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Answer Keys to Practice Midterm Exams Midterm Exam—Econ 201A Winter 2005 Total Points: 50 --- Answer Key Each multiple choice question is worth 2 points 1. The productivity growth in the U.S. surged in the late 1990s a. As the level of economic activity slowed down and some in the labor force were unemployed b. As the level of economic activity slowed down but labor was fully employed c. As the level of economic activity was growing and labor was fully employed *** d. None of the above Answer: c. is correct. As the level of economic activity (Q) goes up and L can not increase anymore (full employment of labor), then Q/L rises. The origin of this question is the following sentence from the article by William Poole on the course website, “Some economists initially believed that faster productivity growth was largely an artifact of the extraordinarily rapid economic growth and tight labor markets that prevailed over the latter part of the 1990s.” Also from the other piece on productivity on the course website, “The post-1995 productivity spurt means the economy needs to grow about 3.5% a year now. It did that for a while in the late 1990s; unemployment fell to the lowest level in a generation as productivity surged.” 2. In an economy productivity of labor has increased by 2% even though the level of employment has fallen by 1% during the same period. You would expect the level of economic activity to 3. Robinson Crusoe can either catch 3 fish or sew 1 fishing net in one hour. In a 10 hour work day, his PPF is a. 1/3* Fish + 1 * Net = 10 *** b. 3*Fish + 1/3 * Net = 30 c. 3*Fish + 1 * Net = 10 Questions 4-7 pertain to the following scenario: The economy of Racer produces 2 goods: cars and robots. Cars are considered consumption goods while robots are investment goods. There are 150 workers in this economy. It takes a worker 1 year to produce a car or 2 years to produce a robot. Currently, 100 workers produce cars and the rest produce robots. The price of a car is \$10K and that of a robot is \$20K. Each worker is paid \$8000 in wages in a year. Government in this economy buys 20 cars. 4. The value of consumption, investment and government expenditures are:

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5. Suppose all the profits of firms are distributed to households (HHs). The government taxes the income of the HHS at 10%. The budget of the government (value of T-G) is:
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