Exam 1 ARE 012, Spring 1998

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1 Exam 1 ARE 012, Spring 1998 Answer the questions below to the best of your ability. Answer the questions on the test sheet. Answer all parts of each numbered question. You must show all work to receive full credit for your answers to numerical problems. The price associated with all parts of each question (input) is provided so that you may make an informed management decision regarding the production of this exam (output). Be thorough and complete in ALL your responses. Please read and sign the Honor Pledge on the test sheet below or your exam will not be graded: I have neither given or received unauthorized aid on this exam. Student Name (print please) Student s Signature 1. Which of the following would be a topic of microeconomic research: (2 points) a. Is there a tradeoff between unemployment and inflation? b. What is the effect of interest rates on the bond market and stock market? c. What is the profit maximizing level of soybean production for a farmer? d. Does the federal deficit and national debt drive up nominal interest rates? e. What effect will a decrease in marginal tax rates have on GDP under the current economic conditions of the U.S.? 2. Which statement below is an example of positive economics: (2 points) a. The President's budget for fiscal year 1999 is not in the best interest of the nation. b. A decrease in taxes will increase disposable income, and most likely increase consumption since the typical consumer saves approximately 5% of their disposable income. c. Tobacco producers are getting a raw deal from the federal government. d. U.S. citizens should buy American made products instead of all those imports from foreign countries. e. The whole problem with the U.S. economy is all those folks on welfare. 3. Please define a negative externality and provide a brief example. (2 points) 1

2 4. Please define a positive externality and provide a brief example. (2 points) 5. Please fill in the missing information in the table below, and then calculate the unemployment rate and the employment rate. Data is for December, (5 points) Employment Variable Civilian Non-Institutionalized Population Number (millions) Civilian Labor Force Employed Population Unemployed Population Population Not in Labor Force Show all your work for the calculations below: Unemployment Rate = Employment Rate = 2

3 6. In 1969, a Whopper without cheese at Burger King had a price of $.45. In 1997, the price of a Whopper without cheese at Burger King was $1.99. In terms of purchasing power, did the price of a Whopper without cheese at Burger King increase or decrease from 1969 to 1997? (Show all of your calculations) (5 points) 7. Lisa earned $30,000 in What would Lisa's salary have to be at the beginning of the year 2000 for her to have the same level of purchasing power as in Assume the expected inflation rate is 3.0% for 1998 and (Show all of your calculations) (5 points) 8. What are the three largest monetary expenses associated with raising a child? (5 points) 3

4 9. What are two useful measurements of the size of government? (2 points) 10. Define the national debt. (3 points) 11. Define the federal deficit. (3 points) 12. How does the government finance a deficit, and the national debt? (3 points) 4

5 13. What is currently believed by many economists to be the "sustainable" growth rate for real Gross Domestic Product (GDP)? (2 points) 14. What is the unemployment rate that is considered by many economists to represent "full employment" in the national economy? (2 points) 15. What is the "industrial capacity utilization rate" that is used to benchmark "full production capacity" in the economy? (2 points) 5

6 16. Jeff Buckshot's gross income in 1997 was $25,000. His wife Ellen grossed $45,000 in Jeff and Ellen have three children ages 2, 4, and 6 years of age. The standard deduction for a married couple jointly filing a 1997 Federal Tax Return is $6,900. Jeff and Ellen have itemized deductions that total $15,000. The personal and dependent exemption is $2,650 each. The combined Social Security and Medicare tax rate is 7.65%. The tax on Jeff and Ellen's personal property that is paid to their county government and local municipality totals $1,200. Jeff and Ellen purchased 1,500 gallons of gas for their vehicles in The combined federal and state excise tax rate on gasoline in North Carolina is $.404 per gallon. The sales tax rate in for North Carolina and the county is 6%. Jeff and Ellen currently save approximately 6% of their take-home pay. They spend about 45% of their gross income on family living expenses (mortgage payment, food, clothing, car payments, utilities). a. Calculate Jeff and Ellen's taxable income for (5 points) b. Calculate Jeff and Ellen's disposable income for (5 points) c. Calculate Jeff and Ellen's discretionary income for (5 points) 6

7 17. Please illustrate the Production-Consumption Model in equilibrium, AND label each component of the model. (5 points) a. Assume you are an executive with Ford Motor Company. You have been given data that shows light duty truck inventories on dealers' lots are at a 75-day supply as of February 1, A 60-to-65 day supply on dealers' lots is considered to be an ideal inventory level. What conclusion would you come to regarding current consumption of light duty trucks relative to current production of light duty trucks? (5 points) b. Light duty truck assembly plants are currently operating with a capacity utilization rate of 80%. What action, in the short run, should you take given our discussions in class, this information, and the information provided in "a" above? (5 points) c. If after the action (or no action) taken in "b" above, light duty truck inventories on dealer lots are at an 80 day supply on April 1, 1998; explain what action you would take. (5 points) 7

8 18. You have just been elected President of the United States and are responsible for submitting a budget proposal to Congress this month. You are confronted with a national economy with real GDP currently growing at a rate of + 4.5%, an unemployment rate of 4.6%, a current inflation rate of 3.5%, and a $5.5 trillion national debt. Last years federal deficit was $47 billion. a. Please describe the current condition of the economy, AND what you expect to happen if you were to take no action (eg. leave taxes and government spending virtually the same). (5 points) b. Please illustrate and explain what fiscal policy action you would propose in your budget under the situation you described in "a" above. Please use the Production-Consumption Model to illustrate your answer to this question, then provide a written explanation. (5 points) 8

9 19. You are the Federal Reserve Chairman. GDP is currently increasing at an annual rate of 3.0%, and unemployment is currently at 4.9%. Employers are reporting difficulty in finding employees to increase production. Employers are reporting that they are having to pay higher wages to new employees when they can find them. Inventory levels of major manufacturing firms are falling even though the capacity utilization rate is hovering around 85%. The prime interest rate is 8.5%. The discount rate is 5.00%. The current inflation rate is 2.5%. a. Please describe the current condition of the economy. (5 points) b. Please illustrate and explain what Monetary Policy action you would take under these circumstances. Please use the Production-Consumption Model to illustrate an answer to this question, then provide a written explanation. (5 points) 9

10 Bonus Questions: 1. A 36-month automobile loan on a new vehicle at Branch Banking and Trust (BB&T) is 9.18%. If the real interest rate is 2.00%, and the expected inflation rate over the life of the loan is 3.0% per year, please calculate BB&T's risk premium charged on this loan. (5 points) 2. If the interest rate for one-year U.S. Treasury Bills is currently 5.23%, and the real interest rate is 2.0%, please calculate the expected inflation rate for the U.S. economy over the next twelve months. (5 points) 3. List the factors that affect the risk premium charged by banks to individuals for loan purposes. (5 points) 10

EXAM PREP WORKSHOP # 2 > ECONOMIC MEASUREMENTS

LIGHTHOUSE CPA SOCIAL SCIENCES DEPARTMENT AP ECONOMICS EXAM PREP WORKSHOP # 2 > ECONOMIC MEASUREMENTS NAME : DATE : True or false, and explain why? 1. If a country could maintain a high economic growth