University of Nevada-Reno College of Business-Department of Economics Ec 103: Principles of Macroeconomics; Fall 2003 Professor Federico Guerrero 1 st MIDTERM EXAM-Tuesday, September 30 th, 2003 There are 33 multiple choice questions in this exam. You are given 1 point just for participating and each question is worth 3 points. Therefore, the total number of points that you can get in this exam is 100 points [(33*3=99)+1=100]. Read the questions carefully. Good luck!! 1. A professional basketball players' union negotiates a contract that dramatically increases all players' salaries. How would this influence the opportunity cost for a player who was considering giving up basketball to pursue a career in broadcasting? a. it would not affect the opportunity cost of playing basketball or of broadcasting b. it would increase the opportunity cost of continuing to play professional basketball c. it would cause the production possibilities frontier to become perfectly flat d. it would increase the opportunity cost of becoming a broadcaster e. it should have no bearing on the player's decision from an economic standpoint 2. Reducing taxes either: (i) Has a very large opportunity cost; money could be better spent on other things, or: (ii) Has a very low opportunity cost; it is the best allocation of resources that can be done, depending on who you ask. Statements (i) and (ii): a) Are both Positive statements b) Are both Normative statements c) Are both Positive Statements, and (i) is the correct one d) Are both Positive Statement, and (ii) is the correct one e) Who cares? 3. A tax cut: A) Has no opportunity cost, because the US is a very wealthy country B) Has a positive opportunity cost, because that amount of money has alternative uses (regardless of how we rank the alternatives) 4. Picking alternative b. on the question immediately above implies: a) A Normative statement that suggests opposition to the tax cut b) A Positive statement unrelated with our opinion regarding the tax cut c) A Normative statement that reveals opposition to the current Republican Administration d) Both a. and c. above are true e) A Normative statement that reflects a negative opinion about President Bush 1
5. Which of the following groups have the highest opportunity cost in terms of earnings? A) Students enrolled in 4-year colleges. B) Students enrolled in 2-year colleges. C) Students attending elementary school D) Students attending graduate school E) Students attending secondary school 6. According to official statistics, Denmark s nominal per capita GDP is 280,000 Danish Krones per year. Knowing that the exchange rate between Danish Krones and the American dollar is 7/1 (seven Danish Krones have to be given in exchange for 1 US$), we conclude that Danish per capita GDP in US dollars is: a) US$ 40,000 b) US$ 19,600 c) US$ 196,000 d) US$ 200,000 e) None of the above 7. Given the dollar number for GDP per capita that you have just calculated for Denmark, a) There is no doubt that the standard of living of the typical Danish person exceeds the one of the typical American person (around US$ 35,000) b) There is no doubt that the living standards of the typical Danish person is below the level corresponding to the typical American person (around US$ 35,000) c) There is no doubt that the standard of living in Denmark is approximately equal to the standard of living in the US (around US$ 35,000) d) There is not enough information to compare the living standards in the US and Denmark e) Since no country can be richer than the US, calculating numbers is irrelevant. We are the wealthiest country 8. Which of the following would be considered a component of government purchases in the expenditures approach to GDP? a. both d and e b. all of the following c. welfare payments d. police salaries e. social security payments 2
9. The sale of which of the following would appear (without any modification) in GDP? a. used automobiles b. iron ore mined from the ground c. maid services d. aluminum rods used in construction e. wood pulp 10. Private investment during a year includes a. the value of inventories plus the values of stocks and bonds b. spending on plant and equipment, new housing construction, and changes in inventories c. stocks and bonds purchased by firms d. spending on plant and equipment plus government spending plus household spending on stocks and bonds e. spending on plant and equipment 11. This is the market for the cheapest model of the BMW car. All units represent thousands. Assume that supply is given by p=2q and demand is given by p=42-q. Then, equilibrium quantity and price are: a) q=0, p=42 b) q=28, p=14 c) q=14; p=28 d) q=20, p=22 e) None of the above 12. With supply still given by p=2q and demand still given by p=42-q, now the government introduces a price ceiling of $14 (to help consumers afford the car). Hence, the new quantities supplied and demanded in the market will respectively be: a) q(s)=14, q(d)=28 b) q(s)=7, q(d)=7 c) q(s)=7; q(d)=28 d) q(s)=6; q(d)=18 e) None of the above 13. With supply still given by p=2q and demand still given by p=42-q, the price ceiling of $14 set by the government will imply a shortage (excess quantity demanded) of: a. 14 units b. 18 units c. 20 units d. 21 units e. none of the above 3
14. With supply still given by p=2q and demand still given by p=42-q, the price ceiling of $14 set by the government will imply a prevailing Black Market price of: a) $35 b) $36 c) $37 d) $38 e) $39 The EU (European Union) has a policy of protection of domestic farmers. In a nutshell, this policy implies the prevalence of Price Floors ( price supports, or minimum prices) for agricultural goods. This policy is tremendously expensive. The OECD (Organization for Economic Cooperation and Development, the club of the rich countries) noted that in 1999 the EU was paying out an average subsidy of $17,000 to every full-time farmer in the Union, compared with an average of $11,000 in countries belonging to the OECD. The EU efforts to boost the prices paid to farmers have made its citizens pay a lot more than world prices for their food. The average family in the EU is paying around $1,200 a year extra for it as a result of the EU farm policies. Agriculture's share of the EU budget, once two-thirds of the total, is now under half (46% of the EU budget, or $ 50,000 million, is eaten up every year by the CAP, the Common Agricultural Policy, even when Agriculture represents just 1.7% of the EU GDP). 15. Now, consider a hypothetical market for sugar in the EU. Assuming that the supply of sugar is given by: p=2q and the demand for sugar is given by: p= 30-q, first calculate equilibrium price and quantity (you should get that q*=10; p*=20 as the equilibrium pair). Now, impose a Minimum Price for sugar of $26. If that price floor is to prevail in the market, then in addition to the quantities demanded by consumers, the government has to purchase: a) 7 units b) 8 units c) 9 units d) 10 units e) None of the above 16. With the supply of sugar still given by: p=2q, and the demand for sugar still given by: p= 30-q, if after the imposition of the Minimum Price, the government does not purchase the excess supply of sugar in the market, the market price: a) would tend to increase until p=30 b) would tend to fall until p=20 c) would remain the same because this is the price set by the government d) would fall until it reaches p=22 e) would tend to fall, but it will remain above the former equilibrium price of $20 4
17. With the supply of sugar still given by: p=2q, and the demand for sugar still given by: p= 30-q, sugar producers total revenues (Revenue=p x q) are: a) $104 b) $234 c) $322 d) $338 e) $486 18. With the supply of sugar still given by: p=2q, and the demand for sugar still given by: p= 30-q, sugar producers revenues from taxpayers (the money the government spends in purchasing the excess quantity supplied of sugar at the Minimum Price) are equal to: a) $104 b) $234 c) $338 d) $366 e) $562 19. With the supply of sugar still given by: p=2q, and the demand for sugar still given by: p= 30-q, the revenues that sugar producers get directly from the consumers of sugar are equivalent to: a) $104 b) $234 c) $338 d) $366 e) $562 20. Now you are asked to analyze how the increase in the price of sugar (after the minimum price was imposed) affects the market for chocolates (sugar and chocolate are complement goods in consumption). After the increase in the price of sugar, the most likely outcome is that: a. The demand curve for chocolate shifts to the right and, for a given supply curve, both equilibrium price and quantity increase b. The supply curve of chocolate shifts to the right and, for a given demand curve, both equilibrium price and quantity increase c. The supply curve of chocolate remains the same, and for a given demand curve, equilibrium price increases and equilibrium quantity decreases d. The supply curve of chocolate shifts to the right, and for a given demand curve, equilibrium price falls and equilibrium quantity increases e. The demand curve for chocolate shifts to the left and, for a given supply curve, equilibrium price falls and equilibrium quantity falls 5
21. Now you are asked to analyze how the effect of the increase in the price of sugar (after the minimum price on sugar was imposed) affects the market for sweetener (sugar and sweetener are substitute goods in consumption). After the increase in the price of sugar, the most likely outcome is that: a. The demand curve for sweetener shifts to the right and, for a given supply curve, both equilibrium price and quantity increase b. The supply curve of sweetener shifts to the left, and for a given demand curve, both equilibrium price and quantity increase c. The supply curve of sweetener shifts to the left, and for a given demand curve, equilibrium price increases and equilibrium quantity decreases d. The supply curve of sweetener shifts to the right and, for a given demand curve, both equilibrium price and equilibrium quantity increase e. The demand curve for sweetener shifts to the left and, for a given demand curve, equilibrium price and quantity both fall 22. Production possibilities frontiers are typically concave (bowed out) -when seen from the origin- because, a. of the law of supply b. there is usually a one-for-one trade-off in resources used in production c. Michael Jordan just retired d. the opportunity cost of a good rises as the quantity of the good produced increases e. resources are often left idle in the firm (managers just don t care) 23. Which of the following would be classified as consumption spending? a. a family's purchase of a new home b. a family's purchase of a used car c. a family's payment for a child's hospitalization d. a family's purchase of Microsoft stock e. a family's purchase of a swing set for their home day-care business 24. Suppose that the Council of Economic Advisers tells the President that "the unemployment rate is 4 percent." The President responds, "That rate is still too high." The President's statement is: a. a normative statement b. a positive statement c. empirically verifiable by checking economic data d. an indisputable statistical fact e. an incorrect positive statement 6
25. When society requires that firms reduce pollution, there is a. a tradeoff because of reduced incomes to the firms owners, workers, and customers. b. no tradeoff, since everyone benefits from reduced pollution. c. no tradeoff for society as a whole, since the cost of reducing pollution falls only on the firms affected by the requirements. d. a tradeoff only if some firms are forced to close e. None of the above 26. According to the article A Living Wage. Getting High in Santa Fe published by The Economist, the main reason why many proponents of minimum wage laws are carrying on their battle at the local (rather than the Federal) level is: a) That Unions tend to lobby more effectively at the local level b) That the Federal minimum wage is already very high c) That attempts in Congress to increase the minimum wage are going nowhere d) That very recently a decisive victory for the cause they championed was obtained in Santa Monica, California, when the local minimum wage rate was increased to $10.50 per hour e) That politicians are more corrupt at the local level, making the passing of an increase in the local minimum wage rate easier 27. According to the article The Effects of the Minimum Wage some costs of the minimum wage (other than increased unemployment) are: a) It makes firms less willing to train workers lacking basic skills b) Companies may choose to hire only experienced workers whose abilities justify the higher wage c) Firms are likely to become less generous with fringe benefits in an effort to hold down labor costs d) It tends to produce a loss of opportunity for the hard-core unemployed e) All of the above 28. Which of the following would increase U.S. GDP during the current year? a. a new U.S.-produced radio bought by a Japanese citizen living in Kyoto b. a used U.S.-produced computer bought by a French citizen living in Kansas c. a new Japanese-produced radio bought by a U.S. citizen in Rhode Island d. a U.S. pianist's concert sales in Britain e. stock in Microsoft Corporation bought by a Russian citizen 29. An example of a service counted in this year's GDP is a. buying shampoo to give your pet a bath b. cleaning your house c. trimming your own hair d. hiring a gardener to weed your garden e. polishing your friend's car as a friendly gesture 7
30. Which of the following would not be included in the consumption component of GDP? a. movie ticket sales b. purchase of a new home c. medical bills d. clothing purchases e. home electricity bills 31. In the expenditure approach to measuring GDP, we add the values of all a. intermediate goods in addition to all final goods purchased b. goods and services purchased by each type of final user c. goods and services purchased in the United States d. goods and services purchased by intermediate and final users e. output produced by U.S. firms 32. If the economy is producing a combination of goods inside its production possibilities frontier, then a. workers are on vacation b. a significant number of workers have little education c. some resources are being wasted or not being used d. technology must improve before output can increase e. the opportunity cost of producing more output is greater than the value of the additional output that could be produced 33. The slope of the production possibilities curve indicates. A) the opportunity cost that we pay in terms of one of the goods when we increase the production of the other good B) the total amount of each good produced C) the nominal prices of the two goods D) the average amount of each good that can be produced 8