Grade 11 Economics Unit #3: Government Intervention Practice Test and Answer Key

Transcription

1 Grade 11 Economics Unit #3: Government Intervention Practice Test and Answer Key Name: Note: Section #1 of the actual test will contain multiple-choice questions. You can practice this type of question within the Mastery Learning Lab. Section 2: Graphing and Analyses (Knowledge / Application / Communication) (17 Marks) 1. The graph below illustrates an excise tax that has been placed on a market. (Note: Excise taxes are paid to the government by the sellers, and therefore represent an increase in costs to the sellers.) Use the information provided in the graph to answer the questions that follow. i) How much tax is placed on each unit being sold in this market? (1 mark) ii) How many units are being sold after the tax? (1 mark) iii) What is the total revenue raised by the tax from this market? (1 mark) iv) How much consumer surplus is lost as a result of the tax? (1 mark) v) What is the value of the deadweight loss caused by the tax? (1 mark) Page 1

2 2. Use the information provided on the graph illustrated below to answer the questions that follow. Calculations: Answer: i) Identify the socially optimal price and quantity. a) Socially Optimal Price: (1 mark) b) Socially Optimal Quantity: (1 mark) ii) Shade in (2 marks) AND calculate the value of (2 marks) the total social welfare triangle. Please show your calculations in the space provided to the right of the graph. iii) Assuming that a monopoly restricted output to 20,000 units: a) calculate the value of surplus the monopoly would gain. (1 mark) b) calculate the value of surplus it would lose. (1 mark) c) calculate the net change to the monopolist s surplus. (1 mark) d) calculate the change to the consumer surplus. (1 mark) e) Calculate the total dead weight loss that would result. (2 marks) Page 2

3 Section 2: Written Response (Knowledge / Communication) (32 Marks) 1. With respect to the issue of government involvement in the economy, what is the fundamental difference between Adam s Smith s and John Maynard Keynes perspectives? 2. Outline and explain two market imperfections that can compromise market economies. 3. Outline and explain one criticism some people have regarding Keynesian Economics. Page 3

4 Section 3: Calculations and Analysis (Application / Thinking / Inquiry) (32 Marks) Xanadu s federal public debt is presently $500 billion. Its population is currently estimated to be around 5,500,000. Its federal government s total budgetary expenditures each year amounts to $100 billion, and of this it spends $5 billion on debt interest. Xanadu s annual GDP is about $700 billion. Based on the above information, calculate the following comparative measures of Xanadu s federal debt. i) Xanadu s federal debt per person ratio: Answer: ii) Xanadu s federal debt to GDP ratio: Answer: iii) Xanadu s federal interest to expenditure ratio: Answer: (Do the entire practice test first then look at the answer key! Answer key to follow.) Page 4

5 Answer Key Section 2: Graphing and Analyses (Knowledge / Application / Communication) (17 Marks) 1. The graph below illustrates an excise tax that has been placed on a market. (Note: Excise taxes are paid to the government by the sellers, and therefore represent an increase in costs to the sellers.) Use the information provided in the graph to answer the questions that follow. i) How much tax is placed on each unit being sold in this market? (1 mark) ii) How many units are being sold after the tax? (1 mark) iii) What is the total revenue raised by the tax from this market? (1 mark) iv) How much consumer surplus is lost as a result of the tax? 1 mark) v) What is the value of the deadweight loss caused by the tax? (1 mark) Page 5

6 2. Use the information provided on the graph illustrated below to answer the questions that follow. i) Identify the socially optimal price and quantity. a) Socially Optimal Price: (1 mark) b) Socially Optimal Quantity: (1 mark) Calculations: Answer: ii) Shade in (2 marks) AND calculate the value of (2 marks) the total social welfare triangle. Please show your calculations in the space provided to the right of the graph. iii) Assuming that a monopoly restricted output to 20,000 units: a) calculate the value of surplus the monopoly would gain. It would gain $2.00 x 20,000 units = $40, (green rectangle) b) calculate the value of surplus it would lose. It would lose ($2.00 x 10,000 units) / 2 = $10, (checkered triangle) (1 mark) (1 mark) c) calculate the net change to the monopolist s surplus. $40, gain, minus the $10, loss = $30, net change. (1 mark) d) calculate the change to the consumer surplus. = ($2.00 x 20,000 units) + ($2.00 x 10,000 units) / 2 = $40, (green rectangle) + $10, (gray triangle) = $50, loss of consumer surplus (1 mark) e) Calculate the total dead weight loss that would result. = ($2.00 x 10,000 units) / 2 + ($2.00 x 10,000 units) / 2 = $10, $10, = $20, (gray triangle + checkered triangle) (2 marks) Page 6

7 Section 2: Written Response (Knowledge / Communication) (32 Marks) 1. With respect to the issue of government involvement in the economy, what is the fundamental difference between Adam s Smith s and John Maynard Keynes perspectives? Adam Smith advocated for non-interference in the economy, as he believed that consumers and producers all working independently to pursue their own interests would end up producing the goods and services that society valued the most (i.e. the socially optimal outcome). John Maynard Keynes believed that an economy could work fairly well without government interference except in those times when economic activity started to fall. Keynes realized that people don t always act in a rational manner, and that at times the aggregate effect of irrational behaviour (what he called low animal spirits) could cause an economy to stall at a low-level of output. Thus, governments could give the economy a much-needed boost during recessions by borrowing money and then spending it to stimulate the economy and get the economy (and animal spirits) up and running closer to the more stable, fullemployment level of output. 2. Outline and explain two market imperfections that can compromise market economies. Incomplete information: Consumers and producers can t always make sound economic decisions without all the facts, and these facts aren t always readily available. Some people even say that successful entrepreneurs are either good, or just lucky, at making guesses about future trends and events. Imperfect competition: In an unregulated market, market power can become concentrated in the hands of just a few sellers, thus creating oligopolies and monopolies who will tend to restrict output and raise prices in order to generate more profit for themselves. 3. Outline and explain one criticism some people have regarding Keynesian Economics. Keynes believed that governments could give the economy a boost during recessions by borrowing money and then spending it to stimulate the economy. However, critics believe that this style of spending only creates temporary benefits, but lead to enduring maintenance expenses (ex. costs of maintaining a hydroelectric damn) as well as enduring debt that future generations will be forced to pay off or pay interest on. Page 7

8 Section 3: Calculations and Analysis (Application / Thinking / Inquiry) (32 Marks) Xanadu s federal public debt is presently $500 billion. Its population is currently estimated to be around 5,500,000. Its federal government s total budgetary expenditures each year amounts to $100 billion, and of this it spends $5 billion on debt interest. Xanadu s annual GDP is about $700 billion. Based on the above information, calculate the following comparative measures of Xanadu s federal debt. i) Xanadu s federal debt per person ratio: Answer: ii) Xanadu s federal debt to GDP ratio: Answer: iii) Xanadu s federal interest to expenditure ratio: Answer: Page 8