (a) (b) (d) (b) (a) (b) MPS out of disposable income is 0.2 MPC out of national income is 0.6 as follows: C=10+O.8(Y—5—0.25Y) =6+0.6Y C+I+G+X-M=Y 6+0.6Y+30+25+14—0.1Y=Y 75+0.5Y=Y 150=Y The level of unintended inventory investment is zero since desired expenditures equal output No change Employment insurance benefits represent a transfer of 2 billion to households (and thus increase disposable income by 2 billion), while taxes reduce disposable income by 2 billion. Yes, the road should be maintained. The total of the benefits to the families ($1,300) exceeds the cost of the maintenance ($1,000) No, the road will not be maintained, due to the “free rider” problem. The road is a public good. If the road is maintained, no family can be excluded from enjoying this benefit. The road is also non-rival; that is; its use by one family does not reduce its usefulness to the other families. No family alone has an incentive to maintain the road, as each family has an incentive to lie about the value it assigns to maintenance (to avoid having to pay). Yes, the road will be maintained. Family 3 would order the maintenance, since its benefit ($600) would exceed its share of the cost ($500). 100 * 7 +150 * 12 +10 * 100 = 3,500 in 2003 120 * 8 +120 * 12 +10 *110= 3,500 in 2004 120 * 7+ 120 * 12 +10 *100= 3,280 GDP deflator = Nominal GDP (2004) / Real GDP (2004) * 100 = 3,500/3,280 * 100 = 106.7 90>! 99:59?) (d) (b) (C) (d) (a) (b) The inflation rate is 6.7% using the GDP deflator Yes. The CPI treats the “basket” of goods in the base year as fixed, and compares the change in the cost of purchasing the basket in 2004 compared to 2003. (In fact, inflation in 2004 is 5.7 percent if calculated by the CPI). Increases GDP Increases GDP (due to the $500 service provided by the salesman) Increases GDP Not included in GDP (since GDP only includes market transactions) Real GDP increases by less than $10 billion (i.e., by less than the amount predicted by the multiplier). The reason is that the price level increases, thereby lowering consumption and exports and increasing imports. Real GDP does not change. The increase in government spending results in an inflationary gap, thereby (in the long run) causing wages and the prices of other factors of production to increase. The SRAS shifts left until equilibrium is restored with GDP equal to potential GDP of 600. Answers to Multiple Choice (6) (C) (b) (6) (e) (a) (e) (d) a subsidy to producers could increase production to the socially optimal level the multiplier is one a decrease in the desired level of savings of all levels of income none of the above wages fall, unit costs fall, and the SRAS curve shifts rightward the market is in equilibrium, but a lower output would make society better off none of the above produces benefits to society as a whole, including those who do not pay for it Page 1 of 6 Last Name: ' First Name: Student Number: Economics 100 Professor James E. Pesando Term Test 3 — March 9, 2007 Length: 55 minutes answer ALL questions in the space provided Aids: Pen] Pencil and non-programmable calculator W glease enter the multiple choice answers in the box below: examiner's report: - — - _ - Page 2 of 6 Question 1 (22 points) ' Consider an economy with fixed prices. The following relationships hold: C = 20 + 0.9Yd I=20 G=15 T=O.2Y X=15 M=0.12Y (a) Calculate the AB schedule and the equilibrium level of national income. If national income were higher than this equilibrium, what would be the relationship between desired and actual inventory investment by firms? (1)) As a result of recent developments, there is a new import function so that M = 0.22Y. What will be the new level of imports? (c) The government increases taxes by $10 million and increases government expenditures by $10 million. Explain what happens to the level of autonomous expenditures. Page 3 of 6 (d) With the new import function in part (b), will the multiplier increase or decrease? Explain your answer. (Calculating the new value of the multiplier is not an explanation.) Question 2 (16 points) Health economists find that “not enough” adults participate in active exercise. These economists estimate that the value to society at large, in excess of the value to participmits, is equal to $200 for each adult whojoins a fitness club. (3) Assume that the market for fitness clubs is perfectly competitive. Will the market, if left to itself, produce the allocatively efficient number of fitness club members? illustrate your answer with an appropriate diagram. 0)) If the government wants the market to produce the allocatively efficient number of fitness club members, should the government tax or subsidize fitness club membership? By how much? Explain your answer. Page 4 of 6 Question 3 (18 points) The Aggregate Demand (AD) and the short-run aggregate supply schedule (SRAS) for a particular economy are as follows: ‘ Price Level A]; SRAS 180 320 320 200 300 350 220 280 380 (a) What is the equilibn'um level of real GDP (output) and the price level in the short run? Illustrate your answer with an appmpriate diagram. (in) The full employment level of real GDP in the economy is 400. Explain what happens to the price level, wages and aggregate demand as the economy moves to its long-term equilibrium. (c) When real GDP is equal to 400, there is a sharp increase in exports. In the m long-run equilibrium, what will happen to (l) the level of real GDP and (2) the price level? Explain your answer. Page 5 of 6 Question 4 (12 points) Explain whether the following statements are true or false. (a) A film makes widgets in a perfectly competitive industry. The wage rate is $8.00 per hour and the firm has hired go workers. If each widget sells for $2.00, and if the firm is maximizing profits, the marginal product of the gift: worker hired is 3 widgets per hour. (b) Lighthouses are a public good. The cost to the government ofbuildlng each lighthouse is $1 million. The total benefit (“willingness to pay”) to consumers of 3 lighthouses is $4 million. Therefore, the government should build 3 lighthouses. Question 5 Multlgle Choice (32 points) 1. Suppose a Canadian firm imports $1,000 worth ot‘bananas and sells them for $2,000. The effect on GDP would be a) to decrease the value of GDP by 53,000. b) to increase the value of GDP by $3,000. 0) to increase the value of GDP by $2,000. d) to increase the value of GDP by $1,000. 6) no effect on GDP since the bananas were produced outside of Canada. 2. The nominal national income for a country falls by 5 percent, when inflation is 5 percent. Therefore goal national income a) fell by 10 percent. b) was unaffected. c) rose by 10 percent. (i) fell by 5 percent. 6) rose by 5 percent. '4») Page 6 of 6 Jane has a tree in her yard whose roots are beginning to break into Dick’s house. (Dick and Jane are neighbours.) Suppose that the benefit of having the tree is worth $800 to Jane and that Dick is willing to pay up to $1000 to protect his house. A possible private solution to this extemzility is that a) Dick pays Jane $900 to destroy the tree. b) Jane pays $900 towards Dick’s housing repair. 0) Dick pays Jane $650 to destroy the tree. d) Dick pays Jane $1,100 to destroy the tree. e) none of the above. If the consumer price index was 100 in the base year and 110 the following year, the inflation rate was a) 1 10 percent. b) 100 percent. 0) ll percent. d) 10 percent. 6) none of the above. If the saving function is S = —100 Jr 0.2Y, the simple multiplier in a closed economy with no government is a) 0.2. b) l . c) l .25. d.) 5. e) insufficient infonnation to determine. In an economy with fixed prices, in order to raise equilibrium national income by 100, G must he a) raised by 100 divided by the multiplier. b) raised by 50. c) raised by the amount of taxes. d) raised by 100. 0) none of the above. Assume that aggregate expenditure is composed of consumption and investment (C + K). As the price level rises, a) the aggregate expenditure curve shifts down and the economy will move up the AD curve. 12) the aggregate expenditure curve shifts upward and the economy moves down the AD curve. c) the aggregate expenditure curve shifts upward and the economy moves up the AD curve. d) the aggregate expenditure curve shifts to the right as does the AD curve. e) the aggregate expenditure curve and the AD curve both shift downward. If the major labour unions succeed in increasing wages, this will cause a) the SRAS curve to shift downward (to the right). 1)) the LRAS curve to shitt upward (to the left). (3) the SRAS and LRAS curves to shift in opposite directions. (1) the AD cum/e to shift downward (to the right). e) none of the above, James E. Pesando Answers Term Test 3 (March 9, 2007): 1. (a) AE=C+I+G+X—M =20+o.9 (Y-O.2Y)+20+ 15+ 15~0.12Y =70+0.6Y AE=Y=>70+0.6Y=Y 70=0.4Y 175=Y If Y were greater than 175, then firms’ sales would be Less than the amount produced and as a result there would be involuntgg inventory investment (i.e. actual inventory investment would exceed desired inventory investment) (b) AE=20+0.72Y+20+15+15—0.22Y =70+ 0.5Y AE=Y=>70+0.5Y=Y=>Y=140 (i.e. the AE schedule and, thus, the equilibrium level of national income will change) New level of imports: 0.22 * (140).: 30.8 (c) The decrease in autonomous expenditure due to higher taxes (0.9 * 10 = 9) is less than the increase due to increased government expenditures (10), so autonomous expenditures increase. (d) The multiplier will decrease. At each round of induced spending subsequent to a change in autonomous expenditure, the additional induced spending on domestic goods and services will be smaller. 2. (a) The market price of fitness club membership will be too high, and the number of fitness club members will be too low. (See Figure 10.4, page 210 of Mankiw text.) (b) The government should subsidize fitness club memberships, by $200, in order to shift the demand curve (private value of memberships) vertically upward to the social value. 3. (a) The equilibrium level of real GDP is 320 and the equilibrium price level is 180. (See Figure 23-5, page 582 of Lipsey—Ragan) (b) There is a deflationary gap. As a result, there will be downward pressure on wages and the prices of other factors of production. The SRAS schedule will shifi rightward, causing the price level to fall, the level of aggregate demand to increase, and the level of real GDP to increase. (c) The new level of real GDP will be unchanged at 400. Initially, AD and SRAS will intersect at a level of real GDP in excess of 400. However, the resulting inflationary gap will lead to upward pressure on wages and the prices of other factors of production. SRAS will shift lefi, raising the price level and reducing real GDP to its long-run equilibrium level of 400. 4. (a) FALSE. The marginal product of the la_st worker hired is 4 widgets per hour (i.e., $8.00/$2.00). The marginal product of the 18;}: worker must be higher, and thus greater than 3 widgets per hour. (b) FALSE. From the information provided, we cannot determine if the marginal benefit of the third lighthouse exceeds $1 million. 5. Multiple Choice: Answers . (d) to increase the value of GDP by $1,000 . (a) fell by 10 percent . (3) Dick pays Jane $900 to destroy the tree ((1) The inflation rate was 10% (d) the multiplier is 5 (a) raised by 100 divided by the multiplier (a) the aggregate expenditure curve shifts down and the economy will move up the AD curve . (6) none of the above (the SRAS curve shifts to the left) sngWNH 00 ...
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This note was uploaded on 11/29/2011 for the course ECO 100 taught by Professor Indart during the Fall '08 term at University of Toronto- Toronto.

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Eco100PesandoSolvedTest3s - Page 1 of 7 Last Name: First...

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