Economics 211 Macroeconomic Principles Exam #1 Time: 1h 15m Date: 19 21 February 2013 Name The value of this exam is 100 points plus 10 points for the Bonus Question. Instructor: Brian B. Young Please show your work where appropriate! Multiple Choice 2 points each #1 One reason the demand for Coke might increase is a a. decrease in price of Coke. b. decrease in price of Pepsi. c. very successful advertising campaign for Coke. d. people begin finding cockroaches in cans of Coke. #2 Because of the circular flows of expenditure and income in the economy, total equals total equals total. a. expenditure; investment; income b. expenditure; income; value of production c. consumption; total expenditure; value of production d. investment; income; consumption #3 When supply increases, there is a a. movement down along the supply curve. b. rightward shift of the entire supply curve. c. leftward shift of the entire supply curve. d. movement up along the supply curve. Page 1 of 10
#4 The law of supply states that, other things remaining the same, if the price of a good falls, then the a. supply increases. b. supply decreases. c. quantity supplied decreases. d. quantity supplied increases. #5 The demand curve illustrates the law of demand because when the price decreases, the a. demand increases. b. demand decreases. c. quantity demanded decreases. d. quantity demanded increases. #6 The table above shows the situation in the gasoline market in Tulsa, Oklahoma. If the price of a gallon of gasoline is $3.65, then a. there is a shortage of gasoline in Tulsa. b. there is a surplus of gasoline in Tulsa. c. the market for gasoline in Tulsa is in equilibrium. d. there is neither a shortage nor a surplus, but the market for gasoline is NOT in equilibrium in Tulsa. #7 Economists use the term full employment to refer to an economy where a. unemployment is less than or equal to 5%. b. there is no cyclical unemployment. c. 100% of the labor force is gainfully employed. d. everyone who wants a job can get one. Page 2 of 10
#8 Potential GDP is the level of real GDP that would occur if an economy a. is at a peak in the business cycle. b. exports at least as much as it imports. c. is at full employment. d. pays a wage that is slightly higher than the equilibrium wage. #9 The price of a General Electric jet engine purchased by Airbus would be included in a. the CPI. b. the PCE deflator. c. the GDP deflator. d. none of the above is correct because a GE jet engine is not a final good. #10 Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then a. the demand for hot dogs will increase. b. the demand for hot dog buns will decrease. c. the quantity demanded of hotdogs will decrease. d. the demand for hot dog buns will increase. #11 A price ceiling set below the equilibrium price leads to a. a shortage. b. a surplus. c. an increase in the quantity bought and sold. d. no change in either the equilibrium price or the equilibrium quantity #12 A price floor set below the equilibrium price results in a. a shortage. b. a surplus. c. an increase in the quantity bought and sold. d. no change in either the equilibrium price or the equilibrium quantity. Page 3 of 10
#13 To be considered unemployed, a worker must have had a. no employment during the week before the survey and be actively looking for a job. b. part-time employment while actively looking for a full-time job. c. no employment during the week before the survey and be actively looking for a job while a student. d. no employment during the day before the survey and be actively looking for a job. #14 BMW s output at its South Carolina plant is a. included in U.S. GNP and, partially, in Germany s GDP. b. included in U.S. GDP and, partially, in Germany s GNP. c. included in U.S. GNP and U.S. GDP. d. included in Germany s GNP and GDP. #15 Workers in the United States pay 6.2 percent of their earnings, and employers also pay 6.2 percent of the worker s earnings, as a Social Security tax. Which of the following is definitely true? a. The incidence of the Social Security tax is shared equally by the workers and the employers. b. Employers pay the full amount of the tax. c. Workers pay the full amount of the tax. d. More information is needed to determine the incidence of the tax. #16 Imposing a sales tax on a product has an effect that is similar to which of the following? a. a decrease in consumers preferences for the good b. an increase in the costs of production c. an increase in demand for the good d. a decrease in people s willingness to work. #17 One means of lowering the stated unemployment rate would be to a. draft unemployed persons into military service. b. put unemployed persons in prison until the economy improves. c. make it so difficult to find a job that the unemployed will stop looking. d. All of the above would lower the reported unemployment rate. Page 4 of 10
#18 The business cycle is defined as a. changes in the stock market. b. changes in financial markets. c. persistent growth in potential GDP. d. irregular fluctuations in output and employment. #19 A Keynesian activist is an economist who believes that fluctuations in a. the money stock are the main source of economic fluctuations. b. aggregate demand combined with sticky wages are the main source of economic fluctuations. c. aggregate supply combined with sticky prices are the main source of economic fluctuations. d. aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations. #20 During a recession, the unemployment rate a. is, by definition, greater than ten percent. b. usually decreases. c. usually increases, but not necessarily above ten percent. d. may go up or down depending mostly on seasonal factors. #21 During a recession, when unemployment increases, a country is likely to produce a combination of goods and services illustrated by a point a. inside its production possibilities frontier. b. on its production possibilities frontier. c. outside its production possibilities frontier. d. either inside or outside but definitely not on its production possibilities frontier. Page 5 of 10
#22 In the real world, opportunity costs a. increase because resources are not all equally productive at all activities. b. are constant because resources are not all equally productive at all activities. c. decrease because resources are not all equally productive at all activities. d. are sometimes decreasing and sometimes increasing. #23 As an economic expansion approaches its peak, it is very likely that real GDP will a. exceed actual GDP. b. exceed potential GDP. c. equal nominal GDP. d. None of the above answers is correct. #24 If the economy is fully employed, which of the following is true? a. The price level equals 100. b. Frictional unemployment is zero. c. Real and potential GDP are equal. d. The unemployment rate is zero. #25 In the absence of external intervention, when the quantity supplied is less than the quantity demanded, there is a a. shortage and the price will fall. b. shortage and the price will rise. c. surplus and the price will rise. d. surplus and the price will fall. Page 6 of 10
Short Answer #1: 10 points each When the expected future price of a good falls, the supply curve shifts to the right and the demand curve shifts to the left at the same time. What happens to the equilibrium price after the shifts? What happens to the equilibrium quantity after the shifts? Is it always possible to determine the direction of change in both the equilibrium price and quantity or is more information necessary? Use supply and demand curves to graphically explain your answer. #2 Why is depreciation (capital consumption) accounted for when using the income approach to calculating GDP and, yet, not accounted for when using the expenditure approach to GDP? Page 7 of 10
#3 Define the unemployment rate (U3) and labor-force participation rate. Discuss the differences between these two rates. #4 Briefly discuss two reasons why the labor force participation rate has been declining over the past twelve years. Also, explain why changes in the unemployment rate may not always be a good indicator of the direction the economy is taking. Page 8 of 10
#5 The following is a supply and demand schedule for ethylene glycol: Price ($/gallon) Quantity supplied (1000 s gls./day) 3.50 16 4 3.00 14 5 2.50 12 6 2.00 10 7 1.50 8 8 1.00 6 9 0.50 4 10 Quantity demanded (1000 s gls./day) a. What is the equilibrium price and quantity for ethylene glycol? b. Suppose that the government places a tax of $1.50 on each gallon of ethylene glycol. What is the new equilibrium price and quantity for ethylene glycol? c. Who bears most of the burden of the new tax, the buyers or the sellers? d. How much revenue does the government collect each day from the tax? Page 9 of 10
Bonus Question 10 points Suppose that corn is an ingredient in the production of eggs. Further, suppose that a drought in the Midwest has significantly reduced the production of corn. In the market for eggs: 1. Which curve(s) shift? Demand shifts to the right / Demand shifts to the left / Supply shifts to the right / Supply shifts to the left. 2. Graph the situation in the market for eggs: P 3. As a result of the reduction in corn production, a. the price of eggs will increase / decrease / can t tell Q b. the quantity of eggs sold will increase / decrease / can t tell Page 10 of 10