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# In 2006, the imaginary nation of Viloxia had a population of 5,000 and real GDP of 500,000. In 2007 it had a population of 5,100 and real GDP of...

1. In 2006, the imaginary nation of Viloxia had a population of 5,000 and real GDP of 500,000. In 2007 it had a population of 5,100 and real GDP of 520,200. Over the year in question, real GDP per person in Viloxia grew by
a. 2 percent, which is high compared to average U.S. growth over the last one-hundred years.
b. 2 percent, which is about the same as average U.S. growth over the last one-hundred years.
c. 4 percent, which is high compared to average U.S. growth over the last one-hundred years.
d. 4 percent, which is about the same as average U.S. growth over the last one-hundred years.

Figure 25-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L).

____ 2. Refer to Figure 25-1. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2007, then it will definitely remain at point A in 2008 if, between 2007 and 2008,
a. the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural resources, and technology all double as well.
b. the quantity of physical capital doubles; human capital, natural resources, and technology all double as well; and the number of workers remains constant.
c. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology all double as well.
d. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant.

____ 3. Last year a country had 800 workers who worked an average of 8 hours and produced 12,800 units. This year the country had 1000 workers who worked an average of 8 hours and produced 14,000 units. This country’s productivity was
a. higher this year than last year. A possible source of this change in productivity is a change in the size of the capital stock.
b. higher this year than last year. A change in the size of the capital stock does not affect productivity.
c. lower this year than last year. A possible source of this change in productivity is a change in the size of the capital stock.
d. lower this year than last year. A change in the size of the capital stock does not affect productivity.

____ 4. If an inexpensive alternative to oil were found, the price of oil adjusted for inflation
a. would decline as the alternative would reduce the demand for oil.
b. would decline as the alternative would reduce the supply of oil.
c. would increase as the alternative would increase the demand for oil.
d. would increase as the alternative would increase the supply of oil.

____ 5. An increase in the saving rate would, other things the same,
a. increase growth more for a poor country than for a rich country, and raise growth permanently.
b. increase growth more for a poor country than for a rich country, but raise growth temporarily.
c. increase growth more for a rich country than for a poor country, and raise growth permanently.
d. increase growth more for a rich country than for a poor country, but raise growth temporarily.

____ 6. The Eye of Horus incense company has \$10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should
a. not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money.
b. not influence the decision to build the factory because its stockholders are expecting a new factory.
c. make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable.
d. make it less likely that The Eye of Horus will build the factory because the opportunity cost of the \$10 million is now higher.

____ 7. If there is shortage of loanable funds, then
a. the supply for loanable funds shifts right and the demand shifts left.
b. the supply for loanable funds shifts left and the demand shifts right.
c. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
d. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

____ 8. Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same?
a. The government reduces the amount that people may put into savings accounts on which the interest is tax exempt.
b. Because they are optimistic about the future of the economy, firms desire to borrow more to purchase physical capital.
c. Consumers decide to decrease consumption and work more.
d. All of the above could explain why the interest rate would be unchanged.

Figure 26-3. The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.

____ 9. Refer to Figure 26-3. Which of the following movements would be consistent with the government budget going from deficit to surplus and the simultaneous enactment of an investment tax credit?
a. a movement from Point A to Point C
b. a movement from Point B to Point A
c. a movement from Point B to Point F
d. a movement from Point C to Point B

____ 10. Suppose that butchers and bakers have no unions. Now suppose the butchers form a union. What does this do the labor supply of and wages of bakers?
a. It increases the labor supply and wages of bakers.
b. It increases the labor supply and decreases the wages of bakers.
c. It decreases the labor supply and increases the wages of bakers.
d. It decreases the labor supply and wages of bakers.

____ 11. Maxine, the owner of a furniture company, decides to raise the wages of her workers even though she faces an excess supply of labor. Her decision
a. might increase profits if it attracts a better pool of workers to apply for her firm’s jobs.
b. will increase the excess supply of labor.
c. may increase the quality of her work force.
d. All of the above are correct.

Question 2 (50 points)

(a) How will an increase in the technology affect the market of loanable funds? What happens to the real interest rate in the market? Explain the shifts and the results in words and graphically. (10 points)

(b) Suppose that public saving decreases and private saving increases at the same time. Explain in words and graphically what will happen in the market of loanable funds. (10 points)

(c) Suppose you are given two countries (A and B). If the Demand for Loanable Funds is more elastic for country A, and both governments increase government spending by the same amount, in which country will be the more pronounced effect in the market of loanable funds? Explain in words and graphically what will happen in each market of loanable funds. (5 points)

(d) Suppose that the government borrows \$ 10 billion more next year than this year. Suppose that the households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future. Explain in words and graphically what will happen in each market of loanable funds. (10 points)

(e) Consider a closed economy with only two industries: auto manufacturing and aircraft manufacturing. Suppose that both industries require similar amounts of training.
(i) What would you expect to happen to the wages in both industries?
(ii) If the economy opens to international trade, and starts importing aircrafts and exporting cars. What will happen to the demand for labor in both industries?
(iii) If it takes some time for the workers in the aircraft industry to be retrained, what will be the effect of the shifts in the demand for labor in both industries in short run and in long run?
Show the changes in the market for labor separately for both industries, graphically and in words. (15 points)

Question 3 (15 points)
Suppose GDP is \$ 10,000, taxes are \$ 1,500, private saving is \$ 2.600 and the budget deficit is \$ 200. Assume this economy is closed.
(a) Calculate consumption, government spending, public saving, national saving and investment. (5 points)
(b) The economists estimate the investment function to be:
I = 3,300-100r
where r is the country’s real interest rate expressed as a percentage. Calculate the equilibrium real interest rate. (5 points)
(c) What happens if the budget deficit turns into a budget surplus of \$ 400? Calculate consumption, government spending, public saving, national saving and the equilibrium real interest rate for this particular case. (5 points)
Question 4 (20 points)
(a) The country of Wrexington uses the same method to calculate the unemployment rate as the U.S. Bureau of Labor Statistics uses. From the data below, compute Wrexington’s unemployment rate. (3 points)

(b) How large is Wrexington’s labor force? (3 points)
(c) Not all of Wrexington’s citizens are accounted for in part a. How are the missing citizens classified? Give some examples of what they may be doing. (2 points)
(d) How many of Wrexington’s citizens are not in labor force? (2 points)
(e) What is the labor participation rate for Wrexington? (2 points)
The 2,140 Wrexington’s citizens who searched for work during the previous four weeks included:

(f) Calculate the job seekers by their type of unemployment and calculate how many fell into each category (4 points)
(g) Find the frictional, seasonal, structural and cyclical unemployment rates. (4 points)

## This question was asked on Mar 21, 2011.

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