ECON 1010 Principles of Macroeconomics Practice Test 1 Solutions

Transcription

1 ECON 1010 Principles of Macroeconomics Practice Test 1 Solutions Section A: Multiple Choice Questions. (40 points; 2 pts each) 1. The condition of scarcity means that: A) when the government produces something, there is no opportunity cost. B) choices must be made in the allocation of productive resources. C) you will not incur an opportunity cost if you make the right choice. D) only a command economy can make efficient use of resources. 2. Suppose you get a college scholarship so that tuition is free. The college education will increase your income by $400,000 over your lifetime. Your other alternative is to work in a job after high school that pays $25,000 per year. Room and board in both cases cost you $15,000 per year. Compare the opportunity costs of the two situations. A) The opportunity cost of college is less than the opportunity cost of working. B) The opportunity cost of college is the same as the opportunity cost of working. C) The opportunity cost of college is greater than the opportunity cost of working. D) The opportunity cost of college is zero. 3. Economists typically depict the production possibility frontier as a bowed-out curve rather than as a straight line in order to show that: A) the opportunity cost of producing a good rises as more is produced. B) the opportunity cost of producing a good declines as more is produced. C) resources used in the production of one good can be used in the production of another good D) cost is always present. 4. What points are unattainable or not feasible on a production possibility curve? A) points along the production possibility curve B) points below the production possibility curve C) points that touch the x-axis and that are also on the production possibility curve D) points above the production possibility curve 1

2 5. (Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. Finland has an absolute advantage in producing: A) cell phones only. B) herring only. C) both cell phones and herring. D) neither cell phones nor herring. 6. A competitive market is: A) a market in which there are many buyers and sellers of the same good or service. B) a market in which everyone negotiates his or her own price. C) a market that is supplied by local producers. D) a market that is supplied by foreign producers. 7. Assuming that yarn and knitting needles are complements, which statement would cause an increase in the demand for yarn? A) A higher price of knitting needles B) A lower price of knitting needles C) A higher price of yarn D) A decrease in the number of people who are interested in knitting 2

3 8. (Figure: The DVD Rental Market) Examine the figure The DVD Rental Market. At a rental price of $6, there will be: A) equilibrium in the rental market for DVDs. B) a decrease in demand. C) an excess supply of 20 DVD rentals. D) an excess demand of 20 DVD rentals. 9. All of these would result in an increase in the supply of a good EXCEPT: A) a decrease in input prices. B) a beneficial technological change. C) an increase in the number of suppliers. D) an increase in input prices. 10. In the market for corn tortilla chips, what would cause a price increase? A) Doctors tell their patients that tortilla chips are unhealthy. B) There is a technological advancement in the tortilla chip production process. C) A fungus kills much of the corn crop in Nebraska. D) The price of salsa triples. 3

4 11. (Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating pomegranates cause wrinkles. Which panel best describes how this will affect the market for pomegranates? A) panel D B) panel C C) panel B D) panel A 12. A decrease in supply, with no change in demand, will lead to a(n) in equilibrium quantity and a(n) in equilibrium price. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease 4

5 13. (Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price ceiling of $0.50 per can of soda, there will be: A) a shortage of 2 cans. B) a shortage of 3 cans. C) a surplus of 3 cans. D) equilibrium in the market for soda. 14. To be binding, a price floor must be set at a price: A) lower than the equilibrium price. B) higher than the equilibrium price. C) at which quantity demanded exceeds quantity supplied D) lower than the equilibrium price and at which quantity demanded exceeds quantity supplied. 15. The likely result of a price floor is: A) a surplus of the good at a price above the market equilibrium price. B) a shortage of the good at a price below the market equilibrium price. C) a surplus of the good at a price below the market equilibrium price. D) a shortage of the good at a price above the market equilibrium price. 16. Which is generally accepted as a long-run indicator of a rising standard of living? A) an increase in the nation's trade deficit B) an increase in the nation's inflation rate C) an increase in the nation's unemployment rate D) an increase in the nation's output per person 5

6 17. Which is NOT included in investment spending in the national income accounts? A) new residential construction B) the purchase of machinery and other productive physical capital C) the purchase of stocks and bonds by a business D) spending on inventories 18. Gross domestic product is defined as: A) consumer spending + government purchases + financial spending + exports imports. B) consumer spending + government transfers + investment spending + exports imports. C) disposable income + taxes + investment spending + exports + imports. D) consumer spending + government purchases + investment spending + exports imports. 19. Which would NOT be a part of GDP? A) used car sales B) new residential construction C) a new truck purchased by a building contractor D) telephone service purchased for a home 20. (Table: Real and Nominal Output) According to the Table: Real and Nominal Output, nominal GDP in year 2 is equal to: A) $40. B) $60. C) $100. D) $280. 6

7 Section B: Short Answer Questions. (60 points) 1. (20 pts) Suppose a worker in Sylvania can produce 15 widgets or 5 tons of potatoes per month (or any linear combination in between). Suppose a worker in Atlantis can produce 4 widgets or 4 tons of potatoes per month (or any linear combination in between). a) (5 pts) Draw a production possibility curve for each country with potatoes on the horizontal axis and widgets on the vertical axis. 7

8 b) (5 pts) What is the opportunity cost of producing one more ton of potatoes for each country? Which country should specialize in potatoes? Which should specialize in widgets? Why? The opportunity cost of producing one more ton of potatoes for Sylvania is 3 widgets. The opportunity cost of producing one more ton of potatoes for Atlantis is 1 widget. Atlantis should specialize in potatoes because the opportunity cost of potatoes is lower in Atlantis. Sylvania should specialize in widgets because the opportunity cost of widgets is lower in Sylvania. c) (5 pts) Suppose Sylvania initially produces 9 widgets and 2 tons of potatoes. Suppose Atlantis initially produces 2 widgets and 2 tons of potatoes. Denote these combinations as points A and B on your graph in part (a). Are the countries efficient in production? Are they efficient in allocation? Explain. Solution: Both countries are efficient in production because the y are producing on their PPF curves. We don't know anything about allocative efficiency because we don't know what makes the countries better off. 8

9 d) (5 pts) Re-draw the graphs and show how each country can fully specialize, trade, and be better off. Since Sylvania has comparative advantage in widgets, it should specialize in widgets and since Atlantis has a comparative advantage in potatoes, it should specialize in potatoes. Both countries are better off when they each specialize in what they are comparatively good at and trade. Gains from trade in widgets for Sylvania: +2 Gains from trade in potatoes for Sylvania: +0 Gains from trade in widgets for Atlantis: +2 Gains from trade in potatoes for Atlantis: +0 9

10 2. (20 pts) Suppose we have the following market supply and demand schedules for cars: Price ($) Quantity Demanded Quantity Supplied a) (5 pts) Plot the demand and supply curves for cars. b) (5 pts) What is the equilibrium price and quantity of cars? If the price decreases by $100, what happens to the curves? The equilibrium price and quantity for cars is $300 and 50 cars, respectively. The curves don't shift. The quantity of cars demanded goes up by 10 and quantity of cars supplied goes down by

11 c) (5 pts) If the price of cars were $400, is there a surplus or a shortage? Show the surplus or shortage on your graph in part (a). Will this cause the price to rise or fall? Why? Surplus, = 20 cars. The price will fall to reach the equilibrium level because some producers won't be able to sell all their cars. This will induce them to lower their price to make cars more appealing. d) (5 pts) Each of the events listed below has an impact on the market for cars. For each event, which curve is affected (supply or demand), what direction is it shifted, and what is the resulting impact on equilibrium price and quantity of cars? The price of steel increases. Supply, shifts left, equilibrium price rises, equilibrium quantity falls Household income decreases. Demand, shifts left, equilibrium price and quantity fall 11

12 3. Suppose the base year in the following table is Year Production of X Price per unit of X ($) units units units 20 a) (5 pts) Calculate the nominal and real GDP for 2012, 2013, and Nominal GDP = $ Nominal GDP = $ Nominal GDP = $ Real GDP = $ Real GDP = $ Real GDP = $100 b) (5 pts) Calculate the percentage change in real GDP from 2012 to 2013 and 2013 to Which period had the highest growth rate? Growth rate in real GDP ( ) = 100*(2013 real GDP 2012 real GDP)/(2012 real GDP) = 0% Growth rate in real GDP ( ) = 0% c) (5 pts) Describe three equivalent ways GDP can be calculated. See the textbook page 125 of Section 3 Review. 12

13 d) (5 pts) For each transaction, explain why it would or would not be counted in the GDP of the United States. American auto producer Ford builds a factory in Alberta, Canada. Does not count toward GDP because it is not built in the U.S. You buy a blueberry muffin at your local coffee shop. Counts towards GDP because the muffin is a finished product produced in the U.S. A Ford dealership in Ohio has 15 unsold new 2011 model cars at the end of Counts towards GDP because it s U.S. production. It is categorized as unplanned inventory under investment. 13