Economics 251 Examination I (100 points) To receive full credit, you must fully explain your answers and show all work.

Transcription

1 Economics 251 Examination I (100 points) To receive full credit, you must fully explain your answers and show all work. ANSWER ONE OF QUESTIONS 1 AND For each of the following events, show graphically and explain verbally the effects on supply, demand, equilibrium price and equilibrium quantity of mink coats bought and sold in the United States. Be sure to label all curves and axes and make explicit any assumptions used in your analysis. (9 points each) a) Event: Animal rights groups are successful in their attempts to make people aware of inhumane conditions at many mink ranches; the price of fake furs decreases. b) Event: Income of consumers increases; a brutal winter causes one third of all mink to die. c) Event: The government imposes a $10 per coat excise tax on mink coats. 2. Suppose the United States imposes a $10 per barrel tariff on all crude oil imported into the United States. (A tariff is simply a per unit tax imposed on an imported good.) Use the model of supply and demand to predict the effect of the tariff on the following markets, showing graphically and explain verbally the effects on supply, demand, equilibrium price and equilibrium quantity. Be sure to label all curves and axes and make explicit any assumptions used in your analysis. (9 points each) a) Crude oil bought and sold in the United States. b) Gasoline bought and sold in the United States. c) Natural Gas bought and sold in the United States. 1

2 ANSWER ONE OF QUESTIONS 3 AND Use the following hypothetical national income and product accounting data to answer parts a) i). (3 points each) Personal Income Personal Consumption Expenditures Expenditure on Durable Goods Expenditure on Nondurable Goods Personal Savings Personal Transfer Payments to Foreigners Interest Paid by Consumers Statistical Discrepancy Subsidies less Surpluses Business Transfer Payment Net Factor Income from the rest of the World Gross Private Domestic Investment Net Private Domestic Investment Exports Net Exports Government Purchases of Goods and Services Corporate Profits Indirect Business Taxes Proprietors Income (Income from Unincorporated Enterprises) Government Transfer Payments Government Interest Payments Net Interest Wages and Salaries Personal Interest Income Social Security Contributions Find: a) Imports 2

3 Since NX = Exports Imports, Imports = Exports NX = 75 ( 20) = 95. b) Expenditure on Services Since C = Durables + Nondurables + Services, Services = C Durables Nondurables = = 330. c) Disposable Income Disposable Income = C + Intererst paid by consumers + personal transfer payments to foreigners + S = = d) Personal Taxes Since Disposable Income = Personal Income Personal Taxes, Personal Taxes = Personal Income Disposable Income = =

4 e) Gross National Product GNP = GDP + Net factor income from abroad = GDP + 0 = C + I g + G + NX = ( 20) = f) Capital Consumption Allowance (Depreciation) Capital Consumption Allowance = I g I N = = 30. g) Net National Product NNP = GGP Capital Consumption Allowance = = h) National Income NI = NNP Indirect Business Taxes = = Business Transfer Payments Statistical discrepance + Subsidies less surpluses 4

5 i) Net Rental Income Since Wages and NI = + Rent + Net Interest + Corporate Salaries Profits Wages and Rent = NI Net Interest Corporate Salaries Profits = = Proprietors, Income Proprietors Income 4. a) What is the intuitive reason for including changes in inventories as a component of gross private domestic investment? (9 points) In the measurement of GDP we are interested in the value of all final goods and services the economy has produced in the currents year. In any given year some of what we produce is not sold. Using inventory change in the investment component of GDP insures this output will be counted in the year it is produced. Similarly, in any given year some of the output sold was not produced in the current year. We don t want to count this as part of this year s GDP and the inclusion of inventory change in investment will appropriately offset this. In short, the convention of using inventory change as a component of gross investment automatically insures that we count output only in the year it is actually produced by our economy. b) What is meant by the term comparative advantage? What is the practical importance of the law (or principle) of comparative advantage? (9 points) A person, country or region is said to have a comparative advantage in the production of a good or service if that person, country or region an produce the good at a lower opportunity cost. The importance of the law of comparative advantage is that if people, countries or regions specialize in producing the goods and services for which they have a comparative advantage then there will be more of all goods available. In this sense there is a creation of wealth that occurs due to this specialization. c) What is meant by the term value added? Why is the method of value added used in national income accounting? (9 points) 5

6 Value added in the difference between the value of a firm s product and the cost of the resources used to produce it. The method of value added is used in the National Income and Product Accounts in order to prevent the double-counting of goods that are in an intermediate stage of production. Using value added also allows us to count goods that are in an intermediate stage of production. 6

7 ANSWER QUESTIONS 5 AND Give a complete and concise definition of ten of the following terms. (3 points each) a) National Income the income received by a country s domestically-owned factors of production in exchange for providing the resources used to produce the nation s goods and services. b) Normal Good a good for which an increase in income results in an increase in demand. c) Opportunity Cost the highest valued alternative forsaken. d) Gross Domestic Product the dollar value of all final goods and services produced in a country during a year. e) GDP Implicit Price Deflator This is the price index used to compute real GDP. It is the value of today s goods at today s prices as a percentage of the value of these goods at base-year price. f) Frictional Unemployment This is a background unemployment associated with the ordinary activities of workers searching for jobs, moving to a new location, acquiring training, etc. g) Positive Economics This is the part of economics that deals with questions that can be resolved by an appeal to the fact. h) Demand the relationship between the price of a good and its quantity demanded when all factors except the good s price are held constant. i) Substitute Goods a pair of goods for which an increase in the price of one results in an increase in the demand for the other good. j) Marginal Propensity to Consume the extra consumption associated with an extra dollar of disposable income. k) Marginal Propensity to Save the extra savings associated with an extra dollar of disposable income. l) Savings Rate This is just savings as a percentage of disposable income. 7

8 m) Absolute Advantage A person, country or region is said to have an absolute advantage in the production of a good or service if that person country or region can produce the good or service using fewer resources. n) Disposable Income This is what we, as a nation have left to spend after receiving income from all sources (i.e., earned as well as unearned) and after paying all taxes (including personal income taxes). 6. In this class we have argued that the macroeconomy will tend to settle at a level of output for which actual spending (Y ) is equal to planned spending (AE ). Suppose that actual output were temporarily above planned output (Y > AE ). Carefully explain the process by which macroeconomic equilibrium would be restored. (16 points) If planned spending is less than actual spending then the firms of the economy will be experiencing unintended inventory accumulation. Firms will cut production and, as they sell off the unwanted inventory, output will begin to fall. The process will continue until actual spending is equal to planned spending; that is, until macroeconomic equilibrium is restored. 8