ECON 3312 Macroeconomics Exam 1 Fall 2016 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) 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 firms economic profit. B) a proportional increase in output price. C) a decline in the nominal wage. D) None of the above. 2) According to the quantity theory of money, the quantity of money determines the A) level of real output B) interest rate C) price level D) level of employment 3) 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) an increase in the quantity of saving B) an increase in consumption C) a decrease in the interest rate D) all of the above 1) 2) 3) Figure 2-7 Figure 2-7 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two goods, cotton and cashews. 4) 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 4) 1
5) 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. 6) Refer to Figure 2-7. Which country has a comparative advantage in the production of cashews? A) They have equal productive abilities. B) Pakistan C) Indonesia D) neither country 7) Which of the following statements most accurately describes the Classical view? A) The economy is a complex dynamic system that is naturally self-correcting and requires no intervention by fiscal or monetary authorities. B) Changes in the money supply are important determinants of changes in real output. C) Fiscal policy is effective at changing nominal aggregate demand but not real aggregate demand. D) All of the above. 8) 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 left B) a decrease in the price level will cause the labor demand schedule to shift to the left C) an increase in the money wage will cause the labor demand schedule to shift to the right D) the labor demand schedule will be upward sloping 5) 6) 7) 8) 2
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 40 $6 Clothing 10 $8 Year 2 Good Quantity Price Food 35 $10 Clothing 20 $7 9) Suppose that Year 1 is the base year. Year 2 real GDP is A) $390. B) $270. C) $490. D) $370. 10) Year 2 nominal GDP is A) $490. B) $390. C) $310. D) $290. 11) The marginal product of labor indicates. Therefore the MPL curve is also. A) the quantity of labor demanded for a given wage; the equilibrium price of labor B) the quantity of labor supplied for a given wage; the equilibrium price of labor C) the quantity of labor supplied for a given wage; the supply curve of labor D) the quantity of labor demanded for a given wage; the demand curve of labor E) none of the above 12) In the classical model, the only government policy that can affect real output in the economy is: A) tax policy B) monetary policy C) spending policy D) none of the above. 13) In the classical model, if money growth and velocity are constant, then A) the price level will fall at the rate of output growth B) the price level will be constant C) the price level will rise at the rate of output growth D) none of the above 9) 10) 11) 12) 13) 3
14) Adam Smith's invisible hand refers to A) the laws of nature that influence economics decisions. B) the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole. C) the government's unobtrusive role in ensuring that the economy functions efficiently. D) property ownership laws and the rule of the court system. 15) When you purchase a new pair of jeans you do so in the A) product market. B) factor market. C) input market. D) resource market. 16) Which of the following changes shifts the Classical aggregate supply curve to the right? A) A demographic change that reduces the labor supply B) A decrease in taxes C) A decrease in the demand for labor D) An increase in consumer confidence 17) The CPI overestimates inflation because A) it always includes discount stores B) it often ignores the invention of new or higher quality goods C) it allows substitution from more expensive goods to cheaper goods D) all of the above 18) The marginal product of capital is the increase in A) capital needed to produce one more unit of output. B) output from a one-dollar increase in capital. C) labor needed to accompany a one-unit increase in capital. D) output from a one-unit increase in capital. 14) 15) 16) 17) 18) 4
19) According to the classical model shown in the figure, an exogenous increase in government spending shifts the demand for loanable funds to the right causing the equilibrium interest rate to rise. What quantity describes an interest rate induced decline in consumption spending? A) Q 1 - Q 0 B) Q 1 - Q 2 C) Q 2 - Q 0 D) Cannot be determined. 19) 20) Suppose the marginal product of labor is MPN = 1000-3N where N is aggregate employment. The aggregate quantity of labor supplied is 100 + 3w/p, where w/p is the real wage. What is the equilibrium quantity of employment and equilibrium real wage? A) N = 1000; w/p = 3 B) N = 600; w/p = 20 C) N = 310; w/p = 70 D) Cannot be determined from information given. 21) An invention that speeds up the Internet is an example of A) an increase in labor. B) a supply shock. C) a substitution effect. D) an income effect. 22) 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) a fall in the price level. D) an increase in the real money supply. 20) 21) 22) 5
23) A production possibilities frontier with a bowed outward shape indicates A) the possibility of inefficient production. B) increasing opportunity costs as more and more of one good is produced. 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. 24) In the classical model, when AD increases due to an increase in money supply, the effect on the equilibrium real wage is: A) The same as the effect on real output B) The real wage is not affected C) The same as the effect on total employment D) All of the above 25) A vertical aggregate supply schedule implies that A) unemployment cannot impact output B) real wages cannot impact output C) aggregate demand is horizontal D) the price level does not impact output 26) If government spending and tax collections both increase by the same amount, then according to the classical loanable funds market A) savings will rise and interest rates will fall B) the demand for loanable funds will increase and the interest rate will rise C) nothing will shift and the interest rate will remain constant D) the demand for loanable funds will fall and the interest rate will rise 27) Assume that the classical labor market can be represented by the following equations: 23) 24) 25) 26) 27) Aggregate Production Function: Y = 200 + 5N 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 = 10, and Y = 250 C) W/P = 2, N = 42, and Y = 410 D) Cannot be determined from information given 6
28) 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 demand, decrease the real wage, and decrease output B) reduce real wages and increase output C) decrease labor supply, increase the real wage, and decrease output D) decrease labor demand and the real wage and increase output 29) The principle of opportunity cost is that A) the economic cost of using a factor of production is the alternative use of that factor that is given up. B) in a market economy, taking advantage of profitable opportunities involves some money cost. C) taking advantage of investment opportunities involves costs. D) the cost of production varies depending on the opportunity for technological application. 30) According to the Price-Specie-Flow mechanism, if half the gold in England disappeared over night the effect would be to A) reduce the price level by 50%. B) make English goods more expensive to French residents. C) double the price level. D) None of the above. 31) Suppose that the production function for the economy is Y = AK0.5L0.5. If the capital stock = 40,000, the quantity of labor = 10,000, and total factor productivity = 3, real GDP is A) $60,000. B) $75,000. C) $150,000. D) $300,000. 32) Suppose that there is an increase in technology. The classical model predicts that A) output rises and the price level falls B) both output and the price level rises C) output rises and the price level remains the same D) none of the above 33) The marginal product of labor A) decreases as the number of workers already employed increases. B) is smaller when the labor supply is relatively smaller. C) is larger when the labor supply is relatively larger. D) is measured by the slope of the production function relating capital to employment. 28) 29) 30) 31) 32) 33) 7
34) Diminishing marginal product means that. A) the amount of output increases when we add more inputs B) when adding extra units of a single input, output increases become larger C) when adding extra units of a single input, output increases become smaller D) when adding extra units of a single input, output declines E) none of the above 35) The slope of the aggregate production function with capital stock held fixed measures A) the marginal utility of output B) the marginal propensity to produce C) the marginal product of labor D) none of the above. 36) What two factors should you equate in deciding how many workers to employ? A) The marginal product of labor and the real interest rate B) The marginal product of capital and the real wage rate C) The marginal product of labor and the marginal product of capital D) The marginal product of labor and the real wage rate 37) 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, a 10% increase in the real wage, and a 10% increase in real interest rates B) a 10% increase in prices, a 10% increase in the money wage, and a 10% increase in nominal interest rates C) a 10% increase in prices, a 10% increase in the money wage, and no change in nominal interest rates D) a 10% increase in prices and no change in the money wage or interest rates 38) The demonstrates the roles played by households and firms in the market system. A) production possibilities frontier B) circular flow model C) business cycle D) theory of comparative advantage 34) 35) 36) 37) 38) 39) If there is an increase in government spending that is financed by issuing bonds, then A) interest rates should rise which increases private investment B) interest rates should fall which increases private investment C) interest rates will remain the same unless taxes are reduced as well D) interest rates should rise which decreases private investment 40) In the classical model, an increase in saving is assumed to increase A) both the demand for money and loanable funds, which reduces interest rates B) the supply of loanable funds, which decreases interest rates C) the demand for loanable funds, which decreases interest rates D) neither the demand for money nor bonds, leaving interest rates unchanged 39) 40) 8
41) 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, raising 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) up and to the right, reducing the quantity of labor demanded at any given real wage. D) down and to the left, reducing the quantity of labor demanded at any given real wage. 42) Which of the following is not a factor of production? A) the manager of the local tire shop B) $1,000 in cash C) an acre of farmland D) a drill press in a machine shop 43) 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 44) Economic decline (negative growth) is represented on a production possibilities frontier model by the production possibility frontier A) shifting inward. B) becoming steeper. C) shifting outward. D) becoming flatter. 45) Fiscal policy encompasses all of the following except A) taxation by the government. B) monetary injection by the government. C) expenditures by the government. D) borrowing by the government. 46) The natural resources used in production are made available in the A) factor markets. B) government market. C) goods and services market. D) product market. 47) Real output is determined by and the price level by in the Classical model A) aggregate supply; aggregate demand B) aggregate supply; aggregate supply C) aggregate demand; aggregate demand D) none of the above. 41) 42) 43) 44) 45) 46) 47) 9
48) An exogenous variable is typically. A) not considered in an economic model B) explained inside the model C) explained by interest rates D) only used to conduct policy analysis E) taken as given 49) According to the classical model, changes in aggregate demand are driven by A) changes in fiscal policy B) changes in the money supply C) changes in taxes D) changes in borrowing and lending 48) 49) Figure 2-1 50) Refer to Figure 2-1. Point A is A) unattainable with current resources. B) the equilibrium output combination. C) inefficient in that not all resources are being used. D) technically efficient. 50) 10
Answer Key Testname: ECON3312_EXAM1_FALL_2016 1) B 2) C 3) A 4) C 5) C 6) B 7) A 8) B 9) D 10) A 11) D 12) A 13) A 14) B 15) A 16) B 17) B 18) D 19) C 20) C 21) B 22) A 23) B 24) D 25) D 26) C 27) C 28) A 29) A 30) A 31) A 32) A 33) A 34) C 35) C 36) D 37) B 38) B 39) D 40) B 41) D 42) B 11
Answer Key Testname: ECON3312_EXAM1_FALL_2016 43) A 44) A 45) B 46) A 47) A 48) E 49) B 50) C 12