ECON 3312 Macroeconomics Exam 1 Summer Name

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1 ECON 3312 Macroeconomics Exam 1 Summer 2015 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The demonstrates the roles played by households and firms in the market system. A) theory of comparative advantage B) business cycle C) production possibilities frontier D) circular flow model 2) According to the quantity theory of money, the quantity of money determines the A) level of employment B) price level C) interest rate D) level of real output 3) The supply-determined nature of output and employment is a crucial feature of A) the mercantilist policies. B) the Keynesian model. C) the Classical model. D) All of the above. 4) If government spending and tax collections both increase by the same amount, then according to the classical loanable funds market A) savings will rise and interest rates will fall B) the demand for loanable funds will fall and the interest rate will rise C) the demand for loanable funds will increase and the interest rate will rise D) nothing will shift and the interest rate will remain constant 5) In the classical system, the quantity of money A) determines the price level and, for a given real income, the level of nominal income B) does not affect the equilibrium values of output, employment, and the interest rate C) affects the equilibrium values of output, employment, and the interest rate D) Both a and b E) Both a and c 6) Adam Smith's invisible hand refers to A) the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole. B) the laws of nature that influence economics decisions. C) property ownership laws and the rule of the court system. D) the government's unobtrusive role in ensuring that the economy functions efficiently. 1) 2) 3) 4) 5) 6) 1

2 7) What two factors should you equate in deciding how many workers to employ? A) The marginal product of capital and the real wage rate B) The marginal product of labor and the real wage rate C) The marginal product of labor and the marginal product of capital D) The marginal product of labor and the real interest rate 7) For the following questions, suppose an economy produces only food and clothing, and that price and quantity data are given in the table below. Year 1 Good Quantity Price Food 20 $6 Clothing 10 $8 Year 2 Good Quantity Price Food 25 $10 Clothing 20 $7 8) Year 1 nominal GDP is A) $270. B) $200. C) $310. D) $390. 9) Suppose that Year 1 is the base year. Year 2 real GDP is A) $310. B) $200. C) $390. D) $270. 8) 9) 10) If there is an increase in government spending that is financed by issuing bonds, then A) interest rates should rise which decreases private investment B) interest rates should rise which increases private investment C) interest rates should fall which increases private investment D) interest rates will remain the same unless taxes are reduced as well 11) Classical economists A) argued that the money supply determined aggregate demand B) regarded monetary policy as unimportant since the quantity of money does not determine the price level C) believed that prices would increase more than proportionate to an increase in the money supply D) believed that the quantity of money influences interest rates and real wages 12) The natural resources used in production are made available in the A) product market. B) government market. C) factor market. D) goods and services market. 10) 11) 12) 2

3 Figure 2-7 Figure 2-7 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two goods, cotton and cashews. 13) Refer to Figure 2-7. What is the opportunity cost of producing 1 bolt of cotton in Pakistan? A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews C) 2 2/3 pounds of cashews D) 120 pounds of cashews 14) Refer to Figure 2-7. Which country has a comparative advantage in the production of cotton? A) Pakistan B) They have equal productive abilities. C) Indonesia D) neither country 15) The production possibilities frontier shows the combinations of two products that may be produced in a particular time period with available resources. A) only B) minimum attainable C) maximum attainable D) equitable 16) According to the classical model, a 10-percent increase in the money supply, holding everything else constant, will lead to A) a 10% increase in prices, a 10% increase in the real wage, and a 10% increase in interest rates B) a 10% increase in prices, a 10% increase in the money wage, and a 10% increase in nominal interest rates C) a 10% increase in prices, a 10% increase in the money wage, and no change in interest rates D) a 10% increase in prices and no change in the money wage or interest rates 13) 14) 15) 16) 3

4 17) In the classical model, an increase in the government deficit that is bond financed results in: A) an increase in the quantity of saving B) a decrease in the interest rate C) an increase in consumption D) all of the above 18) Which of the following changes shifts the Classical aggregate supply curve to the right? A) A demographic change that reduces the labor supply B) A decrease in the demand for labor C) A decrease in taxes D) An increase in consumer confidence 19) In the classical model, an increase in tax on firms that hired labor would (not an increase in labor income tax, but an increase in payroll tax) A) decrease labor demand and the real wage and increase output B) decrease labor demand, decrease the real wage, and decrease output C) decrease labor supply, increase the real wage, and decrease output D) reduce real wages and increase output 20) Real output is determined by and the price level by in the Classical model A) aggregate supply; aggregate supply B) aggregate supply; aggregate demand C) aggregate demand; aggregate demand D) none of the above. 21) What is the relationship between real and nominal GDP? A) real GDP = nominal GDP/Price level B) nominal GDP = Real GDP/Price level C) real GDP = nominal GDP * Price level D) real GDP = nominal GDP - Price level 22) The classical economists believed that A) labor supply is upward sloping because the substitution effect is greater than the income effect B) labor supply is upward sloping because the income effect is greater than the substitution effect C) labor supply is downward sloping because the income effect is greater than the substitution effect D) in equilibrium, the marginal product of labor must exceed the real wage 17) 18) 19) 20) 21) 22) 4

5 Figure ) Refer to Figure 2-1. Point A is A) the equilibrium output combination. B) technically efficient. C) unattainable with current resources. D) inefficient in that not all resources are being used. 24) A person is more likely to increase labor supply in response to an increase in the real wage, the is the income effect and the is the substitution effect. A) smaller; larger B) larger; smaller C) smaller; smaller D) larger; larger 25) A winter ice storm has paralyzed the entire east coast, reducing productivity sharply. This supply shock shifts the marginal product of labor curve A) down and to the left, raising the quantity of labor demanded at any given real wage. B) down and to the left, reducing the quantity of labor demanded at any given real wage. C) up and to the right, raising the quantity of labor demanded at any given real wage. D) up and to the right, reducing the quantity of labor demanded at any given real wage. 26) The income effect of a higher real wage on the quantity of labor supply is the A) effect that income must rise when wages rise. B) tendency of workers to supply less labor in response to becoming wealthier. C) tendency of workers to supply more labor in response to becoming wealthier. D) idea that workers feel psychologically wealthier when wages are higher, so they work more. 23) 24) 25) 26) 5

6 27) Which of the following is not consistent with the Classical assumption of perfectly competitive markets? A) The economy is always at full employment. B) The economy is always on its PPF. C) Firms can set the price of their output. D) Prices and wages are completely flexible and adjust to restore market equilibrium. 28) In the classical model, an increase in saving is assumed to increase A) both the demand for money and loanable funds, which reduces interest rates B) the supply of loanable funds, which decreases interest rates C) neither the demand for money nor bonds, leaving interest rates unchanged D) the demand for loanable funds, which decreases interest rates 29) In the classical model, the only government policy that can affect real output in the economy is: A) spending policy B) monetary policy C) tax policy D) none of the above. 30) In the classical model, if money growth and velocity are constant, then A) the price level will rise at the rate of output growth B) the price level will fall at the rate of output growth C) the price level will be constant D) none of the above 31) Which of the following is not a factor of production? A) a drill press in a machine shop B) the manager of the local tire shop C) an acre of farmland D) $1,000 in cash 32) A production possibilities frontier with a bowed outward shape indicates A) decreasing opportunity costs as more and more of one good is produced. B) the possibility of inefficient production. C) increasing opportunity costs as more and more of one good is produced. D) constant opportunity costs as more and more of one good is produced. 27) 28) 29) 30) 31) 32) 6

7 33) Assume that the classical labor market can be represented by the following equations: 33) Aggregate Production Function: Y = N Labor Demand: Nd = 5-4(W/P) Labor Supply: Ns = 4 + (W/P) What is equilibrium W/P, N, and Y A) W/P = 0.50, N = 3.00, and Y = B) W/P = 0.20, N = 1.00, and Y = C) W/P = 0.20, N = 4.20, and Y = D) Cannot be determined from information given 34) The principle of opportunity cost is that A) in a market economy, taking advantage of profitable opportunities involves some money cost. B) the economic cost of using a factor of production is the alternative use of that factor that is given up. C) taking advantage of investment opportunities involves costs. D) the cost of production varies depending on the opportunity for technological application. 35) Assuming that money is neutral, an increase in the nominal money supply would cause A) a fall in the price level. B) an excess supply for goods. C) a rise in nominal wages. D) an increase in the real money supply. 36) Suppose the marginal product of labor is MPN = N where N is aggregate employment. The aggregate quantity of labor supplied is w/p, where w/p is the real wage. What is the equilibrium quantity of employment? A) 760 B) 190 C) 380 D) ) In the Calssical model, the AS curve is because output is completely determined by the. A) vertical; quantity of money supplied. B) horizontal; loanable funds market C) vertical; availability of resources and technology D) vertical; amount of the AD 34) 35) 36) 37) 7

8 38) The CPI overestimates inflation because A) it always includes discount stores B) it often ignores the invention of new goods C) it allows substitution from more expensive goods to cheaper goods D) all of the above 39) Economic decline (negative growth) is represented on a production possibilities frontier model by the production possibility frontier A) becoming flatter. B) becoming steeper. C) shifting inward. D) shifting outward. 40) An invention that speeds up the Internet is an example of A) an income effect. B) a substitution effect. C) a supply shock. D) an increase in labor. 41) The slope of the aggregate production function measures A) the marginal utility of output B) the marginal product of labor C) the marginal propensity to produce D) none of the above. 42) The marginal product of capital is the increase in A) output from a one-unit increase in capital. B) output from a one-dollar increase in capital. C) labor needed to accompany a one-unit increase in capital. D) capital needed to produce one more unit of output. 43) The marginal product of labor A) is smaller when the labor supply is relatively smaller. B) decreases as the number of workers employed increases. C) is measured by the slope of the production function relating capital to employment. D) is larger when the labor supply is relatively larger. 44) If the demand for labor is plotted against the money wage, with the money wage on the vertical axis, then A) an increase in the money wage will cause the labor demand schedule to shift to the right B) an increase in the price level will cause the labor demand schedule to shift to the right C) an increase in the money wage will cause the labor demand schedule to shift to the left D) the labor demand schedule will be upward sloping 38) 39) 40) 41) 42) 43) 44) 8

9 45) A vertical aggregate supply schedule implies that A) real wages cannot impact output B) unemployment cannot impact output C) aggregate demand is horizontal D) the price level does not impact output 46) Fiscal policy encompasses all of the following except A) expenditures by the government. B) borrowing by the government. C) monetary injection by the government. D) taxation by the government. 47) In the classical model, when AD increases due to an increase in money supply, the effect on the equilibrium real wage is: A) The same as the effect on total employment B) The same as the effect on real output C) The real wage is not affected D) All of the above 48) Suppose that there is an increase in technology. The classical model predicts that A) both output and the price level rises B) output rises and the price level falls C) output rises and the price level remains the same D) none of the above 49) According to the classical model, changes in aggregate demand are driven by A) changes in borrowing and lending B) changes in taxes C) changes in fiscal policy D) changes in the money supply 50) Which of the following is not a characteristic of the classical system? A) Money wage flexibility B) real values, not nominal values, matter C) Price flexibility D) temporary excess demand and supply in labor markets 45) 46) 47) 48) 49) 50) 9

10 Answer Key Testname: ECON3312_EXAM1_SUMMER_2015 1) D 2) B 3) C 4) D 5) A 6) A 7) B 8) B 9) A 10) A 11) A 12) C 13) B 14) C 15) C 16) B 17) A 18) C 19) B 20) B 21) A 22) A 23) D 24) A 25) B 26) B 27) C 28) B 29) C 30) B 31) D 32) C 33) C 34) B 35) C 36) D 37) C 38) B 39) C 40) C 41) B 42) A 10

11 Answer Key Testname: ECON3312_EXAM1_SUMMER_ ) B 44) B 45) D 46) C 47) D 48) B 49) D 50) D 11