ECON 3312 Macroeconomics Exam 1 Spring Name

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1 ECON 3312 Macroeconomics Exam 1 Spring 2016 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the classical model, an increase in the government deficit that is bond financed (i.e. borrowed in the loanable funds market) results in: A) a decrease in the interest rate B) an increase in the quantity of saving C) an increase in consumption D) all of the above 1) Figure 2-7 Figure 2-7 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two goods, cotton and cashews. 2) Refer to Figure 2-7. Assume that in autarky Pakistan consumes 50 cotton and 70 cashews while Indonesia consumes 30 cotton and 80 cashews. What are the potential gains from trade if each nation specializes in the production of the good in which it has a comparative advantage? A) No gains are possible since both countries are producing effieciently. B) 100 pounds Cashews. C) 240 Cotton bolts. D) Both B and C. 3) Refer to Figure 2-7. What is the opportunity cost of producing 1 pound of cashews in Indonesia? A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton C) 2 2/3 bolts of cotton D) 120 bolts of cotton 2) 3) 1

2 4) Refer to Figure 2-7. Which country has a comparative advantage in the production of cashews? A) They have equal productive abilities. B) Indonesia C) Pakistan D) neither country 5) Which of the following changes shifts the Classical aggregate supply curve to the right? A) A decrease in the demand for labor B) An increase in consumer confidence C) A demographic change that reduces the labor supply D) A decrease in taxes 6) In the classical model, an increase in saving is assumed to increase A) neither the demand for money nor bonds, leaving interest rates unchanged B) the supply of loanable funds, which decreases interest rates C) the demand for loanable funds, which decreases interest rates D) both the demand for money and loanable funds, which reduces interest rates 7) Economic decline (negative growth) is represented on a production possibilities frontier model by the production possibility frontier A) shifting inward. B) becoming steeper. C) becoming flatter. D) shifting outward. 4) 5) 6) 7) 8) 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 9) 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 10) According to the classical model, changes in aggregate demand are driven by A) changes in fiscal policy B) changes in taxes C) changes in the money supply D) changes in borrowing and lending 8) 9) 10) 2

3 11) Assume that the classical labor market can be represented by the following equations: 11) Aggregate Production Function: Y = N Labor Demand: Nd = 50-4(W/P) Labor Supply: Ns = 40 + (W/P) What is equilibrium W/P, N, and Y A) W/P = 50, N = 300, and Y = 3500 B) W/P = 2, N = 42, and Y = 410 C) W/P = 2, N = 10, and Y = 250 D) Cannot be determined from information given 12) According to the Price-Specie-Flow mechanism, if half the gold in England disappeared over night the effect would be to A) double the price level. B) reduce the price level by 50%. C) make English goods more expensive to French residents. D) None of the above. 13) According to the classical model shown in the figure, an exogenous decline in investment shifts the investment schedule to the left, from i 0 to i 1, causing the equilibrium interest rate to decline. Distance B in the figure describes an interest rate induced A) decline in saving, which is an equal increase in consumption B) decrease in investment C) increase in the quantity of investment D) decline in saving, which exceeds the increase in consumption 12) 13) 3

4 14) What two factors should you equate in deciding how many workers to employ? A) The marginal product of labor and the marginal product of capital B) The marginal product of capital and the real wage rate C) The marginal product of labor and the real wage rate D) The marginal product of labor and the real interest rate 15) The production possibilities frontier shows the combinations of two products that may be produced in a particular time period with available resources. A) minimum attainable B) only C) maximum attainable D) equitable 16) Under the assumption of perfect competition, all resources are paid their marginal oppotunity cost such that firms will earn zero economic profit. Under such conditions any cost increases faced by firms will result in A) a decline in the nominal wage. B) a decline in firms economic profit. C) a proportional increase in output price. D) None of the above. 17) Classical economists A) believed that prices would increase more than proportionate to an increase in the money supply B) argued that the money supply determined aggregate demand C) believed that the quantity of money influences interest rates and real wages D) regarded monetary policy as unimportant since the quantity of money does not determine the price level 18) An invention that speeds up the Internet is an example of A) an income effect. B) an increase in labor. C) a substitution effect. D) a supply shock. 19) Fiscal policy encompasses all of the following except A) taxation by the government. B) expenditures by the government. C) monetary injection by the government. D) borrowing by the government. 20) The natural resources used in production are made available in the A) goods and services market. B) government market. C) factor markets. D) product market. 14) 15) 16) 17) 18) 19) 20) 4

5 21) Real output is determined by and the price level by in the Classical model A) aggregate supply; aggregate demand B) aggregate demand; aggregate demand C) aggregate supply; aggregate supply D) none of the above. 22) A production possibilities frontier with a bowed outward shape indicates A) increasing opportunity costs as more and more of one good is produced. B) the possibility of inefficient production. C) constant opportunity costs as more and more of one good is produced. D) decreasing opportunity costs as more and more of one good is produced. 23) The principle of opportunity cost is that A) taking advantage of investment opportunities involves costs. B) in a market economy, taking advantage of profitable opportunities involves some money cost. C) the economic cost of using a factor of production is the alternative use of that factor that is given up. D) the cost of production varies depending on the opportunity for technological application. 24) Suppose the marginal product of labor is MPN = N where N is aggregate employment. The aggregate quantity of labor supplied is w where w is the real wage. What is the equilibrium quantity of employment? A) 760 B) 380 C) 12 D) ) In the Classical model, an increase in tax on firms that hired labor would (i.e. a tax the firm pays for each worker hired) A) decrease labor supply, increase the real wage, and decrease output B) decrease labor demand and the real wage and increase output C) decrease labor demand, decrease the real wage, and decrease output D) reduce real wages and increase output 26) A vertical aggregate supply schedule implies that A) real wages cannot impact output B) the price level does not impact output C) aggregate demand is horizontal D) unemployment cannot impact output 21) 22) 23) 24) 25) 26) 5

6 27) The demonstrates the roles played by households and firms in the market system. A) business cycle B) theory of comparative advantage C) production possibilities frontier D) circular flow model 28) Which of the following statements most accurately describes the Classical view? A) Fiscal policy is effective at changing nominal aggregate demand but not real aggregate demand. B) Changes in the money supply are important determinants of changes in real output. C) The economy is a complex dynamic system that is naturally self-correcting and requires no intervention by fiscal or monetary authorities. D) All of the above. 29) Adam Smith's invisible hand refers to A) the government's unobtrusive role in ensuring that the economy functions efficiently. B) property ownership laws and the rule of the court system. C) the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole. D) the laws of nature that influence economics decisions. 30) The marginal product of capital is the increase in A) output from a one-unit increase in capital. B) labor needed to accompany a one-unit increase in capital. C) output from a one-dollar increase in capital. D) capital needed to produce one more unit of output. 31) Assuming that money is neutral, an increase in the nominal money supply would cause A) a rise in nominal wages. B) an excess supply for goods. C) an increase in the real money supply. D) a fall in the price level. 32) 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, reducing the quantity of labor demanded at any given real wage. B) up and to the right, raising the quantity of labor demanded at any given real wage. C) down and to the left, 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. 27) 28) 29) 30) 31) 32) 6

7 33) In the classical model, if money growth and velocity are constant, then A) the price level will be constant B) the price level will rise at the rate of output growth C) the price level will fall at the rate of output growth D) none of the above 34) Which of the following is not a characteristic of the classical system? A) real values, not nominal values, matter B) Money wage flexibility C) Price flexibility D) temporary excess demand and supply in labor markets 35) The marginal product of labor A) is smaller when the labor supply is relatively smaller. B) is larger when the labor supply is relatively larger. C) is measured by the slope of the production function relating capital to employment. D) decreases as the number of workers already employed increases. 36) According to the quantity theory of money, the quantity of money determines the A) level of real output B) level of employment C) price level D) interest rate 37) 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) the labor demand schedule will be upward sloping C) an increase in the money wage will cause the labor demand schedule to shift to the left D) an increase in the price level will cause the labor demand schedule to shift to the right 38) 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 33) 34) 35) 36) 37) 38) 7

8 39) 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 and no change in the money wage or interest rates B) a 10% increase in prices, a 10% increase in the money wage, and no change in nominal interest rates C) a 10% increase in prices, a 10% increase in the money wage, and a 10% increase in nominal interest rates D) a 10% increase in prices, a 10% increase in the real wage, and a 10% increase in real interest rates 40) The CPI overestimates inflation because A) it often ignores the invention of new or higher quality goods B) it always includes discount stores C) it allows substitution from more expensive goods to cheaper goods D) all of the above 39) 40) Figure ) Refer to Figure 2-1. Point A is A) unattainable with current resources. B) the equilibrium output combination. C) technically efficient. D) inefficient in that not all resources are being used. 42) 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) $1,000 in cash D) an acre of farmland 41) 42) 8

9 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 43) Year 2 nominal GDP is A) $310. B) $390. C) $200. D) $ ) Suppose that Year 1 is the base year. Year 2 real GDP is A) $310. B) $270. C) $390. D) $ ) The slope of the aggregate production function with capital stock held fixed measures A) the marginal propensity to produce B) the marginal product of labor C) the marginal utility of output D) none of the above. 46) In the classical model, the only government policy that can affect real output in the economy is: A) spending policy B) tax policy C) monetary policy D) none of the above. 47) 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 48) In the classical model, when AD increases due to an increase in money supply, the effect on the equilibrium real wage is: A) The real wage is not affected B) The same as the effect on real output C) The same as the effect on total employment D) All of the above 43) 44) 45) 46) 47) 48) 9

10 49) When you purchase a new pair of jeans you do so in the A) product market. B) resource market. C) factor market. D) input market. 50) If government spending and tax collections both increase by the same amount, then according to the classical loanable funds market A) the demand for loanable funds will fall and the interest rate will rise B) the demand for loanable funds will increase and the interest rate will rise C) savings will rise and interest rates will fall D) nothing will shift and the interest rate will remain constant 49) 50) 10

11 Answer Key Testname: ECON3312_EXAM1_SPRING_2016 1) B 2) C 3) C 4) C 5) D 6) B 7) A 8) A 9) D 10) C 11) B 12) B 13) C 14) C 15) C 16) C 17) B 18) D 19) C 20) C 21) A 22) A 23) C 24) B 25) C 26) B 27) D 28) C 29) C 30) A 31) A 32) A 33) C 34) D 35) D 36) C 37) D 38) B 39) C 40) A 41) D 42) C 11

12 Answer Key Testname: ECON3312_EXAM1_SPRING_ ) B 44) A 45) B 46) B 47) A 48) D 49) A 50) D 12