Economics 719 Test 1 Chappell August 2, Name. Last 4 digits

Transcription

1 Economics 719 Test 1 Chappell August 2, 2007 Name Last 4 digits

2 Part 1. Multiple Choice (2.33 points each). Choose the one alternative that best completes the statement or answers the question. 1) The number of unemployed divided by the labor force equals 1) A) the misery index. B) the labor force participation rate. C) the unemployment rate. D) the inflation rate. 2) The difference between microeconomics and macroeconomics is that 2) A) microeconomics usually looks at individual consumers, firms, and markets, but macroeconomics looks at economy-wide aggregates. B) microeconomics looks at national issues, macroeconomics looks at global issues. C) microeconomics looks at supply and demand for goods, macroeconomics looks at supply and demand for services. D) microeconomics looks at prices, macroeconomics looks at inflation. 3) Because government services are not sold in markets, 3) A) their value is assumed to be equal to cost of production plus a markup of 20%. B) they are excluded from measurements of GDP. C) taxes are used to value their contribution. D) they are valued at their cost of production. 4) Intermediate goods are 4) A) final goods that remain in inventories. B) capital goods, which are used up in the production of other goods but were produced in earlier periods. C) goods that are used up in the production of other goods in the same period that they were produced. D) either capital goods or inventories. 5) Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries A) purchase large amounts of military wares from other countries. B) have a high level of imports and exports relative to GNP. C) have a large number of citizens working abroad. D) have a large portion of their GNP produced by multinational corporations. 5) 6) The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data, where quantities are in gallons and prices are dollars per gallon. 6) Between 2003 and 2004, nominal GDP grew by A) 83.3%. B) 190.0%. C) 65.5%. D) 60.0%.

3 7) The expected real interest rate (r) is equal to 7) A) nominal interest rate minus inflation rate. B) expected nominal interest rate minus inflation rate. C) nominal interest rate minus expected inflation rate. D) nominal interest rate plus expected inflation rate. 8) The tendency of different economic variables to have related, regular patterns across industries over the business cycle is called A) periodicity. B) persistence. C) comovement. D) recurrence. 8) 9) An economic variable that moves in the opposite direction as aggregate economic activity (down in expansions, up in contractions) is called A) a leading variable. B) countercyclical. C) acyclical. D) procyclical. 9) 10) Which of the following macroeconomic variables is acyclical? 10) A) Consumption B) Money supply C) Unemployment D) Real interest rates 11) The marginal product of capital is the increase in 11) A) output resulting from a one-unit increase in capital. B) output resulting 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. 12) The fact that the production function relating output to labor becomes flatter as we move from left to right (when plotting output as a function of labor input) means that A) the marginal product of labor is positive. B) the marginal product of capital is positive. C) there is diminishing marginal productivity of capital. D) there is diminishing marginal productivity of labor. 12) 13) An adverse supply shock would 13) A) shift the production function down and decrease the marginal product of labor at every level of employment. B) shift the production function up and increase the marginal product of labor at every level of employment. C) shift the production function up and decrease the marginal product of labor at every level of employment. D) shift the production function down and increase the marginal product of labor at every level of employment.

4 14) One reason that firms hire labor at the point where w = MPN is 14) A) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers. B) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers. C) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they have the right number of workers. D) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring them, so they should hire more workers. 15) The Widget Company has the following production function. 15) If widgets sell for $6 each and the wage rate is $33, how many workers will the company hire? A) 2 B) 0 C) 1 D) 4 16) If Jeffʹs wage rate rises, he decides to work fewer hours. From this, we can infer that 16) A) for Jeff, the substitution effect is equal to the income effect. B) for Jeff, the substitution effect is greater than the income effect. C) for Jeff, the substitution effect is less than the income effect. D) Jeff is a nitwit. 17) An increase in expected future output while holding todayʹs output constant would 17) A) decrease todayʹs desired consumption and increase desired national saving. B) decrease todayʹs desired consumption and decrease desired national saving. C) increase todayʹs desired consumption and increase desired national saving. D) increase todayʹs desired consumption and decrease desired national saving. 18) If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a in consumption and a in saving, for someone whoʹs a lender. A) rise; fall B) rise; rise C) fall; rise D) fall; fall 18) 19) With a nominal interest rate of 4%, an expected inflation rate of 1%, and interest income taxed at a rate of 25%, what is the expected after-tax real interest rate? A) 2% B) 1% C) 3% D) 0% 19)

5 20) The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut 20) A) causes a current account deficit. B) doesnʹt affect consumption. C) raises interest rates. D) causes inflation. 21) Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%, when the nominal interest rate is 4% and the expected inflation rate is 1%. A) $3,000 B) $29,000 C) $28,000 D) $25,000 21) 22) You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as A) the expected marginal product of capital is greater than or equal to the expected marginal product of labor. B) the expected marginal product of capital is greater than or equal to the marginal product of capital. C) the expected marginal product of capital is greater than or equal to the user cost of capital. D) the expected marginal product of capital is positive. 22) 23) In 2003, your firmʹs capital stock equaled $100 million, and in 2004 it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment in 2004 equaled A) $25 million. B) $5 million. C) $1 million. D) $7 million. 23) 24) Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to A) the left and increase the real interest rate. B) the right and decrease the real interest rate. C) the right and increase the real interest rate. D) the left and decrease the real interest rate. 24) 25) A temporary decrease in government purchases would cause 25) A) no shift in the saving curve, but a leftward shift in the investment curve. B) a rightward shift in the saving curve, but no shift in the investment curve. C) a rightward shift in the saving curve and a leftward shift in the investment curve. D) a rightward shift in the saving curve and a rightward shift in the investment curve. 26) Why do people keep currency in their pockets when bank deposits pay interest? 26) A) Because bank deposits lose value due to inflation. B) Because bank deposits lose value due to changes in interest rates. C) Because currency is more liquid. D) Because banks might steal your money. 27) Whatʹs the most common way for a central bank to reduce the money supply? 27) A) Buy bonds from the government B) Buy bonds from the public C) Sell bonds to the public D) Collect higher taxes

6 28) An increase in expected inflation is likely to cause 28) A) no change in the demand for real balances. B) an increase in the demand for real balances. C) no change in the demand for real balances only if the income elasticity of real money demand is zero. D) a decline in the demand for real balances. 29) If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then velocity is A) 0.1. B) 100. C) 10. D) 1. 29) 30) Large differences in inflation rates among countries are almost always the result of large differences in A) productivity. B) real income growth. C) the growth rates of nominal money supplies. D) the growth rates of real money demand. 30)

7 Analytical Questions (10 points each) Question 1 The country of Myrule has produced the following quantites of gauges and potatoes, with the price of each listed in dollar terms. (a) Using 1999 as the base year, what is the growth rate of real GDP from 1999 to 2000? (b) Based on the GDP deflator, what is the inflation rate from 1999 to 2000?

8 Question 2 Suppose oil prices fall temporarily, as oil becomes more plentiful (Hint: think of this as a favorable productivity shock). What impact is this likely to have on each of the following variables or functions? Please indicate a direction of change (an increase or decrease, or the direction of a curve shift). Provide a onesentence explanation for each: (a) the production function (b) the marginal product of labor (c) the labor demand curve (d) employment (e) the real wage

9 Question 3 Suppose that the government decides to fund a one year project with a goal of turning mercury in a goal. It is widely recognized that this is a wasteful project. Use a saving-investment diagram to explain what happens to saving, investment, and the real interest as a consequence of this event. Label the axes on your diagram, and provide a one sentence explanation for any curves shifts that occur as a result of the increase in spending on this project.